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