When was the last time your balance sheet, cash flow statement, income statement, and profit and loss statement were reviewed by a neutral party? If it has been a while, then the chances are good that you have errors and other issues that could affect the credibility of your business.
At Cook Martin Poulson, we understand that the idea of having an external financial statement service company in your office might not be your idea of a good time. You'll need to answer questions, deal with interruptions, and provide documentation of every invoice and receipt you have. But inconvenience aside, hiring a CPA to audit your business financial statements is one of the best things you can do for your company.
An article in The Houston Chronicle notes that:
“...external audits provide many benefits for business owners, such as an objective opinion on your accounting processes. Sometimes small business owners do not have an in-depth understanding of detailed accounting principles, and they simply prepare their accounting information as best they can.”
When an external accounting team comes to your place of business, you can be sure that they will provide quality, unbiased opinions on the quality and accuracy of your financials. And when you have both quality and accuracy, you can be confident that the value and credibility of your business will increase. In other words, the small, short-term annoyance of going through an audit can help you avoid much bigger annoyances -- and catastrophes -- down the road.
To show you just how much these services can help, we’ve compiled five ways your business can benefit from financial statement services. But first, let's talk about which financial reports you need for your company.
Important Financial Reports Your Company Needs
Most business owners aren't accountants, and that means they may not have a deep understanding of the financials of a business. It's very common for small businesses to focus on the cash flow statement, since that's something they need to consider on a daily basis to pay overhead expenses. But if you're ignoring other reports, such as your income statement, balance sheet, and retained earnings, you may not have a clear picture of your net income or your true financial position.
Here are some of the reports you should have to help give you a clear snapshot of your company's financial status and income.
- The balance sheet. The balance sheet is a snapshot of your business at a specific moment in time. It shows your assets and liabilities at a glance. Some business owners look at a balance sheet every day, while others prefer to look monthly or quarterly.
- Profit and loss statement. The P & L report or income statement, as it's more commonly known, shows your revenue, costs, and expenses at a given period of time. If your balance sheet is a snapshot, the P & L is like a book report that shows you your net income and other key metrics for the period in question.
- Cash flow statement. The cash flow statement takes your net income from the P & L report and accounts for every penny you send and receive. A flow statement is usually prepared only for companies using the accrual method of accounting.
- Accounts receivable aging report. The accounts receivable aging report is a must for every business, but particularly those experiencing cash flow issues. It shows you which invoices are past due, making it easy to identify potential cash flow problems and increase your net income.
There are other reports you may want to consider creating, including the AR Days vs. AP Days report, the Net Profit Margin Over Time Report, and the Budget vs. Actual report, which compares your projected spending earnings with your actual numbers.
6 Ways Small Business Financial Statements Services Can Help Your Organization
Now that you understand the key financial reports you need for your small business, here are 6 ways that hiring an external company to create or audit your financials can help you.
1. Save Time and Money
One of the most common mistakes we see small business owners make is thinking that preparing a financials statement in house will save them money. In fact, the opposite may be true.
When you put a regular employee in charge of creating or auditing your cash flow statement or income statement, you're not just paying them their regular salary to do it. Costs are high when you hire an employee and can include:
- Providing benefits, including healthcare and disability
- Paying rent for their office space
- Paying for insurance
- Paying for the equipment they use
- Contributing to their Social Security and other taxes.
These expenses contribute to at least a 20-30% increase in your payroll costs. Hiring external financial statement services will also give you and your business more flexibility. Instead of allocating money for an in-house accounting department, let a company like Cook Martin Poulson take care of it for you.
That takes care of the money but hiring a CPA firm to prepare your balance sheet and income statement also saves you time. At Cook Martin Poulson, we'll send a team of specialized experts who will work more quickly and efficiently than an employee who might need to be trained. Here's what one of our clients said about our service:
Whenever possible, they assign the same people to our audit each year. This saves me time and energy because I don’t have to bring someone up to speed on the workings of our company year after year after year. I’ve found this to be invaluable.
Even if one of our employees leaves, we consider it our responsibility to bring any new person on the team up to speed before we set foot in your office. That means you won't waste time or money trying to explain your business to us.
2. Ensure Government Compliance
One of the most time-consuming things for small businesses is adhering to regulations. In addition to adhering to Internal Revenue Service regulations, you may also need to comply with state and federal rules regarding how your report your financial status or how you structure reports such as your balance sheet, income statement or cash flows.
That brings us to the second big benefit of hiring a team of professionals to review your balance sheet and other financials. You can be confident that you're hiring expert accountants whose responsibility is to determine whether their client’s business is complying with government rules.
There are various laws that accountants must follow. These can vary from state to state, but ensure that the firm you hire provides quality work. They'll provide an unbiased view based on their deep knowledge of regulatory requirements, allowing you to catch any mistakes before they turn into big problems down the line.
For example, your business may be required to follow Generally Accepted Accounting Principles (GAAP) standards. GAAP is the highest U.S. authority for accounting standards, and its regulations are required any time a business is preparing financial information. A professional service will follow these regulations and can educate you, as a business owner, on the importance of following these guidelines throughout the year.
