Connect with us
nairametrics
UBA ads

Financial Literacy

What business owners need to know about balance sheets

The balance sheet is one of the primary financial statements that can be used to manage your business on both a long-term and daily basis.

Published

on

Federal Government to introduce new laws for online businesses, What business owners need to know about balance sheets, Why investors should understand the basics of financial statements, How adopting an agile approach can optimize your business outcomes, Tips to help you launch your own business in 2020 (Part 2), Here are reasons your business should monitor its website, Helpful ways to get your business to run without you, Priority needs of Nigerian businesses during this Covid-19 era

The balance sheet is one of the primary financial statements that can be used to manage your business on both a long-term and daily basis. While you may delegate the preparation of the balance sheet to an accountant or bookkeeper, it represents your business, so you should understand how to read and use it.

Business owners and CEOs often overlook their balance sheets in favour of the income statement, or profit and loss (P&L) statement, which is pillar of management. At a glance, the income statement reveals revenue, maybe gross profit, and net income but taking the time to zoom out and look at the big picture is a chance for you to evaluate your business.

UBA ADS
  • Are things working as you expected?
  • Should you make changes to your strategy?

Why do a monthly balance sheet analysis?

Your balance sheet gives you an at-a-glance view of your business’s assets (what you own) and liabilities (what you owe). Your balance sheet also tracks owner and shareholder investments (equity), but that’s less important for most small businesses to keep an extremely close eye on.

financial security, Financing for Small Business, Financing for Small Business, Why having a growth plan is important for your business, Here’s how to SWOT your way to competitive advantage

Your balance sheet complements your profit and loss statement and your cash flow statement, to give you a complete financial picture of your business. Here are the questions your balance sheet can answer for you that your other financial statements can’t address:

GTBank 728 x 90
  • How much money is in the bank?

This is probably one of the most frequent and most important questions that business owners ask themselves. Knowing what you have in the bank is the key to most financial decisions. The amount of cash that your business has on hand is listed in the assets section of your balance sheet and is classified as a “current asset.” Current assets are cash and other things that you can quickly turn into cash to pay your bills.

[READ MORE: Is there a legitimate Nigerian business that can guarantee 5-10% monthly interest?)

  • Are you owed money?

Keeping track of how much money you are owed is also an important part of your financial position. You will find this number in the “accounts receivable” row on your balance sheet. If your customers don’t pay you in cash – you send them invoices and they pay later – this is where you will find what’s owed to you.

onebank728 x 90
  • How much inventory do you have on hand?

If you sell products, you deal with inventory. While your balance sheet doesn’t tell you exactly what products you have on hand and how many of each, it does tell you the value of that inventory. Keep in mind that the value of the inventory listed on your balance sheet is what you paid for that inventory, not what it might be worth if you sold it to customers. Inventory is a current asset because the assumption is that you can convert that inventory into cash relatively quickly.

  • What other assets do you have?

If you have other assets, both other current assets and what are called “long term assets,” you will also find those listed on the balance sheet. Long term assets are things that you would typically hold for a longer period of time and are more difficult to convert into cash.

  • What bills are outstanding?

Just like you will want to keep a close eye on who owes you money, you will also want to track how much money you owe to your vendors. Those accumulating bills will show up on the “accounts payable” line of your balance sheet. How much cash you have in the bank and how much your customers owe you will likely be factors, as you consider how quickly you want to pay those bills.

app
GTBank 728 x 90
  • How much do you owe?

In addition to bills from your vendors, your business is probably accumulating other debts. Those are called “current liabilities” and will show up on your balance sheet in that section. Everything that you owe will total up in the liabilities section of your balance sheet, showing you exactly how much your business owes. 

Balance sheets are really all about comparison

Learn the following three keys to reading balance sheets to make the most of them:

  • Begin by Tracking Equity Trends

Equity is the summary and culmination of everything that happens in your company. Over time, it reveals how well you are managing your company’s value. Use balance sheets distributed at the end of each period to track your company’s equity, which is the net worth of the business.

Equity = Assets – Liabilities + Net Income

  • Consider Changes in Assets and Liabilities

After using assets and liabilities to calculate equity, consider them individually. These numbers on their own will reveal to you where your company’s cash goes each week, month or year. You can determine whether or not your company is growing by comparing these numbers from balance sheet to balance sheet. If assets increase more than liabilities, then the company is growing. If liabilities increase more rapidly than assets, then the company is losing value (equity). With this simple comparison, you can quickly assess how well you are managing the business.

app

[READ ALSO: Solomon Udoh’s experience is why you should monitor your investment performance constantly)

What you should know before investing in Cryptocurrency

  • Determine Your Liquidity by Calculating the Current Ratio

The current ratio also referred to as the working capital ratio, reveals a company’s liquidity or its ability to repay debts (both long-term and short-term obligations) by comparing all of a company’s liquid and illiquid assets to the company’s total liabilities. This ratio reveals much more than simply looking at your cash on hand from a balance sheet because total assets in the current ratio also includes receivables.

Current Ratio = Current Assets / Current Liabilities

A current ratio greater than one generally expresses a healthy financial state. A ratio above one means the company has more assets than liabilities and should not have a problem repaying debts or covering expenses.

