What Financial Statements Does my Business Need?

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Financial statements are a set of documents showing a company’s current financial status. They communicate what your business owns and what it owes at a fixed point in time and provide details about your assets, liabilities and equity. There are three statements that all businesses require for tax, financing and investing purposes.

 

Balance sheet:

The balance sheet is a snapshot of a company’s performance at a given time. It identifies the company’s assets (inventory, equipment, vehicles, furniture, property, cash), liabilities (short term debts, long term loans, accounts payable) and equity (what would be left if assets were sold and debts paid). The balance sheet is an indication of the health of a business and helps business owners make decisions regarding how much inventory to order, if assets should be sold and whether a cash infusion is called for. Lenders use a company’s balance sheet to evaluate collateral and risk.  

 

Income statement:

The income statement, also known as a profit and loss statement, summarizes a company’s revenue and expenses for a given period of time. This report shows the company’s bottom line. The income statement consists of four sections; revenues (net sales), cost of goods sold (inventory, freight, labour, indirect expenses), expenses (wages, advertising, depreciation, payroll taxes, office expenses, utilities) and other income (assets sold, interests on loans/investments). The income statement is the document you show to potential lenders/investors and is necessary during tax season. It indicates the profitability of a business’ current operations and guides management in how to expand or cut operations for greater profits.

 

Cash flow statement:

The cash flow statement reports the cash and cash equivalents that flow into and out of a company in a given time period. It measures how much cash a company has on hand. Your income statement shows your company’s bottom line while the cash flow statement shows how your business earns cash and where it goes. The information in this report is used to project how much revenue can be expected in the future, estimate upcoming expenses and make judgments re revenue gaps that may result in non-payment of business liabilities and debts. There are three activities documented in a cash flow statement; operations (accounts receivable, accounts payable, wages, merchandise expenses), investments (equipment and merchandise purchased, purchase of an asset, loans made to vendors, payments related to a merger or acquisition)  and financing (bank loans, shareholder monies, personal investments, dividend payments, loan repayments, sale of company stocks). This report informs management of how much cash is available to pay expenses and invest in the business. Large discrepancies between the cash flow statement and the income statement help identify problems in a business’s operations.

Financial statements are written records that convey a company’s activities and financial performance. The balance sheet provides an overview of assets, liabilities, and stockholders’ equity. The income statement focuses on a company’s revenues and expenses. The cash flow statement measures how a company generates cash to pay its debt obligations, fund its operating expenses, and fund investments. These three main financial statements are interrelated and help you make smart financial, investment and management decisions. All businesses should prepare these reports on a regular basis. Talk to your chartered accountant. They will have the knowledge, expertise and experience to provide you with the financial statements you require. 

Need help with your company’s financial statements? Contact Cook and Company Chartered Professional Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company uses their experience and expertise to help your business. Contact us for a complimentary consultation.

Why do I Need a Financial Statement for my Business?

Why do I Need a Financial Statement for my Business? - Cook & Co - Professional Accountants - Featured Image

Financial statements are records that communicate the activities and the financial performance of a business. They generally include a balance sheet, an income statement and a cash flow statement. They indicate:

  • How much money is made
  • How much money is spent
  • What the company owns
  • What the company owes
  • The net value of the business
  • Where the money came from and where it went
  • The amount of money kept in the company

Companies generally hire an accountant to prepare their financial statements then use the reports as a management tool to affect positive change within their organization. There are several reasons why a business needs financial statements:

  • For performance measurement: Financial statements provide a gauge of performance that helps you review the success of your business and communicate your past, present, and future prospects to stakeholders. It allows you to assess management’s stewardship of the company, the viability of the business and is a starting point in forecasting future performance.
  • For loan applications/investors: Many lenders will not consider a loan application without up to date financial reports. The information in a financial statement forms the foundation of a bank’s decision whether to fund a venture or a company. A business can use financial statements to persuade an investor to buy into the company, or to attract a venture partner who can put money into a new project.
  • For the CRA: In order to file corporate tax returns, Canadian corporations are required to produce financial statements. To avoid penalties, a company needs to have financial statements prepared on a yearly basis.
  • For regulating cash flow: Financial statements help a business anticipate borrowing needs. Reviewing your statements can reveal trends your business can use in its cash flow strategies.
  • For decision making: Financial statements provide decision-makers within a company with the up-to-date information necessary to make effective choices. Financial reports are used to provide shareholders, partners and/or potential investors with key business metrics.