The CPA you hire can provide you with language to include on your financials, such as:
The financial statements present fairly in all material respects and in conformity with accounting principles generally accepted (GAAP) in the United States.
The external accountants will also let you know where you may have inefficiencies. Simply put, they are there to shoot straight. An internal employee may have more of an incentive to hide wrongdoings with financial reports. External accountants have no fear of repercussions and can give you an in-depth analysis of how your business is operating. This honesty isn’t typical when a business has an internal review of their financial statements. Employees will often be more frightened of the consequences of delivering bad news to their employer.
3. Improve Your Business Credibility
In business, we often need the assistance of outside stakeholders to help us keep what we earn. Whether those giving assistance are stakeholders, creditors, or private investors, they often need assurance that the company’s financial statements accurately represent its true financial position. If they don't receive that assurance, they may worry that your balance sheet isn't an accurate reflection of your assets and liabilities.
When your financial statements have been reviewed and evaluated by an external source, your business will have more credibility in the marketplace than those who have not. Lenders, investors, and potential clients will all be more confident in a company that has been externally audited.
It's also been seen that businesses are typically more able to attract better terms, such as on a loan if your business has externally audited financial statements. They provide some level of security to the lender that the accounts are error-free, and your business has not committed any fraud and tax scam.
Gaining this kind of favorable reputation is a long process that should be taken seriously for the most efficient long-term performance of your company. Some experts have stated that having a favorable reputation, like keeping your financial statements clean, will lead to more favorable outcomes. These can include:
- Customers may be willing to pay higher prices to a company with a stellar reputation
- It may be easier to attract new and better clients based on your reputation
- Investors will be more attracted to a company with solid financials.
Although it may come at a cost, in the beginning, building an excellent reputation is a part of your brand that will have a significant impact on the long-term success of your business. It’s an intangible asset that could increase your company’s value and increase your opportunities for future, sustainable success.
4. Improve Your Efficiency
In an ideal world, your business would run smoothly without inefficiencies. Unfortunately, we don't live in an ideal world. When inefficiencies remain unaddressed, they can negatively impact your balance sheet and income statement. They can even decrease your net income and cut into your profits.
Even if everything is running smoothly, an external accountant will have the expertise and experience to recommend certain processes that will help make your business more efficient. Not every recommendation your CPA makes will be something that works for your business. That means you can pick and choose which suggestions to implement. That said, it is always useful to have someone impartial identify areas of inefficiency and point out areas where your business can improve its efficiency and profitability.
External financial statement services will be able to review your internal controls and be sure your business is following guidelines that will ensure your success in the future. For example, they will make sure you have an adequate paper trail that you can use in the event that your business is exposed to an HMRC tax investigation or a tax audit.
Likewise, the servicers you hire will review the technological systems you are using and will either say they’re good, or they will recommend better products that would be more efficient and effective for your team. The bottom line is that hiring an external firm to create and review your financial statements is like getting a CPA and an efficiency expert all in one package.
5. Providing You Another Perspective
We all know the saying "You can't see the forest for the trees." It's an enduring proverb because it is true in many cases. When you're too close to a situation, it can be extremely difficult -- if not impossible -- to get a big picture view of it.
The financial statement services team will review how duties are segregated to employees. According to the AICPA, segregation is an important aspect to consider when trying to safeguard against fraud and human error within any business.
Internal employees are often blinded from both risks and opportunities because they have been focusing on the same issues for so long. When an external group comes in to deliver financial statement services, they come in with a fresh set of eyes and a new perspective that can prove to be very fruitful for their clients.
In other words, they don’t have any biases towards what they like or dislike about the company. They may be able to point out blind spots that you and your employees have missed, such as biases for certain employees or departments, overspending, or an unwillingness to change. it can delay needed process improvements that will enhance and promote growth.
6. Setting You Up for Future Success
Finally, hiring an outside company to review your cash flow statement, balance sheet, income statement, and accounts receivable can pave the way for the future success of your company.
At Cook Martin Poulson, we understand that it can be overwhelming to think about gathering your financials and getting a handle on your net income. With outside help, you can put everything in order -- and that will make it easy, going forward, to stay on top of your retained earnings, income, and other key metrics for your small business.
Of course, hiring someone now doesn't mean that you'll need to do all the work yourself. You may choose to retain an accountant to provide you with essential statements, so you can keep a handle on your income, balance sheet, and cash flow statement.
When an external group comes in to deliver their service, they are able to verify that the procedures used to report and compile a company’s financial information are satisfactory. If it isn’t, the external group can provide or recommend internal controls that will reduce the possibility of misreporting or fraud.
A certified public accountant can provide you with a list of weaknesses they have identified within your business. These suggestions are important to consider, and if you implement the recommended solutions, you should see your day-to-day operations run more smoothly.
Do you need help preparing your business financials? Click here to learn how Cook Martin Poulson can help!