Financial Statements for Small Businesses

Temitope Adeyemo

An enterprise whether small or large can be measured using different performance metrics. Financial statements are like a report card that shows how healthy a company is. There are three basic statements- balance sheet, income statement and cash flow statement. Each provides specific financial information on different aspects of an enterprise.

Balance Sheet

Balance Sheet is a financial statement that shows a company’s assets, liabilities and owners (shareholders)equity at a specific period in time. In other words, the balance sheet captures what a company owns, owes and the amount invested by the owner(s) of the business.,

There are three major components of a balance sheet; assets, liabilities, and equity.

Asset= Liabilities + Equity

The logic behind this is that a business has to pay for whatever it owns through liabilities and/or Shareholders’ funds. For example, a business has N1 million in its bank account. How did the business fund the account? Did it borrow? Or was it funded by the owners? All revenues generated by the business in excess of its liabilities go to shareholders’ equity.

Amina starts a business- Amina’s Bakery. She decides to invest N500,000 into the business and borrow N200, 000. The total asset of the business is 700,000 while its liabilities and equity are N700,000. Amina’s Bakery’s total balance sheet is N700,000. To find out the networth of the business, subtract the total liabilities from the asset. Amina’s bakery net worth is N500,000.

Income Statement

Income Statement, also known as profit and loss statement, is a financial statement that reports a company’s financial performance over a given period. Essentially, it captures revenues and expenses during a particular period. While the balance sheet provides a snapshot of what a company owns, owes and shareholders equity, Income statement records income/loss. It provides crucial insights into a company’s operations, efficiency and performance.

There are four major components of an income statement; revenue, expenses, gains, and losses. The structure/ formula is calculated thus:

Net Income= (Revenue+Gains)- (Expenses+losses)

Amina’s Bakery in the first quarter of 2019 sold 10,000 loaves of bread at N100 per loaf. The total revenue is N1,000000. The company purchased raw materials totaling N300,000, paid N200,000 as salaries and paid another N200,000 as electricity, transportation, and other utility bills. So, the total expenses for the period are N700,000. During the quarter, the company decided to dispose of an old oven. It sold it for N80,000. This is reported as gains. The company also paid a N50,000 as fine when a LASTMA official arrested the company’s driver for driving without a seat belt. This is reported as a loss. Using the formula above, the company’s income statement will look like this:

Net Income= (Revenue-N1,000,000+Gains-N80,000)- (Expenses-N700,000+Loss-N50,000)

Net Income=N330,000

Cash Flow Statement

Cash flow is the movement of cash, in and out of a business. It tracks the increase and decrease of money at a given period in time. It measures how well a business manages its cash position. Cash is the life of any business. Without cash, a business dies. Basically, cash coming in from customers or clients, buying your products or services, forms cash inflow into your business. Monies going out of the business, in the form of expenses like salaries, purchase of raw materials, etc., make up the cash outflow in your business.

Cash is cash. Account receivable (monies owed to the company) is not cash. To keep a healthy cash flow as a business, you must ensure you collect monies due to the business at the earliest possible time and delay payment for as long as possible. When customers or clients owe you, find ways to quickly collect what they owe. That is, convert your account receivables to cash as quickly as possible. On the other hand, avoid having too many pre-payments. Create a strategy where you have a large portion of accounts payable. For instance, you can negotiate with suppliers to give you raw materials upfront and pay them at an agreed future date. The objective is to retain cash in the business for as long as possible.

Develop a system to track the movement of cash in your business. As a small business, keep it simple. As earlier said, cash is cash. You must strive to maintain positive cash flow. Simply put, the amount of cash flowing into the business must exceed the amount exiting the business. If you have a negative cash flow, you either need to inject more equity in the business or take a loan to cover the shortfall. However, your aim must be to build a business to a level where it can sustain itself by generating enough cash to cover its expenses.

Temitope Adeyemo is the publisher @sme360ng and the author of Young, Black and Successful. Follow him on Twitter @topeadeyemo