One of my clients, Raphael, is busy picking up the pieces of his small business. He entered into a contract with a supplier. When it came time to pay, he realised there was a short-fall in his current account, and he panicked. He couldn't find an investor to help him out of his crisis. He came to me for help.
The supplier sued him for R500 000 because he couldn't fulfil the terms of the agreement… he couldn't pay. The root cause of this predicament was that he didn't do financial reporting for three months, didn't know the financial status of his business, and was sued. He had to pay up.
I've written this to highlight the two types of financial reports, and tell you why you should compile and analyse them regularly. Let's see how to avoid ending up like Raphael…
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There are two types of financial reports you must do
1. Financial statements
Financial statements are also known as financial accounting reports. Without financial statements, you won't have a summary of your financial position, performance and changes to the financial position of your company. SARS, your bank, and other external investors will analyse these to make decisions about the financial position of your company.
That's why they're known as external reports, your business can't gauge profits, cash flow and changes in the net assets. You don't have to produce these reports every month, but don't go years without doing them.
2. Management accounting reports
Are you like Raphael who didn't update his management accounting reports? If you are, you may be making the incorrect internal management decisions, because you can't monitor the company's performance correctly.
If Raphael had known the financial position of the business, he might've ordered less stock, and not ended up in financial distress.
So what should you be doing for financial reporting in your company?
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Why financial reporting is crucial for your business
Produce financial statements at least once a year to the prescribed standards. If Raphael had recent financial statements, he'd have been in a position to find an investor to help him pay the supplier.
There's no prescribed template or frequency for doing management accounting reports. Your management accounting reports depend on the type of business and what information you need. Clearly once in three months wasn't good enough for Raphael!
For A-Z on financial reports turn to Accounting reports chapter A 03 in your Practical Accountancy Loose Leaf.
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Editor-In-Chief - Practical Accountancy Loose Leaf
P.S: You could face up to R1 million in fines if you don't comply with the regulations of the new Companies Act
. Need expert advice to avoid this? Click here.