The Sunday Mail
Dr Kudzanai Vere
When running your business large or small, your attention is pulled in a thousand directions every minute and that’s how it is like in business.
Often times we tend to focus on the qualitative nature of it as owners of these entities without much emphasis on the financial health of the same. A gifted entrepreneurs doesn’t necessarily need to be a mathematician or an accountant per se, but the general appreciation of the major accounting headers in your business matters.
Every entrepreneur must have an understanding of budgets, revenue, sales, expenses, assets (current and non-current), creditors, debtors, interest computations, liabilities and the overall cash flows.
In the language of accountants, there are basically four types of financial statements that summarises the various sub accounts
I have mentioned above and these are, the income statement, statement of financial position (balance sheet), cash flow statement and statement of changes in equity. These four gives you an appreciation of how your business is progressing and allows you to plan diligently and from an informed position.
All profit making businesses must be so much particular with figures. It is from the daily number crunching that profits or losses within a business are arrived at and this is an area that every serious business person must invest time, resources and energy in understanding.
An income statement is a financial report detailing a company’s income and expenses over a reporting period. It can also be referred to as a profit and loss (P&L) statement and is typically prepared monthly, quarterly or annually.
Income statements depict a company’s financial performance over a reporting period. Because the income statement details revenues and expenses, it provides a glimpse into which business activities contributed how much in revenue terms and which ones cost the organization money.
An income statement typically include the following:
Revenue: How much money a business took in during a reporting period
Expenses: How much money a business spent during a reporting period
Costs of goods sold (COGS): The total costs associated with component parts of whatever product or service a company makes and sells
Gross profit: Revenue minus costs of goods sold
Operating income: Gross profit minus operating expenses
Income before taxes: Operating income minus non-operating expenses
Net income: Income before taxes
Earnings per share (EPS): Net income divided by the total number of outstanding shares
Depreciation: Value lost by assets, such as inventory, equipment, and property, over time
EBITDA: Earnings before interest, depreciation, taxes, and amortisation
The Income statement gives the owner of the business an insight as to how the business is performing and which of the explained areas above needs attention. A company can be experiencing huge expenses that are gobbling the entire revenue, keeping such records and compiling the income statement necessitates looking into the expense items that are on the high side and come up with ways of reducing them.
Balance sheet (Statement of financial position)
A balance sheet is one of the three fundamental financial statements and it states a business’s assets, liabilities, and shareholders’ equity at a specific point in time.
It offers a snapshot of what your business owns and what it owes as well as the amount invested by its owners. A balance sheet tells you a business’s worth at a given time, so you can better understand its financial position. Most small and medium enterprises doesn’t have an appreciation of their business’s worth mainly due to the in availability of such statements.
Simplified presentation of balance sheet
A balance sheet is made up of the following :
These are what your business owns of value that is or can be converted into cash to meet certain obligations. The balance sheet normally list the assets in order of liquidity. We have the non-current and the current assets.
Non-current are those assets which cannot be converted into cash within a period of one year. Examples of non-current assets include, your buildings, machinery, and property.
Other non-current includes long term securities which cannot be converted into cash within one year. You will also see a line item of intangible assets within this section which includes goodwill and some franchise agreements, patents and copyrights.
These are assets which can be quickly converted into cash within one year or less. This takes the form of your cash and cash equivalents, accounts receivables (debtors), marketable securities (investments that you can sell within one year), inventory (for businesses that sells goods, this can include both your finished products and the raw materials and prepaid expenses. If you pay an expense in advance, that’s a current asset, you can chose to have that refunded at any time since you haven’t enjoyed the benefit.
The next section of a balance sheet lists a company’s liabilities. Your liabilities are the money that you owe to others, including your recurring expenses, loan repayments, and other forms of debt. Liabilities are further broken down into current and long-term liabilities.
A current liability is an obligation that is payable within one year. A business must have sufficient liquidity to ensure that they can be paid off when due. These includes all amounts due but not yet paid.
Since current liabilities are typically paid by liquidating current assets, the presence of a large amount of current liabilities calls attention to the size and prospective liquidity of the offsetting amount of current assets listed on a company’s balance sheet. Current liabilities may also be settled through their replacement with other liabilities, such as with short-term debt.
A long-term liability is an obligation resulting from a previous event that is not due within one year of the date of the balance sheet (or not due within the company’s operating cycle if it is longer than one year).
Long-term liabilities are also known as noncurrent liabilities. These includes loans payables, bonds, retirements, deferred revenues and others.
Shareholders’ equity is the money that would be left if a company were to sell all of its assets and pay off all its debts. The money would belong to the owners of the company.
It is the net worth of a company and can also be called “owners’ equity”. It can be found on a firm’s balance sheet and financial statements, along with data on assets and liabilities.
Stockholders’ equity shows the quality of a firm’s economic stability, it also provides insights into its capital structure. Finding it on the balance sheet is one way you can learn about the financial health of a firm.
Cash flow statement
The Statement of Cash Flows (also referred to as the cash flow statement) is one of the three key financial statements that report the cash generated and spent during a specific period of time (e.g., a month, quarter, or year). The statement of cash flows acts as a bridge between the income statement and balance sheet by showing how money moved in and out of the business.
Three Sections of the Statement of Cash Flows:
Operating Activities: The principal revenue-generating activities of an organization and other activities that are not investing or financing, any cash flows from current assets and current liabilities.
Investing Activities: Any cash flows from the acquisition and disposal of long-term assets and other investments not included in cash equivalents
Financing Activities: Any cash flows that result in changes in the size and composition of the contributed equity capital or borrowings of the entity (i.e., bonds, stock, dividends)
Without a grounded understanding of these numbers in business, it is very difficult to grow and sustain it. Everyone who is in or aspires to become an entrepreneur must invest some time and resources in understanding business figures.
The writer, Dr. Kudzanai Vere is the founder and CEO of Kudfort Zimbabwe, a fast growing accounting and business advisory firm that has assisted individuals and organizations start, support, sustain and succeed in their businesses through company registration, establishment of standard operating procedures (SOPS), basic book keeping, accounting, auditing, forensic accounting, PRAZ registration, business health checkups and business advisory services. Dr Vere authored a number of business and personal development books that have transformed minds. /You can contact Dr. Vere on +263 719 592232 or [email protected]