Patricia
Click to comment

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Personal Finance

Emergency Fund: Can you raise N50,000 cash tomorrow?

Focus on building up your emergency funds before building a portfolio of assets.

Published

on

Emergency Fund

Can you raise N50,000 cash tomorrow? Yes cash, without selling any asset of yours; Can you? This is a very important question you need to ask yourself. One generally accepted lesson from the 2020 economic downturn for both corporations and individuals is to always have an emergency fund (EF). So, what is an Emergency Fund? How is it set up? How is it used? Let us explore.

What is Emergency Fund

An EF is a savings account set up to pool and hold a minimum of three months of calculated Non-Discretionary Income (NDI). The EF is advised as the first activity any investors should undertake. Specifically, before even investing a cent, set up and maintain an EF because this fund acts as an “insurance” or stop-gap for your income or investment portfolio.

UBA ADS

How is an Emergency Fund set up?

An EF captures a minimum of three months of Non-Discretionary Income (NDI). What is NDI? These are expenses incurred that must be settled irrespective of income. For instance, rent must be paid, groceries must be paid, we cannot simply stop paying utility bills because we lost our job and thus income.

Once we decide on an investment plan, the first thing to do is to list out all expenses we will incur and attach a cost to them per month or annual basis but corresponding to the period of payment. We do this to identify the necessary expenses which we refer to as the NDE.

List of expenses

  • Rent N1,500
  • School fees N500
  • Camping/Holiday N300
  • Go to Movies N100
  • Groceries N400
  • Cable TV N200
  • Gas for cars N200
  • Phone Bill N300
  • Eating out Dinner N200

Total expenses for the month are 3,500

GTBank 728 x 90

Next, decide which of the expenses listed above are Non-Discretionary. In other words, which of these expenses must be settled irrespective of income? Let us assume our client chooses the following as NDE:

  • Rent N1,500
  • School fees N500
  • Groceries N400
  • Gas for car N200
  • Phone bills N300

These expenses above come to a monthly NDE of 2,900, with a three months minimum of 8,700. This minimum sum means that should the client lose his job or suffer any other income interruption, these necessary expenses will be paid from the emergency fund, without the need to sell down investment assets at fire-sale prices just to raise income.

How is it used?

The Emergency Fund is simply a piggy bank. Once it is set up, you can increase the minimum saving from 3 to 4 and as high as you want to go. What is does is insulate your investment portfolio from losing any compounding or dissipation in principal because you must sell.  So, if there is income interruption due to job loss or you simply want to take a long holiday and write a book, you can do so and still meet your expenses from these savings.

onebank728 x 90

An EF is not only for downturns, as it is also good for opportunities. A friend of mine bought an almost brand new car from a work colleague that was emigrating abroad because he could pay cash immediately in short notice. Cash is always king when you are in a tight negotiation with a seller.

Your Emergency Fund should be kept in cash or near cash investments. Return on investment for the EF is secondary to access to those savings. Also, you want your EF in an investment class with fixed income with no variation in returns. this means in practical terms do not invest your EF portfolio in equities that pay a variable return or even any asset which may need documentation and visits before you can access your funds. I am also wary of a commodity like gold, which does hold value, but cannot easily be converted to cash. The recommended asset classes to invest your EF are:

  1. Call or Fixed Deposit in Banks
  2. Sovereign Treasury bills, they are easily discounted and converted to cash
  3. Certificates of Deposit with bank

If the asset call cannot be converted to cash in one activity should be avoided. Also, ask the institution if they charge fees for early withdrawal and what those fees are.

app
GTBank 728 x 90

What can I do tomorrow?

  1. Start an emergency fund immediately. Do the expense exercise, determine your Non-Distortionary Expenses, start to build up a savings pot.
  2. Focus on building up your emergency funds before building a portfolio of assets.

Patricia
Continue Reading

Investment Tips

What bad stocks have in common with bitter relationships 

The feeling you get from marrying the wrong partner is similar to that felt after buying the wrong stocks.

Published

on

I have always argued that stocks cannot be summarised into one statement for a newbie, until recently when a friend told me that it could.  

“Simply put, buying stocks can be likened to relationships, he said.  

UBA ADS

did not immediately agreebut over the next few minutes, he explained to me what he meant, and drew several analogies to back his claims.  

While he is no expert, I understand that he has drawn his conclusion from his experience buying stocks for himself over the past 5 years, so I took his points seriously. These points have been summarised in this article. 

READ MORE: Cocoa prices melt lower as COVID-19 weakens demand 

GTBank 728 x 90

When it crashes, there is no telling how far it can go  

My friend mentioned of some company’s stock he bought in 2016 in the hope of selling short-term. At the time he bought, there was a dip and he expected things to pick up within some months so he could sell-off.  

Two years later, the stock price had plummeted 50% down from the price at which he bought. Without saying, he became a long-term investor because he was not ready to sell off at a loss.  

 

onebank728 x 90

How does this liken to being in a bad relationship?

As the value plummets, you keep hoping it will rise again and then before you know it you are stuck for the long haul. Same thing can happen with a wrong partner. You remain there hoping things will be better but it gets worse. 

