Preparing financial statements real purpose

Preparing the financial statements

As final statements “Bokslut“ submitting date is about to come. Many business owners wonder about balance sheet and income statement (profit and loss account)! They contact the responsible accountant, or the accounting responsible to follow up their financial and tax matters. They want to know if the company budget is finished or not! Sometimes they urge the accountant to finish it as fastest as he can.

When the accountant finishes the reports. The the following often happen:

• The business owners reads net profit or net loss only.
• They do not read the budget at all, or rather do not know what the budget means and do not know how to use it.

It is very possible that the accountant himself doesn’t know how to analyze the budget, or doesn’t know what does it mean. His duty is limited on entering financial data in the accounting software. The software application usually perform budget automatically.

Here comes the question. What the owner has benefited from the final statements (budget and income statement)?

Some people may answer that these statements are required for tax purposes. Here we say that not all types of companies are required to make a final budget, especially small companies, but this doesn’t mean that they are not necessary.

Does the accountant know how to analyze the budget and other final statements? If we assume that the answer is yes! the following question will come: Did the accountant give some time to his client to analyze the budget? Did he allocate a special session with the company owner to discuss, and explain his financial situation, strengths, weaknesses, and what should he do during the next year?

If we analyze what actually happens, the answer will be negative with a big percentage. There are many reasons for this negative results:

• The accountant does not know how to process a scientific analysis of the budget. He often completely ignores this.
• The accountant is always busy, and doesn’t give enough time to his clients.
• The owner of the company has no time, or he is uninterested or was not alerted to the importance of this matter.

It is important to note that the real purpose of preparing the financial statements is not the delivery of these documents to the Tax agency.

The main purpose

The main purpose of financial statements, especially the budget is to know the real financial status of the company, and carry out analytical operations beneficial to the owner to develop his work. It helps the owners take the correct decisions.

An example of some things that analytical analyzes of budgets can illustrate:

• Predict financial shortfall or bankruptcy in the long or medium term.
• Does the company use its assets correctly?
• Analysis of inventory and knowledge of the speed of turnover of the goods and the proportion of slow-moving stock?
• The analysis of debt, the nature and quality of debts, the proportion of doubtful debts and their impact on the work of the company?
• Measure the company’s ability to meet its obligations.

It good to mention, that many of bankruptcy cases could have been avoided, if the company accountant, and financial manager were efficiently doing the analyzes and developing solutions, because the so-called fiscal deficits are not born suddenly or received.

Finally, we want to emphasize, that the main purpose of the preparation of the financial statements, is to assist the management in the decision-making process, It is vital key for planning and work development. It is not only the delivery of this data to the tax authorities. If the budget is not useful why it is required by the government and tax bodies and they insist on it? The law force large companies to develop a qualified accountant to prepare them in accordance with international and legal accounting standards.

In conclusion, we would like that company owners know the importance of these data, how to use them to develop their business, giving them the ability to avoid many of financial and administrative problems in the future.