Making Tax Digital – bringing financial information into economic context
Making Tax Digital has received a lot of negative press, it is fair to say. But like it or not, it is coming. There is some benefit in finding the merits to focus on rather than the drawbacks, if only at the very least for the purposes of personal sanity!
Financial statements are very informative. They demonstrate the business’s ability to generate profit and the balance sheet informs the user of the current status of the business. Current?
Unincorporated businesses don’t need to prepare financial statements until their tax is due. A business with a year end of 30 April 16, will not need to prepare their accounts until the 31 January 2018. That’s almost 2 years from the end of the accounting period. So when you have that set of financial statements in hand, what value do they provide to you at that point in time other than a box-ticking exercise for the purposes of self assessment? The bookkeeping function as we currently know it has stagnated and is not providing you with the financial tools and information you need in today’s highly competitive and complex business environment.
Never more importantly than now, has there been a need for the bookkeeping function to shift its focus from looking at the past and moving its focus towards one with a financial management objective, one that looks to the future. Getting information that indicates all is not well early allows the owner-manager to take proactive rather than reactive corrective action. This facilitates better cost management and shifts the profit focus onto the today rather than ‘the accounts we have for the last accounting period’.
Financial statements are designed to offer predictive value. But that predictive value is lost the further away you move from the year end. The traditional approach to the preparation of financial statements is losing momentum and probably working in inverse correlation to the speed at which the economic environment is changing. This is the point at which we need to ask whether they have a purpose.
A move to digitalisation begins to look more attractive when things are put like this. Holding the information in as close to real time as possible, enables the business to make better strategic and investment decisions at a point where opportunities are available rather than looking back at when they were missed wishing you’d acted quicker.
If you would like to speak to someone about Making Tax Digital or cloud accounting please contact your local office or send an enquiry as we are interested in discussing this with you.