| Income
Statement and Balance Sheet for the period 1 March 2004 to 28 February
2005 for ABC Widgets CC |
|
|
| Assets |
|
| Current Assets |
|
| Bank
Account |
R 23,450 |
| Debtors |
R 156,000 |
| Total Current
Assets |
R 179,450 |
| Fixed/non
current assets |
|
| Buildings |
R 720,000 |
| Equipment |
R 125,000 |
| Total fixed/non
current assets |
R 845,000 |
| Total Assets |
R 1,024,450 |
|
|
| Liabilities |
|
| Current
Liabilities |
|
| Loan
from owner |
R 450,000 |
| Creditors |
R 135,000 |
| Total current
Liabilities |
R 585,000 |
| Non current
liabilities |
|
| Bond
on property |
R 102,000 |
| Total non
Current Liabilities |
R 102,000 |
| Equity Capital
and reserves |
|
| Owners'
Equity |
R 90,635 |
| Profit
carried forward |
R 246,815 |
| Sub Total -
Equity Capital and reserves |
R 337,450 |
| Total Liabilties |
R 1,024,450 |
|
|
| Income |
R 790,000 |
|
Cost of Sales |
R 255,000 |
| Gross Profit |
R 535,000 |
|
|
| Expenses |
|
| Postage |
R 7,800 |
| Staff Welfare |
R 1,290 |
| Entertainment |
R 1,250 |
| Travel |
R 8,900 |
| Commission paid |
R 6,700 |
| Accounting Fees |
R 3,500 |
| Insurance |
R 4,800 |
| Internet Charges |
R 3,400 |
| Stationery |
R 5,675 |
| Bank charges |
R 2,300 |
| Bank Duty |
R 560 |
| Cell phone
expense |
R 9,600 |
| Telephone |
R 12,000 |
| Interest paid |
R 2,455 |
| Lease Charges |
R 14,500 |
| Repairs &
Maintenance |
R 7,855 |
| Advertising |
R 15,600 |
| Salaries &
Wages |
R 180,000 |
| Total - Expenses |
R 288,185 |
| Profit |
R 246,815 |
Take a look at the balance sheet and income statement
alongside for the fictional business ABC Widgets CC.
It looks intimidating! Right?
Wrong? If you spend less than 5 minutes reading this article you will
understand and see the benefits on studying financial statements for
your own business.
The financial
experts talk about the bottom line. Go rignt now to the end of the
financial statements and see that the "bottom line" shows a profit of
R246,810.00. Decide if this is good or bad. Most would judge this
to be good!. There you have just analysed the most important part of
the financial statements.
Now go further:
The financial statements contain two main items:
Balance sheet:
This consists of assets and liabilities. Assets
are things you own, like the money in your bank accounts, and people
who promise to pay you money - i.e. your customers or debtors.
In this example the bank account has R23,450 in it, and your customers
(debtors) still owe the business R156,000). You also own a building
worth R720,000 and you have equipment worth R125,000. Does this mean it
is in a good financial position? Well we now have to look at what the
business owes - loans to repay and other items owed. in this case the
business owes you (the owner) R450,000, and it owes suppliers
(creditors) R125,000 for goods it has purchased. Ignore the Owner's
equity item.
To analyse your
balance sheet therefore: You owe suppliers R125,000 while your customer
owe you R156,000 - not too bad as long as you can collect that money
and your suppliers don't mind being paid late. The loan that the
business owes the owner is quite high, and it only has R23,450 in the
bank. Basically you need to be concerned about your cashflow. You don't
have that much in the bank, and the business can only pay your
suppliers when it gets paid by its customers.
There, in another two minutes you have analysed your cashflow!
Continuing...The
business owns a building worth R720,000 and only has a bond of R102,000
on it. Not too bad, and a way to raise finance if necessary by
increasing the bond.
Note this is often preferable to taking out an
overdraft with your bank.
Income Statement
Now to look at the income statement. The income
statement shows income of R790,000, with cost of sales of R255,000,
giving a gross profit of R535,000. Now look at expenses: The aim of a
business is to keep its expenses below income. The total expenses are
R288,185, well below the gross profit. That is why the busines has
shown such a high profit. It is worthwhile looking at expenses to see
which are high and which are low. In this business salaries are
R180,000 and make up the vast majority of expenses. Other expense are
very low.
When looking at
expenses in particular, it is often useful to look at expenses each
month over the past couple of years. That way it will be easy to see a
trend of ncreasing, or decreasing expenses and take remedial action. Do
the same exercise for sales.
There, the job is
done - you now know more about this business and its finances than you
did 5 minutes ago. you could probably make some good decisions about
this business and how to run it just by having done this exercise. Have
we proved to you that financial statements have a use, more than just
giving to your bank manager because he asked for them?
Do you think your business
would perform better if you had this information at your fingertips,
and could therefore make informed decisions?
With
our product EconoAccounting,
you will be able to produce similar financial statements and make
better decisions. |
|
|
Your
Business and
Debtors
Debtors are customers who owe money to your business. A customer will
purchase goods or services from you, and either pay you immediately -
COD (cash on delivery) or offer to pay later. Even if you do not allow
accounts, a customer is a debtor until he pays, even if it is later in
the day or the following day. It is the business's job to collect that
money as soon as possible.
