Do small businesses need financial statements?
A recent conversation I had with a prospect was quite an interesting one. This is really a one-man band and has a side gig consulting business. It's common in today's world for someone to have a successful side-gig while working full or part-time on a regular job.
So arguably this question is fair. Forgetting the requirements under the law, does a small business really need financial statements?
I would say "yes" with a slight qualification
"Small businesses need financial information to take informed decisions - just like large companies"
We need to really demarcate between the financial information one produces for the law / tax authorities and what we should have internally to take intelligible decisions.
The Timing factor
In most jurisdictions around the world, financial reporting for the authorities is an annual exercise. You scramble and find your receipts, pick out lines from the bank statements that relate to your business and quickly run to an Accountant to make them into acceptable formats. But does that really help financial decisions - perhaps in a very limited way. By the time your reports are collated, the ship has already sailed....
Whether you keep records on a software or not, you need some format of numbers to make spot decisions. They needn't be massive decisions, simple things like,
1. Do I have the leeway to purchase an additional software subscription to make my life easier?
2. Can I take the taxi every time I need to visit a client - does the payment I make from him cover my additional costs or should I put costs extra in my contract?
Unless you have recorded numbers, you might be making decisions detrimental to your business interests.
Should numbers influence decisions?
So it feels a bit like we only need to worry about numbers and keeping them handy if you want to base decisions off them.
Sometimes people start businesses out of passion or simply to kill time. It is an enviable position to be in - so congrats to you. In the traditional sense, you may not need numbers to influence or help you make decisions. How about an idea of how much time you spend pursuing the passion? I've had many instances where people start something for fun or just working on an idea to see where it goes and it turns out to be a reasonably valuable business proposition. Again we are not talking about funding rounds and millions in turnover. It could even be a retirement project.
Even if that were your position, I feel you should have a pulse of your numbers. Here are my arguments for it
- At some point you may need records to satisfy the tax man that what you pursue (unless completely unpaid) should / shouldn't have a tax impact.
- If it shapes up to be a viable project, you definitely should know whether it makes sense to formalise it from a numbers point of view,
- When we say numbers, don't think about sales and expenses alone. Any resource you put towards it should be quantifiable - such as time. How much time are you spending Vs how much more / less time you will need in the future should you choose to pursue the idea full-time?
So I would conclude that yes, small businesses do need their numbers - but keep it in a format that you can understand easily. If having a software is too expensive to begin with, keep it in excel. When you need a more streamlined software, look at options available. I am sure business owners would know when they need a software, if you don't have a clue where to begin with your numbers, please feel free to drop us a line...
Evalua8 works with small and medium sized businesses in SAAS, marketing (agencies), professional services, construction and education sectors. We are often called in when companies have operations in more than one location and you need someone to break down jargons like cross-border tax implications or corporate structuring. We talk in human terms so please don't hesitate to ask if you have a question.