 

Start your business off with the correct financial statements and a maintenance plan for keeping them in order. These reports will assist you when measuring the value of your company,  applying for a loan, attracting investors and/or selling your business. They are a powerful diagnostic tool you can use to evaluate your firm’s strengths and weaknesses, helping you chart the way forward. Talk to your accountant about the statements that your business needs. They will have the knowledge, experience and expertise to help you with your financial statements.

Need help with your company’s financial statements? Contact Cook and Company Chartered Professional Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company uses their experience and expertise to help your business. Contact us for a complimentary consultation.

Should I Incorporate my Business?

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When you incorporate a business, you create a distinct legal entity separate from its owners and/or shareholders. This entity has the same rights as a person. It can own property, obtain loans, enter into contracts, sue, be sued and be found guilty of a crime. You can incorporate either federally or provincially. Which you choose depends on whether you intend to do business in more than one province. Though there are a multitude of advantages to small business incorporation, it is not the right path for every company. Carefully examine the pros and cons of incorporation before deciding.

 

PROS:

  • Limited liability: Incorporating provides a layer of security against personal liability. You’re not responsible for the corporation’s financial obligations, personal assets cannot be taken to pay business debts and you do not answer to company lawsuits.
  • Lower tax rate: Corporations are taxed separately from their owners/shareholders. This is an advantage as corporate tax rates are typically lower than the tax rates for individuals.
  • Tax deferral: Instead of taking a salary, you can choose to leave income in the business, taking it out when your personal tax rate is lower.
  • Continuous existence: Corporations continue to exist unless they wind-up, amalgamate, or give up their charter. An incorporated business continues to exist even if the ownership changes making the selling of the business easier.
  • Better Access to Financing: Corporations are often able to raise money and grow more easily because they can issue bonds/shares to investors and borrow money at lower rates.
  • Income Splitting: The owner of an incorporated company can hire their spouse and children, a significant tax advantage. The company deducts the amount it pays them as an expense, while family members pay tax at their personal income tax rate.
  • Business name protection: When you incorporate your business provincially, the business name you choose is reserved for you. If you incorporate federally, you have the right to use your business name throughout the country. Without incorporation, anyone can start a business with the same or a similar name.

CONS:

  • Costs of incorporation: The process of incorporation requires completion of legal paperwork and the associated costs. Ongoing costs include annual legal filing fees and professional accountant fees (filing an annual corporate tax return, notices of any changes and articles of amendment).
  • Multiple tax returns: Owners of corporations must file personal income tax returns and an additional tax return for the company.
  • Increased administrative requirements: The owner of an incorporated business needs to maintain a minute book containing corporate bylaws and minutes of corporate meetings. They must also maintain up to date records of business activities.
  • More complexity: An incorporated business has individuals who act on its behalf (shareholders, owners, directors, CEO, CFO, president, etc.). The company requires a paper trail of activities of these individuals to ensure all by-laws are followed.
  • Reduced tax flexibility: When revenues are high, there are many tax advantages to being incorporated. When a company experiences losses, incorporation can be a disadvantage. Losses can only be carried forward or back to reduce the company’s income from other years, not in the year the losses are incurred.

When it comes to small business incorporation in Canada, it’s wise to consider every angle before making your decision. Talk to your accountants. They will provide you with advice and information to help you decide whether incorporation will be a benefit for your company.

Considering incorporation? Contact Cook and Company. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company uses their experience and expertise to help your business. Contact us for a complimentary consultation.

 

 

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