Why do business  financial statements matter?

Financial statements serve both internal and external purposes. Internally, they help businesses set financial targets, prepare budgets and forecast future performance. From a tax perspective, they ensure compliance with the South African Revenue Services (SARS) for accurate tax assessments.

Externally, financial statements are vital for company valuations in the case of potential mergers, acquisitions or sales. They’re also essential for creating transparency and trust with stakeholders such as investors or partners.

When it comes to financing your business, for example applying for loans or investment funding, financial statements form an essential part of your application.

What do financial statements consist of? 

There are three main sets of documents that form a company’s financial statements:

1. Balance Sheet: This is a summary of your business’s financial status at a particular moment in time. It shows your business’s assets and liabilities, as well as the value of your equity in the business as the owner or shareholder. This is useful for knowing the overall value and liquidity of the business
2. Income Statement: Also known as a Profit & Loss Report, the income statement shows the income and expenses for your business during a specified period. It’s useful for knowing how much income and profit your business generated in a particular period (such as a month, quarter or year), and where business money is being spent.
3. Statement of Cash Flows: This document provides insights into how the company generates and uses its cash. It organises cash-related activities into three main categories: operating, investing, and financing activities. It’s mainly used by stakeholders (such as owners, shareholders or investors) to determine the business’s overall health in terms of cash flow, given where the company is in its stage of growth.

Do I have to prepare financial statements?

South African financial reporting is regulated by the Companies Act of 2008 and overseen by the Companies and Intellectual Property Commission (CIPC). Under the Act, all registered entities, including companies and trusts, must prepare annual financial statements — even if they are currently dormant.

The Companies Act mandates preparation of a business’s financial statements within six months of the financial year-end. If you fail to prepare and submit them within this timeframe, you could be liable for penalties from SARS or the CIPC. Your business may also face reputational damage and operational setbacks, particularly if you want to seek funding or partnerships in future.

Do I need to have my business’s financial statements audited?

A private or personal liability company in South Africa is required to have its financial statements externally audited by a third party if:

• It holds assets in a fiduciary capacity for people not related to the company, and these assets have an aggregate value at any time during the financial year of R5 million or more.
• It compiles its financial statements internally (for example, by its financial director or one of the owners) and it has a Public Interest Score (PIS) of 100 or more.
• Its financial statements are compiled by an independent party (such as an external accountant) and it has a PIS of 350 or more.

Under the Companies Act, a Public Interest Score (PIS) is a metric used to measure the level of public interest in a company. This score depends on factors such as the number of employees, the amount of third-party liabilities, turnover and beneficial shareholders.

How can I get help with my financial statements?

Understanding and preparing financial statements isn’t just a legal obligation—it’s a strategic necessity. By ensuring timely compliance and leveraging the insights from these documents, you can ensure that your business strengthens its operations, enhances transparency and builds trust with stakeholders.

At Cornerstone, our outsourced financial management and accounting services include the preparation of your financial statements. Our financial and tax experts have sound knowledge about South Africa’s unique regulatory environment to ensure the statements are correct and compliant – plus we’ll provide interpretive analysis so you can understand the health of your business in the context of the relevant accounting principles. In this way, you can protect your business, enhance operational efficiency and be prepared for any future financial opportunities.