| 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.
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