Those of us who run our own business tend to think we have a pretty good handle on what we do. When you think about it, besides ‘doing the job’, there are a lot of other unseen functions within the business that need to be done during the year to ensure that you’ll still be trading again next year. For example, budgeting, invoicing, paying bills, salaries and completing BAS statements, just to name a few.
One other very important thing on the list is book work and seeing the accountant. It is not uncommon for us to see most small businesses completing their business financials and tax returns long after the financial year has finished. Many people believe this is because it’s only to find out how much tax they have to pay. In other words, if they didn’t have to pay tax – they wouldn’t bother getting it done.
Although there is often a large focus placed on tax, the main purpose of preparing financial statements is to have accurate and up to date information on the business so that important decisions can be made. A profit and loss statement and balance sheet can provide vital information on the health of a business. If these statements are prepared long after the financial year has ended, what value do they have? Very little, really. It’s like trying to drive a car using only the rear-vision mirror. What has happened in the past is nice but it is merely historical and has little bearing on what will happen in the future. A classic scenario is tax planning. You can’t minimise tax if you don’t know what it might be – and you certainly can’t minimise it after 30 June has passed. Bank managers and insurers love it when their clients can quickly provide recent and accurate financials, as it assists them in assessing loans and underwriting policies. A good example I have witnessed involved a farm purchasing more land at short notice. Having up-to-date information made this process easier for everyone involved.
We find our business clients get the best results when they work closely with their accountant to ensure financials are kept up-to-date on an ongoing basis. Quite often, this means handing over all or part of the book work and lodgement of BAS statements. This can be a little daunting for some people at first – especially those who are very hands-on, but they soon realise how much time they save.
Technology is moving ahead rapidly, with clever solutions that can track bank transactions (saving manual entries) and web-based software that allows accountants and clients to view the same screen simultaneously. This means that minor queries can be sorted out over the phone as they occur. In many cases, these efficiencies actually reduce accounting costs.
You don’t necessarily need to have a finance or accounting degree to understand business financials – you just need to know that they are important!