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Financial Literacy

What business owners need to know about balance sheets (PART 2)

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.

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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

How do I format a balance sheet?

Assets

Assets are subdivided into current and long-term assets to reflect the ease of liquidating each asset. Cash, for obvious reasons, is considered the most liquid of all assets. Long-term assets, such as real estate or machinery, are less likely to sell overnight or have the capability of being quickly converted into a current asset, such as cash.

Current assets:  Current assets are assets that can be easily converted into cash within one calendar year. Examples of current assets are checking or money market accounts, accounts receivable, and notes receivable that are due within one year’s time.

  • Cash: Money available immediately, such as in checking accounts, is the most liquid of all short-term assets.
  • Accounts receivable: This is money owed to the business for purchases made by customers, suppliers, and other vendors.
  • Notes receivable: Notes receivable that are due within one year are current assets. Notes that cannot be collected on within one year should be considered long-term assets.

Entrepreneur, Multiple businesses, Nigeria partners UAE to boost SMEs , US technology company deploys software to ease business process in Nigeria 

[READ MORE: What business owners need to know about balance sheets 1]

Long-term assets: Long-term assets include land, buildings, machinery, and vehicles that are used in connection with the business.

  • Land: Land is considered a fixed asset but, unlike other fixed assets, is not depreciated, because land is considered an asset that never wears out.
  • Buildings: Buildings are categorized as fixed assets and are depreciated over time.
  • Office equipment: This includes copiers, fax machines, printers, and computers used in your business.
  • Machinery: This figure represents machines and equipment used in your plant to produce your product. Examples of machinery might include lathes, conveyor belts, or a printing press.
  • Vehicles: This includes any vehicles used in your business.
  • Total fixed assets: This is the total dollar value of all fixed assets in your business, less any accumulated depreciation.

Total assets: This figure represents the total dollar value of both short-term and long-term assets of your business.

Creating a balance sheet might seem difficult, but it is essential for your business.

Liabilities and owners’ equity

This includes all debts and obligations owed by the business to outside creditors, vendors, or banks that are payable within one year, plus the owners’ equity. Often, this side of the balance sheet is simply referred to as “liabilities.”

Current liabilities: This is the sum total of all current liabilities owed to creditors that must be paid within a one-year time frame.

    • Accounts payable: This is comprised of all short-term obligations owed by your business to creditors, suppliers, and other vendors. Accounts payable can include supplies and materials acquired on credit.
    • Notes payable: This represents money owed on a short-term collection cycle of one year or less. It may include banknotes, mortgage obligations, or vehicle payments.
    • Accrued payroll and withholding: This includes earned wages or withholdings that are owed to or for employees, but have not yet been paid.

Long-term liabilities: These are any debts or obligations owed by the business that are due more than one year out from the current date.

  • Mortgage note payable: This is the balance of a mortgage that extends beyond the current year. For example, you may have paid off three years of a fifteen-year mortgage note, of which the remaining eleven years (excluding the current year) are considered long term.
  • Owners’ equity: Sometimes this is referred to as stockholders’ equity. Owners’ equity is made up of the initial investment in the business, as well as retained earnings that are reinvested in the business. Remember, total liabilities, including owners’ equity, must equal the assets. The way you achieve balance is by totaling up all the assets of the business, then subtracting all of the liabilities, except for owners’ equity. The remaining amount is the owners’ equity.
  • Common stock: This is stock issued as part of the initial or later-stage investment in the business. This stock remains fixed at its initial valuation on the company’s books.
  • Retained earnings: These are earnings reinvested in the business after the deduction of any distribution to shareholders, such as dividend payments. Retained earnings are determined by subtracting common stock from the owners’ equity.
  • Total liabilities and owners’ equity: This comprises all debts and monies that are owed to outside creditors, vendors, or banks and the remaining monies that are owed to shareholders, including retained earnings reinvested in the business.

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

Essential soft skills that will help you succeed in your business

The difference between a balance sheet and an income statement

Your balance sheet and income statement are two of the most important documents your business has.

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Your income statement lists the revenues, expenses, and profits and losses accrued during a specific period. It gives a quick picture of what profits your business is generating. Unlike a balance sheet, it doesn’t show your liabilities and debt.

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The bottom line of an income statement is the company’s net earnings or losses, which shows how profitable your business has become.

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Personal Finance

5C’s of creditworthiness: What lenders, Investors look for in a business plan

Business owners need to be aware of the criteria lenders and investors use when evaluating the creditworthiness of entrepreneurs seeking financing.

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Five things to consider before securing a loan

Banks usually are not a new venture’s sole source of capital because a bank’s return is limited by the interest rate it negotiates, but its risk could be the entire amount of the loan if the new business fails. Once a business is operational and has an established financial track record, banks become a regular source of financing.

