Why UK businesses need to prepare financial statements

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Financial statements are an important part of running a business in any part of the world, and the UK is no exception. They provide insight into the financial health of a company and are used by the leadership, investors, lenders, and other stakeholders for decision-making purposes.

Why is it important to understand the financial aspect of your business as an owner?

For UK business owners who are just starting out, having proper knowledge about financial statements is essential to ensure success. That is because they are used to track revenue, expenses and profits over time and identify any potential financial risks, which guides the businesses towards the right growth opportunities.

What are the main types of financial statements?

There are three main financial statements that UK business owners should be aware of:

1. Balance sheet

A balance sheet is a snapshot of a company’s financial position at a specific point in time. It shows the assets, liabilities, and equity. Assets are things that the company owns, such as cash, inventory, and property. Liabilities are things that the company owes, such as loans and accounts payable. 
Equity is the difference between assets and liabilities and represents the owner’s stake in the business. Naturally, a healthy balance sheet will have more assets than liabilities, indicating that the business is financially stable. If it is showing the other way around, the sooner you know that, the better.

2. Profit and loss statement

Also known as an income statement, it is a record of a company’s revenues and expenses over a specific period, usually a quarter or a year. It shows how much money the business made and spent and the net income or loss. This statement can help business owners identify areas where they can cut costs or increase revenues.

3. Cash flow statement

This is a record of the cash that a business generates and uses during a specific period. It shows how much cash the company has on hand, how much it generates from operations, and how much it uses for investments and financing.

This statement is crucial because it can indicate whether a business will have enough cash to meet its financial obligations and continue to operate.

In addition to these three main financial statements, there are other financial reports that the business owners should be aware of, such as the statement of changes in equity and the statement of cash flows. These statements provide more detailed information about a company’s finances and can help owners run their businesses more efficiently.

What to keep in mind when preparing financial statements

There are general guidelines and rules regarding financial accounts preparation, but that may vary depending on the company size, the nature of the business and the accounting regulations applicable. Nonetheless, here is what you should always remember:

1. Compliance with the UK GAAP

Financial statements must be prepared in accordance with Generally Accepted Accounting Principles (UK GAAP), which are the guidelines and standards set by the Financial Reporting Council (FRC). This means that it will be presented in a consistent manner with standardized content, terminology and so on and can easily be compared with other GAAP-compliant entities.

2. Disclosure requirements

The statements must include all required disclosures as outlined in the FRC’s Financial Reporting Standard (FRS) 100-102. Disclosures are included at the end of a financial statement and provide additional non-financial information that can support the financial data and provide context. For example, the impact of Covid on a business would be a disclosure, either positive or negative, to explain a change in the financial status of a business.

3. Format and presentation

When creating financial statements, please make sure they maintain accuracy and consistency. This means that the same accounting method should be used for all transactions and that all transactions should be recorded in the correct period.
This will ensure your statements are reliable and enable you to make accurate comparisons and analyses of the financial performance of your business.

4. Auditing

Small companies tend to quality for an audit exemption and the criteria for this is if it has at least 2 of the following:

  • an annual turnover of no more than £10.2 million
  • assets worth no more than £5.1 million
  • 50 or fewer employees on average
Listed companies in the UK are required to have their financial statements audited by an independent auditor. For private companies, this depends on their operational size and the nature of the business. However, having your financial statements checked by an expert accountant is a good idea from a growth perspective.

5. Taxation

Financial statements should be prepared in a way that is consistent with the company’s tax returns to minimize the risk of errors and disputes with the tax authorities.
You should know how to prepare and file your taxes correctly and take advantage of tax breaks and deductions that are available to them. This knowledge will help you pay the right amount of taxes and ensure you are not at risk of penalties or fines.

What to do when you are not confident about preparing financial statements?

If your business wants to keep tabs on its financial performance and position and run operations in compliance with the law, you cannot ignore financial statements. However, if you have no idea what they are or are not confident about preparing them on your own, it may be helpful to consult with an accountant or financial advisor like Golding Accountancy.
We can explain different types of financial statements and how they are used to assess a company’s financial health. Additionally, we can guide how to read and interpret the statements, which can help you make informed decisions about investments or better manage your business finances. Talk to us today!
Over to you

As a UK business owner, you should be familiar with the main financial statements as well as other financial reports that provide more detailed information about business finances. You should be aware of accounting standards and tax laws and regulations, as these will help ensure your statements are accurate and reliable and you are paying the right amount of taxes. Set up your business for long-term success with accurate and timely financial statement preparation.

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