When any person wants to know about the financial health of a business, they go through their financial statements. The statements are prepared from the daily bookkeeping that captures the company’s inflow and outflow of funds. The information in the financial statements helps to benchmark the business and provide information that enables the relevant persons to adjust and come up with the company’s overall direction.
Other people outside the company rely on the financial statement to judge the business’s performance. The government depends on the financial statements referred to as statutory accounts to compute a company’s tax liability. T
Making Informed Decisions
During decision making, it is necessary to analyze financial statements. For example, when deciding if to expand the company, the decision-makers will look through the financial statements. The idea is to see how much debt the business has, the amount of the shareholders’ capital, and how much liabilities the company has. From the information, they can decide on the affordable or most appropriate form of financing to seek.
Evaluating Tax Liability
One of the hugest burdens that businesses have to shoulder is the corporate tax. Most business owners are surprised that they have so little cash left after paying tax to the government. They are interested to know if there are ways in which they can reduce their tax liability.
To decrease their tax burden, they will need to prepare or seek assistance to make accurate financial statements. The government’s perception is that most businesses cook their books to avoid paying tax or reduce their tax payable. So to get any tax allowance, or to pay the correct tax amount, accurate financial statements are necessary.
Building Trust
Accurate financial statements are critical for inducing trust in the business. Various stakeholders need to be assured that the company is stable and doing well. This can be seen from the financial statements. For example, investors are interested in knowing how the business is performing to decide if they will inject their hard-earned cash into the business. Lenders need to be sure the business is stable to approve it for credit facilities. Employees also need to know how the company is faring, and this through the statements. The reason for this is to be sure that their jobs are not at risk.
