Financial accounting and reporting is important both for internal and external users.
Internal financial accounting
Within the business it is important to maintain accurate and up to date records for the following reasons:
1. Tax compliance
It is required by the Revenue commissioners. Tax compliance is mandatory so maintenance of proper books and records are essential to ensure accurate reporting of income and expenditure and the timely and accurate return of payroll and VAT returns.
2. Measuring performance
The prime users of financial accounting information about a business must be those who manage the business on a day to day basis. Furthermore, every business should have a business plan and a resultant annual budget to measure actual performance against. Information about sales revenue and gross profit, together with levels of expenditure on overhead is critical to the operation of the business. Operational decisions must be made consistently and these can be dangerous wrong if made on the basis of inaccurate or out of date information.
3. Planning and budgeting
Business plans are not just for loan applications or grant claims. The business plan is of course an important requirement for obtaining external support but if it is not a real plan for a real business then it is a recipe for disaster. The old adage states that if you fail to plan you plan to fail. That can be updated to state that if you fail to plan honestly, accurately and realistically you will plan to fail spectacularly, disastrously and financially. Simply put, when you prepare your initial plan you require feedback from your accounts system to measure your business performance against the plan, so that early corrective action can be taken. When you selectively prepare your annual budgets past performance measured by your accounts system forms the basis for future projections.
External financial accounting
For external users too, financial accounting and reporting is of extreme importance:
1. Existing (include yourself) and potential investors
Your accounts give a clear picture of the financial standing of the business to existing and potential investors, helping them in deciding whether or not to invest. Financial accounting also gives you up to date information for existing investors about the future of their investment.
Financial accounting is required by banks to support loan applications and existing borrowing facilities including overdrafts.
3. Suppliers and Customers
Suppliers often take decisions about extending credit to companies based on information extracted from accounts. Also customers, especially PLCs or large multinationals often check the financial status of potential providers of goods and services before awarding contracts. The absence of up to date financial accounting statements to demonstrate capability to fulfill contracts can be costly.
4. Tax Clearance
A current tax clearance certificate is required by semi-state and state companies as well as local and central government departments prior to awarding contracts. There are also an increasing number of private sector companies who are insisting on tax clearance as a prerequisite to trade. A tax clearance certificate can only be obtained from the Revenue Commissioners if all taxes are paid up to date and all returns made. Needless to say, having accurate and up to date accounts is necessary to achieve this.
If you are not in control of your financial accounting you are not in control of your business