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Financial Statements: How Important Are They?

For any business leader, understanding the importance of financial statements is critical for businesses striving for sustainable growth. While tracking business growth and trends with financial reports can be very tedious, these financial statements play a pivotal role in providing a comprehensive snapshot of a company’s financial health.

In this article, we will be exploring the critical aspects of financial statements and highlighting some of their benefits such as managing financial risks and ensuring compliance with regulations.

What Are Financial Statements? 

Financial statements are formal records of a company’s business activities, similar to a GPS guiding you through its financial landscape. It serves as the foundation for assessing liquidity, solvency, and overall financial stability. They offer a comprehensive snapshot of your financial health, including:

  • Profitability: This is measured by the Statement of Comprehensive Income (Profit and Loss, or P&L, Account). It shows your revenue, expenses, and net income over a specific period.
  • Financial Position: The Statement of Financial Position (Balance Sheet) provides a snapshot of what your business owns (assets), owes (liabilities), and the difference (equity) at a specific point in time.
  • Cash Flow: The Cash Flow Statement details how cash moves in and out of your business. This is essential for understanding your business liquidity and ability to meet short-term obligations.
  • Equity Changes: The Statement of Changes in Equity explains how your equity (ownership stake) in the company has changed over time.
Statement of financial position

Importance Of Financial Statements For SMEs

Maintaining accurate financial statements helps your business tremendously in various ways. It should not be perceived as an insignificant task that merely fulfils financial statement requirements for SMEs, and instead, be seen as a strategic necessity. The following is why accurate financial reporting is crucial for business success:

1. Adhering To Regulations

In Singapore, most businesses need to file their financial statements with the Accounting and Corporate Regulatory Authority (ACRA). Only businesses below are exempted:

  • Sole proprietorships
  • Partnerships and Limited Partnerships
  • Solvent Exempt Private Companies 
  • Dormant unlisted companies which are dormant from the time of their formation, or since the end of the previous financial year

However, sole proprietorships and partnerships in Singapore are still required to maintain proper records, emphasising compliance with ACRA and Singapore Financial Reporting Standards (SFRS). Additionally, companies that meet 2 out of the 3 conditions below may be required to submit audited financial statements:

  1. Total annual revenue exceeding S$10 million;
  2. Total assets exceeding S$10 million; or
  3. Has more than 50 employees

It is imperative to adhere to regulations set by the Accounting and Corporate Regulatory Authority (ACRA) and Singapore Financial Reporting Standards (SFRS).

Failure to comply, such as submitting an unaudited financial statement, may result in fines, penalties, and even legal repercussions. Ensuring compliance is an important part of any business plan and is the first step toward business success, especially for small businesses. 

2. Financial Position Insights

Beyond regulatory compliance, accurate balance sheets and P&L statements act as your business’s financial mirror. They facilitate performance analysis, aiding in identifying growth trends, evaluating strategies, and enabling comparisons with competitors.

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3. Comparison Across Time

Monthly or quarterly reports allow you not only to compare your performance with competitors but also to track growth trends over time. This is especially beneficial for small businesses, helping assess marketing campaign success and areas for improvement.

4. Estimation Of Future Cash Flow

Leveraging historical financial data in previous balance sheets and P&L statements allows businesses to predict future cash flows, aiding in planning, investments, and goal-setting. This foresight is crucial for attracting external investors and minimising risks.

5. Simplifying Tax Filing

Accurate financial records streamline tax filing, ensuring timely submissions and reducing the risk of errors. Taxable income, claim deductions, and exemptions provided for by IRAS can be easily tracked in the financial statements, primarily the P&L statement. This proactive approach prevents penalties, contributing to a smooth income tax compliance process.

6. Access To Funding

Transparent financial records enhance your company’s credibility, fostering trust among stakeholders and potential investors. This credibility may ease the challenge of attaining funding, as lenders may be more inclined to offer loans at lower interest rates.

Getting Help With Financial Statements

Accounting firms offer a spectrum of accounting and corporate services tailored to meet your needs. One example is Axine Accounting, which utilises cloud technology to address your accounting needs in a timely and convenient manner through mobile applications. With Axine’s affordable accounting technology, analysing your financial position becomes a seamless process.

Bridge Business Financing Gaps With Poss Capital

While SMEs may face challenges in securing funding, Poss Capital offers business loans for SMEs in Singapore with simple borrowing requirements and transparent fees. Contact us today to bridge your financing gap and achieve your business goals.

Financial statements

Financial Statements: Your Business’s Cornerstone

Maintaining financial statements isn’t just a regulatory obligation; it is your business’s cornerstone for success. From informed decision-making to overcoming funding challenges, the role of financial statements is extremely crucial to business growth and sustainability. Embrace the tedious task and it pays off in transparency, credibility, and ultimately, the success of your business.

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