Why 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 demarcate between the financial information one produces for HMRC and the numbers that can drive decisions. There has to be some means by which you can measure the changes in cash, receivables, revenue and costs on a monthly basis. Perhaps you can start doing that on google sheets, but you will quickly outgrow that,
The Timing factor
In most jurisdictions around the world, financial reporting for taxes 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 put them into acceptable formats. But does that really help financial decisions? By the time your reports are collated, the time to make changes within your business is long past.
Whether you keep records on a software or not, you need numbers in a consistent format 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.Should I drive or use a cab every time I visit a client? Should I add costs + reimbursements to my contract? Having the numbers to hand is important to take the right call for such.
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 help you make decisions. We have come across instances where people start something for fun and it turns out to be valuable business proposition. Again we are not talking about funding rounds and millions in turnover. But something that pays for additional holidays while keeping you engaged.
You might also need your numbers in hand for the following.
- In case of an HMRC audit, you'd need your back up numbers for the revenue and costs you declare.
- If you want to put a formal structure around your hobby and want to include other people, they'd want to know where the financials stand.
- How about other resources you are spending on the business - 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 we 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 google sheets. When you need a more streamlined approach, look at the options available.
Evalua8 works with small and medium sized businesses in SAAS, marketing (agencies) and professional services. 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.