When I teach small business owners the importance of Bookkeeping, I always highlight that they know the following categories by heart. That is: Assets, Liabilities, Income, Expense and Owners ‘s equity.
The reason I do that is because, the above-mentioned categories play a huge role in preparing the company Annual reports known as Annual Financial Statements – AFS.
Briefly, the importance of AFS is that you want to know the performance and the position of the business after a certain period. I also urge the business owners not to wait for a 12 months period before they prepare the reports. Preferably on a monthly basis. That way you also understand the business, risks to mitigate if any as well as improvements to be made. You do not want to wait for a year. It will be a little too late and so much would have been lost.
The four primary parts that forms the Annual Financial Statements are: Income Statement, Balance Sheet, Cashflow Statements and Statement of owner’s equity.
1. Income Statement
– explains the performance of the business. Consists of the operating and non-operating section. This report have all the the details of the company earnings as well as the company spending. Earnings in the form of sales generated/ revenues. Spending is operational expenses incurred in order for the business to operate. However prior we list the expenses we also have to take into account the COS – Cost of Sales. To simplify it, COS are the raw materials that are needed to be put together in order to have the end product. They are known as the non operational section of the report. Not all businesses will have this part of the report. It depends on the nature of business. The reason to minus the expenses from the business sales it is so that we can determine how much profit we are left with. That is the net profit of the business. The figure is also known as the taxable income by the receiver of revenue. From this report, you will be able to see if the business is profitable, stagnant or non-profitable, thus the performance.
2. Balance Sheet
– explains the position of the business. It consists of the Assets and Liabilities.
Assets are the items that the business owns. The use of assets is to generate an income. We have current assets and non-curremt assets. Current Assets are those items that change their position at anytime. For e.g. cash, stock,etc. While non-current Assets have a long time span in the business. For e.g. vehicles, machinery, property, etc. Though they lose their value over time but they help in generating income for the business over and over again. Liabilities are the people that the business owes. Such as loan, suppliers, tax, etc. We call them liabilities because you are obligated to pay back.
3. Cashflow Statements
– it pertains the inflow and outflow of cash in the business. The person reading this report they are able to determine your relationship with the money. As money comes into the business as sales/revenue or a loan – we also scrutinise the manner in which it leaves the business. The business funds must be used for the following reasons: Operational use, Investing and Financing. If anyone reads the cashflow statement and they find the discrepancies that are not of the above-mentioned reasons, they can conclude that you are then careless with the money. And this conclusion may block many opportunities for you. No one would like to risk doing business with an irresponsible individual. Thus, seriously be in check the relationship you have with the money.
4. Statement of Owner’s equity
– the main objective of this report is to indicate how much of the business owner is stored in the business. For e.g. the money that the owner inject into the business is called Capital. The transaction can be allocated on the balance sheet section of the financial statement. As it has the same effect as those of liabilities.
Let It be known that all these reports combined are called Annual Financial Statements. You cannot prepare one and name it AFS. They each give a specific status of the business.
These reports are also important to external parties such as the banks, Sars, investors, funding institutions, government, and many others.
If you need a consultation with us with regards to your business, any type of business – please reach out to us on email PA@matsobanemetja.co.za
Compiled by Ms. Dikeledi Seoloane on behalf of Matsobanemetja Business Consulting (Pty) Ltd
For more information: enquiries@matsobanemetja.co.za
“You have more independent eyes scrutinizing the decision-making and financial statements of companies.”
Steve Odland
Matsobanemetja Business Consulting Pty Ltd 