4 benefits of preliminary financial statements to your company
Preliminary financial statements are an enormous help in planning the future of the company, and sometimes they can even help you to change the upcoming financial statements so that they show a profit instead of a loss. The information in the preliminary financial statements helps with tax planning and budgeting for the next financial year, for example. Companies with significant changes that have taken place or are taking place in their operation as well as companies that have lost their equity benefit from them in particular. Despite the numerous benefits, only few companies prepare preliminary financial statements.
Preliminary financial statements make preparing the actual financial statements as well as the planning and budgeting for the next year much easier. In practice, they involve preparing the matters required for the actual financial statements as far as possible in advance, as well as gathering information needed for the notes to the financial statements and the balance sheet itemisation. This means that the information will be available to the company well in advance before the end of the financial year.
The preliminary financial statements may reveal important details about the company’s finances early enough that there is still time to influence or address them during the financial year. In addition, preparing the actual financial statements is faster, when the main accounts are already up to date and most of the information required for the financial statements has been collected.
How your company benefits from preliminary financial statements
1. The preliminary financial statements highlight issues that require action well in advance.
For instance, if the company has made a loss during the financial year and it has lost its equity, it is necessary to make entry on the issue in the Trade Register. The company may nevertheless know that it will receive large amounts of revenue at the start of the next financial year, in which case financial statements showing a loss and the related entry in the Trade Register can be avoided by extending the financial year by six months at maximum. The Trade Register must be notified about the extension of the financial year two months before the end of the current financial year, however.
If such issues are only discovered in connection with the actual financial statements, it will be far too late to do anything. The same applies to revising the withholding taxes for the financial year; for instance, the revision will not be possible for self-employed individuals or partnerships after the end of the financial year.
2. Preliminary financial statements form a good basis for the budget of the following financial year.
Preparing preliminary financial statements in September or October creates a good basis for the planning and budgeting of the following year. This is especially important for companies, if there have been changes in their operation or operating environment, regardless of whether those changes involved the growth of the company, major investments, or a downward trend in the business.
A company that has undergone major changes cannot use the figures from previous years to predict the new year reliably. The same is true for new companies without history data.
3. Preliminary financial statements improve the predictability of financial management and make tax planning easier.
Based on the preliminary financial statements, the company can influence its result and the state of its equity during the financial year. By taking your own measures, you can improve or reduce the result of the financial year, if necessary, by moving deliveries and investments earlier or later and recording small purchases, such as computers and hand tools, in the income statement as a lump-sum expenditure.
When information on equity is up to date, it is also easier for entrepreneurs to consider whether to withdraw wages or dividends from the company, because the information on wages cannot be changed after it has been reported to the tax authorities.
4. The audit after the financial statements have been prepared is faster.
Auditors have also started to audit preliminary financial statements. This reduces their backlog and speeds up the audit after the financial statements have been prepared, because the majority of issues during the financial year has already been reviewed.
In connection with the preliminary financial statements, the company can also agree with the accountant on other details of the actual financial statements, which speeds up the audit further.
Act in time
Despite its benefits, preliminary financial statements are not a well-known option for companies.
If the monthly accounts and their accruals are up to date, preliminary financial statements are usually not considered necessary. They are also easily confused with interim financial statements; those, however, only show the situation on the monthly level and at the time of preparing the interim financial statement. The preliminary financial statements are much more detailed and describe the future situation of the whole financial year.
If you are considering preparing preliminary financial statements, discuss it with your accountant at least three months before the end of the financial year.
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