A business will typically issue an invoice to its customers whenever
the customer makes a purchase. It could be a cash sale slip, a hand
written invoice from a pre-printed invoice book, or computer generated.
Either way it is usually the only proof that the required goods or
services have been supplied to the customer, and that the customer
agrees to pay for those goods. When the customer pays, it is necessary
to mark the invoice as being paid, or at worst that the debt is no
longer owing. If a business has one invoice per day, it is usually easy
for the owner to remember whether or not he has been paid. As the
business get busier and invoices mount up, this task that seems so easy
becomes impossible. This is often the start of the "admin nightmare" in
a business. The business seems busy, but customers don't pay or don't
pay on time and it is difficult to find out exactly how much they still
owe the business, never mind the inter-personal difficulties of dealing
with customers who are becoming bad debts.
We have come across many businesses that are unable to reprint an
invoice, because the invoice was lost, or never saved on the computer.
We have seen many businesses that are unable to give a summary of all
amounts purchased, owed and paid - the common debtors statement. We
have seen businesses where the system consists of two piles of invoices
- the left-hand pile is the unpaid invoicess, and the right-hand pile
is the paid invoices. What happens if a blast of wind blows the two
piles into each other? Simple, the business closes because it is unable
to collect monies owed.
Many customers, particularly large corporates and government
institutions only pay on statement. Their own order form clearly states
their terms as being 30, or 60 or even 90 days from date of statement.
Unfortunately the business does not get around to issuing a statement.
The invoice is hard enough to produce. The statement gets delayed for
weeks or months or never gets produced! Never mind the terms clearly
state that a statement must be supplied!
What is a statement?
A debtors' statement is a document summarising all amounts owing,
itemised by date. It also lists all amounts paid, usually indicating
which invoice was paid by which payment. This is known as the "open
item" method of producing statements. If the amounts paid are not
reconciled against specific invoices, the statement is known as
"balance brought forward". It is usually preferable to use the open
item method, as this shows the business owner exactly which invoice has
been paid and which is still unpaid. If a particular invoice is not
paid, at least the owner can ask the customer about that particular
invoice and if he has a reason for not paying it.
Aging
A statement usually has an aging or age analysis or it. The
aging analyses each outstanding amount and calculates for how long it
has been unpaid. This is usually summarised into all amounts that have
been unpaid for less than 30 days (sometimes known as current), amounts
unpaid between 31 days and 60 days, 61 days and 90 days and over 90
days. As a general rule of thumb any debtor older than 30 days needs to
be followed up and anything over 90 days (or three months) is a problem
and about to be lost. This obviously depends on the credit terms
advanced to the customer.
Another useful document is the Age Analysis for all customers. This
document lists all customers, in a table format, and shows each
customers aging. A total for each age category is then printed,
summarising the entire business's situation. Again, the higher the
number of days of debtors, the worse the situation.
How to calculate and produce a statement:
Use the following as an example: A customer purchases on 17th February.
The full amount is R9800.00. Let us assume the customer has so far paid
R4500.00 on 12th March 2005. The amount outstanding is therefore
R5300.00 This is being written on 22nd March 2005, so the aging on this
invoice is between 31 and 60 days, 33 days to be exact.
Let us assume the customer purchased additional goods on 18th February
worth R2300.00. If he has not made any payments then this amount also
falls into the 31-60 days aging.
The statement would show;
|
17th Feb 2005 |
Purchases (invoice no 1254) |
R9800.00 |
|
18th Feb 2005 |
Purchases (invoice no 1302) |
R2300.00 |
|
13th March 2005 |
Payment (invoice no 1254) |
-R4500.00 |
|
16th March 2005 |
Purchases (invoice no 1352) |
R1800.00 |
Aging:
| > 60 days |
31-60 days |
Current |
Total Owing |
| 0.00 |
R7600.00 |
R1800.00 |
R9400.00 |
How to produce the Age Analysis:
The age analysis summarises each customer's aging and displays it in a
table format.
Below is an example of an age analysis
Age Analysis for ABC as at 22nd March 2005-03-23
Company
| |
>60days |
31-60
days |
Current |
Total |
|
Abc
|
R560.00 |
R0.00 |
R780.00 |
R1340.00 |
|
XYZ |
R0.00 |
R450.00 |
R120.00 |
R 570.00 |
|
Total |
R560.00 |
R450.00 |
R900.00 |
R1910.00 |
The bottom line is that you are owed R1910.00, of which R900 is
current, R450 is over a month old, and R560.00 is over 2 months old. In
this example nearly 30% of all debtors is over 2 months old. (R560 of
R1910).
If this sounds complicated, it is not! However doing the job manually
becomes quite tedious and is prone to error. It is too easy to forget
to include an invoice, or exclude a payment. That is why it becomes
essential to use a computerised system, such as our EconoAccounting,
which does the job automatically.
Is it worth the initial expense and minimal effort to computerise?
Well, decide for yourself and look at how much is outstanding, and how
long the amounts have been owing.
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