Small business owners wear a lot of hats. You need to do the main job of your business – whether you are a plumber or a yoga teacher or something else – but you also need to take care of the marketing & advertising, billing, customer service, bookkeeping, and so on. When you are trying to perform all the different roles a business needs, you’re not going to be an expert at all of them. One of the most painful areas for a small business owner is frequently the accounting part of the business, but it’s also one of the most important things to get right.
So, why should a small business owner care about financial statements? Here are four important reasons:
1. To understand the financial health of your business
Do you know how much money you made last month? How much you owe in loans? What the most profitable areas of your business are? Where you spend the most money? Where you are losing money?
Financial statements can help you understand the answer to all those questions if you are keeping up with your bookkeeping records in a system like QuickBooks.
2. You’re required to maintain your records and pull financial statements upon request if you got a PPP or EIDL loan
From the PPP loan agreement:
- IV.IV FINANCIAL STATEMENTS. Borrower shall promptly furnish a copy of its financial statements, tax returns, and such other or additional financial information as Lender may from time to time request.
- IV.V EXAMINATION OF RECORDS. Borrower shall permit any representative of Lender to examine and to audit any or all of Borrower’s books and records and to copy portions thereof upon receipt of reasonable notification and request.
From the EIDL loan agreement:
- Borrower will maintain current and proper books of account in a manner satisfactory to SBA for the most recent 5 years until 3 years after the date of maturity, including extensions, or the date this Loan is paid in full, whichever occurs first. Such books will include Borrower’s financial and operating statements, insurance policies, tax returns and related filings, records of earnings distributed and dividends paid and records of compensation to officers, directors, holders of 10% or more of Borrower’s capital stock, members, partners and proprietors.
- Borrower authorizes SBA to make or cause to be made, at Borrower’s expense and in such a manner and at such times as SBA may require: (1) inspections and audits of any books, records and paper in the custody or control of Borrower or others relating to Borrower’s financial or business conditions, including the making of copies thereof and extracts therefrom, and (2) inspections and appraisals of any of Borrower’s assets.
- Borrower will furnish to SBA, not later than 3 months following the expiration of Borrower’s fiscal year and in such form as SBA may require, Borrower’s financial statements.”
3. You’ll need it to apply for a business loan or even a personal mortgage as a sole proprietor
If you want to borrow money for your business, whether it’s from a bank or somewhere else, they will generally want to see your financial statements. This also applies to non-profits applying to many grants. And if you are a self-employed sole proprietor and looking for a personal loan or mortgage, the lender will likely also want to look at your business’s financial statements to confirm your income.
4. You need to have your records and financial statements together to file your taxes every year
Whether you are trying to self-file or having your taxes done for you, you’ll need your financial statements to do it. And it’s much less stressful at tax time if you keep your records up to date throughout the year rather than trying to do everything at one time.