It could happen sometimes that a company’s stock market price comes crashing and it never goes back to where it was againThe factors which triggered its fall, may not even be able to return it to its starting price.  

 

app
GTBank 728 x 90

The stock price is not indicative of the company’s profitability 

For some reason, there are company stocks market prices that remain low year after year despite the billions declared in profits, and the dividends paid out to shareholders.  

Sometimes, the stock market price could still slump even when the company has positive records in its financials. Market experts are not always able to explain this, but it remains true. Some of the most profitable stocks are undervalued.  

 

You can never take stocks at face value

That a stock has been on an upward trend in the last few months does not mean it will remain so. One must always consider several other factors before purchasing a stock.  

While it is important to look at past performance, there are other things that could point to the likely future of such stocks. 

app

Say, for instance, the company has just announced a new board chairman who was implicated in some fraud cases in the past. It doesn’t matter how well the stocks have performed in the last 365 days, or the chairman’s competence, the stock prices are most likely to slump due to loss of investor confidence.  

There was a recent case where the CEO of an internet service provider company was alleged to have been involved in sexual harassment, and was eventually pressured by shareholders to resign. The pressure came not necessarily because they thought he was guilty, but because of the implications on the company.  

You have to probe to discover the real qualities.  

 

The most expensive stocks are not necessarily the best. 

If you ever heard a stock described as under-priced or over-valued, then you should understand that the price you pay is not necessarily suggestive of the value.  

Some great stocks, with good potentials, high liquidity, good company profile and adherence to corporate governance ethics, are not as expensive as they should be. While some other stocks are ridiculously overpriced, even when they do not have as much promise. Some of these overpriced stocks could still be basking in past glory or just positive media hype.  

This explains why investors must conduct due diligence before putting in their hard-earned money. Sometimes the media hype around a company’s stock might not be giving you all the information you need to make a decision, so you necessarily have to go the extra mile.  

Subscribe to newsletters from financial news websites if you need to, take courses if you have to, but ensure to learn all you can.  

Remember price is what you pay for the stock, but value is what it is really worth, and there is no law stating that one must justify the other.  

READ MORE: Global stocks records astronomical gains in Q2 2020

When you get the wrong stocks, you get stuck! 

You know that feeling when you are sure that you have made the wrong choice, but also know that there is no way out? That’s the feeling you get when you marry the wrong partner, as my friend said. And that’s the same feeling you get when you get the wrong stocks.  

You simply get stuck.  

No returns. No dividends. Probably, no way to sell either because no one else is interested in buying from you. And if you do succeed in selling off at this point, you would most likely be doing so at a loss.  

If you study trends in the stock market, you will see some dormant stocks that have remained stagnant for long periods of time. No rise in share price, no fall in share price, and no share is being traded either.  

READ ALSO: Best time to make money trading BTCs

It is not a nice position to be in, and that is why you want to be sure of the company, its management, and board members who take the decisions before you decide to buy or not, even more so when you are a long-term investor.  

And even then, with the wrong stocks, you could suddenly find that your proposed short term investment of 6 months will run into years because you keep waiting for things to pick up before you sell.  

Patricia
Continue Reading

MSME

130 farmers to receive seed funding of N100,000 each

The target of the programme is to adopt farmers in 774 LGAs across the country.

Published

on

The National Information Technology Development Agency has kick-started a job and wealth creation programme where 130 farmers will each receiv, e seed funding of N100,000Border Closure: Nigerian rice farmers are struggling to feed a rice-hungry nation. CBN to give Niger Delta rice farmers single-digit loan 

The National Information Technology Development Agency has kick-started a job and wealth creation programme where 130 farmers will each receive seed funding of N100,000. The programme will be supervised by the Federal Ministry of Communication and Digital Economy.

According to a statement from the agency, the National Adopted Village for Smart Agriculture (NAVSA) programme is in line with the government’s drive to lift 100 million Nigerians out of poverty, and it will start with 130 farmers in Jigawa state.

UBA ADS

 

The target of the programme is to adopt farmers in 774 LGAs across the country, open the platform to all agriculture ecosystem players with access to information, facilitate and improve productivity, reduce the cost of production, and facilitate access to local and international markets.

GTBank 728 x 90

READ MORE: President Buhari directs Ministries of Power, Finance, BPE to seal Siemens deal

With all of this in place, it is expected that the farmers will be able to build sustainable business models and digital business opportunities that will create not less than 6 million well-paying jobs in the next 10 years.

“NAVSA Platform is aimed at digitalising agriculture to drive Digital Economy, as part of President Buhari’s agenda to leverage on technology and innovation to revolutionise the agriculture value chain,” the statement read.

onebank728 x 90

Dowmload the Nairametrics News App

Among other things, the farmers will be empowered with a digital platform, smart devices (tablets), connectivity for data and calls, Digital agripreneurship skills, and enrolment with telecom operators and the National Identity Management Commission (NIMC) for identification.

All of these will be given to them at the end of the programme, which will last from July 1 to July 13, 2020.

app
GTBank 728 x 90

Patricia
Continue Reading