Description: The meaning of financial statements and the reasons of maintaining financial statements is deemed necessary after incorporating a company in the UAE.
Small businesses in the UAE have a lot to deal with. Managing their own company and taking care of the accounting process is a hectic task for a small business. This is concerning to the authorities since there are financial practices that are way too risky and significant to ignore. Among the most important and vital tips that small and medium businesses should follow is to never forget the maintenance of financial statements.
Segmentation of Financial Statements
Financial statements of any organisation are segmented into multiple records, and each record is associated with a different purpose.
A few of those records are mentioned below,
- Income statements
- Statement of cashflows
- Balance sheet
The purpose affixed or associated with each of this segment provides one specific service to the business.
1. Income Statements
Better known as the profit and loss statement, the income statement primarily focuses on a company’s revenues and expenses during a particular period. They provide an accurate representation regarding the money-making capabilities of a company.
These reports allow the management of the company and the third parties to see how the funds are being earned and utilised in the company.
2. Statement of Cash-flows
Cash flow and forecasting statements is a financial statement that summarises the value of the cash that enters and leaves the company in a given period of time, mostly a year. This statement measures how well a company manages its cash position to pay its short-term debt obligations and fund its operating expenses. The structure of cash flow statements is as follows,
- Cash from operating activities
- Cash from financing activities
- Cash from investing activities
- Disclosure of some non-cash activities is also required under the international accounting standards.
Cash flow is different from the income statement and other statements because it does not consider the future cash or cash recorded on credit.
3. Balance Sheet
A balance sheet displays a company’s worth at any given time; It records the assets and liabilities held by the business, shareholder equity and capital in order to report how much the company owes and owns. It provides a basis for the calculation of rates of return and business valuation.
Reasons a Business in the UAE Requires Financial Statements
The purpose of maintaining financial statements is to gain information regarding the operations, financial positions and cash flows of an organisation. This information can be used by the readers of financial statements to either allocate better resources or make proper decisions regarding the betterment of the business. Here are some major reasons,
1. To Appease Shareholders
You will need to inculcate confidence in the shareholders that the company is doing well so that they don’t take the ownership responsibilities from you. For this reason, they want to show results, and financial statements are the best medium to demonstrate the company’s attestation to detail, control and full understanding of the financial management.
2. Make Management Decisions
By producing accurate and updated financial statements of your company, you’ll be able to make proper and well informed financial and business decisions regarding the direction you want your business to go in.
Through careful analysis of your financial statements, you can detect patterns that can either be profitable or risky for your business; you can discover them prior and either take advantage of them or get business advisory services to get them fixed before they become a huge issue for your business.
3. Entice Investment opportunities
In the world of investors and investments, there are some investors who may take an interest in your business as it is innovative or new. The investors may be willing to risk, but they’ll need empirical evidence that they’ll get their money back with a good return.
Financial statements let you showcase your business to the investors and reap the benefits of cash flow forecasting, which would, in turn, help in enticing the investors when the business carries a certain risk.
The above are some of the important reasons due to which it is necessary for a business to create and maintain Financial Statements in the United Arab Emirates.