As an entrepreneur, you already know the fundamentals of accounting. Like every kienyeji business person you know about revenue and expense. You know about stock and investment; not good enough. To come up with great strategy you need to get a little bit more handle on things.
First, HerBusiness introduces you to the 3 most important financial statements.
If you are newbie entrepreneur this will sound most familiar to you. It’s that awareness of both revenue and expense. Many entrepreneurs in Kenya don’t go beyond this thus their businesses don’t go beyond being a corner shop. An income statement also referred to as a ‘profit and loss statement’, enables you track whether you’re operating at profit or experiencing losses.
You go beyond just calculating the difference between the sales and costs of goods sold. You subtract your operating expenses from your gross profit. If you are seeking a loan, this is what you will use to show how profitable your venture is.
2.Statement of Financial Position
A statement of financial position will show the financial health of your business. It is commonly called the balance sheet but we are cooler so we can’t use that. This financial document is easily summarized; it’s a summation of your equity and business liabilities. Collectively, these are the business’ assets.
Assets will include liquid ones like cash and inventory. Also included are fixed assets like machinery and premises. These you don’t look to convert to cash anytime soon. They affect your productivityand getting rid of them infact represents an unwanted picture of your business’ financial position.
3.Cash Flow Statement
This informs you about the monies coming into and going out of the business. We have stated before how a poor grasp of cash flow leads to business failure. Cash is the fuel for your business (corny but checks out). It’s obvious that you don’t want cash outflows to exceed cash inflows.
This is the most important financial document when you’re just starting out. Most importantly, it helps you keep up with business expenses. The cash flow statement tracks 3 activities; operating, investing and financing.