Financial statement and taxes - when is it needed?

[tabat]

Hello and thank to you all in advance,

I have started a corporation and this would be my first year in business. With regards to providing a "financial statement" at tax filing time, I was told:
Usually if you are starting out you don’t really need one unless the bank or financier wants it

Is it true? When is the financial statement needed? And by whom?


Thank you

Best regards

[lucas.bowser]

That's a loaded question. Is it true? Yes.

The truth is, you are rarely forced compile financial statements strictly for taxes, but you do need to understand several pieces of what would be on them. You need to understand your capital purchases and track their respective depreciation schedules, your revenues and your pre-tax expenses. Depending on the type and size of the business you have, you should probably be using a basic accounting package like QuickBooks or PeachTree to track this information. If you are using this software and you are doing it right, you should be able to generate financial statements auto-magically.

As far as when you need them and who needs them, this depends upon what your business is doing. Suppliers who have limited capacity may want them to understand the risk of providing you with product. Customers who consider your product or service critical may demand them before signing on with you. Banks and investors want to understand the health of your company before investing or loaning to you. These are just a few examples of outside interested parties. There are potentially others.

The bigger question is why you would want to avoid generating them? The four basic financial statements (I assume you are just referring to an income statement above), when used properly, are one of the best tools you have to understand your business and where your problems and strengths are. You can make a lot of money without them, but you can also lose a lot of money without them too. You need to think about your business statements as a monthly check-up. If your margins start dropping, you need to diagnose the problem immediately and take steps to correct it. Remember, no one will look after the health of your business but you.

At the end of the day, you should be the biggest user of your financial statements.

[lucas.bowser]

In reading what I just posted, I should point out that margins is just one example of financial health. In a vacuum, margin is meaningless. There are other metrics that you can get from financial statements that you can use together as an indicator of total health. I would equate margin with blood pressure. BP by itself does not indicate good heart health. You need to understand pulse rate, cholesterol, etc... Financial statements are the same way. They can provide a series of signals, that when taken together, indicate good or bad business health.

[tabat]

Thank you Lucas.

Great answer !!!

I really needed to know if a financial statement was a requirement at Tax filing time...I guess the answer is no.