For this reason, the small business owner needs to be aware of the criteria lenders and investors use when evaluating the creditworthiness of entrepreneurs seeking financing.

Will the business that an entrepreneur actually creates look exactly like the company described in the business plan? Of course, not.

The real value in preparing a business plan is not so much in the finished document itself but in the process it goes through – a process in which the entrepreneur learns how to compete successfully in the marketplace. In addition, a solid plan is essential to raising the capital needed to start a business; lenders and investors demand it.

Lenders and investors refer to these criteria as the five C’s of credit.

READ: 5 ways to raise funding for your business

1. Capital: A small business must have a stable income base before any lender is willing to grant a loan. Otherwise, the lender would not be making, in effect, a capital investment in the business. Most banks refuse to make loans that are capital investment because the potential for return on the investment is limited strictly on the interest on the loan, and the potential loss would probably exceed the reward. In addition, the most common reasons that banks give for rejecting small business loan applications are undercapitalization or too much debt. Banks expect a small company to have an equity base investment by the owner(s) that will help support the venture during times of financial strain, which are common during the start-up and growth phases of a business. Lenders and investors see capital as a risk-sharing strategy with entrepreneurs.

2. Capacity: A synonym for capital is cash flow. Lenders and investors must be convinced of the firm’s ability to meet its regular financial obligation and to repay loans, and that takes cash. More small businesses fail from lack of cash than from lack of profit. It is possible for a company to be showing a profit and still have no cash – that is, to be bankrupt. Lenders expect small businesses to pass the test of liquidity, especially for short term loans. Potential lenders and investors examine closely a small company’s cash flow position to decide whether it has the capacity necessary to survive until it can sustain itself.

READ: How to scale as a small business on a budget

3. Collateral: Collateral includes any asset an entrepreneur pledges to a lender as security for repayment of a loan. If the company defaults on a loan, the lender has the right to sell the collateral and use the proceeds to satisfy the loan. Typically, banks make much unsecured loans (those not backed up by collateral) to business start-ups. Bankers view the entrepreneurs’ willingness to pledge collateral (personal or business assets) as an indication of their dedication to making the venture a success. A sound business plan can improve a banker’s attitude towards venture.

4. Character: Before extending a loan or making an investment in a small business, lenders and investors must be satisfied with an entrepreneur’s character. The evaluation of character frequently is based on intangible factors such as honesty, integrity, competence, polish, determination, intelligence, and ability. Although the qualities judged are abstract, this evaluation plays a critical role in the decision to put money into a business or not.

READ: 7 Ways to pay for your higher education

5. Conditions: The conditions surrounding a funding request also affects an entrepreneur’s chances of receiving financing. Lenders and investors consider factors relating to a business’ operation such as potential growth in the market, competition, location, strength, weakness, opportunities and threats. Another important condition influencing the banks is the shape of the overall economy, including interest rate levels, inflation rate, and demand for money. Although these factors are beyond an entrepreneur’s control, they still are an important component in a banker’s decision.

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The higher a smaller business scores on the five C’s, the greater its chances of receiving a loan.

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Written by Chukwuma Aguwa

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Personal Finance

Don’t be fooled by COVID-related scams

Always consult the institution in charge of health-related matters to confirm any fishy information you come across.

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The nature of and the manifestation of the Covid-19 disease is such that there’s only a little time available to remedy the situation before it gets chronic. Although the infection begins by exhibiting mild symptoms, if you do nothing in a short time, it could lead to death in a matter of days.

This whole picture has caused many to become desperate about Covid-related issues, launching into panic mode at the sight of any information. As a result, such people are not far away from falling for fraudsters.

With the different kinds of news flying around, you mustn’t be fooled by Covid-related scams.

The Coronavirus threatens the health of millions of people around the world daily, also killing thousands along the way. To curb the spread and remedy the situation, bodies like the CDC, WHO, and every country’s local health organisation like the NCDC, frequently circulate information around communities. However, it has also led to fraudsters taking advantage to provide fake news, and even asking for donations.

Each day, there seems to be a new account or NGO asking for donations into the health sector, and though some are legit, many are just fraudsters posing to take advantage of innocent citizens. So far, numerous complaints about scams have been recorded, especially with people who are looking to support the health cause in any way they can.

READ: Africa to spend $9 billion on Covid-19 vaccine, access to supply is big problem

Channels used for COVID-related scams 

There are three major ways scammers take advantage of the haziness of the situation to dupe people. To start with, they appeal to the emotions of humans, who see the high death toll and suffering. As a result of what is happening, people have been willing to donate funds for medical supplies, isolation centres, and financial compensation for medical workers.

Scammers take advantage of this by posing as charity organisations and solicit for funds. Most times, as soon as their target is met, they clear their footprint without leaving a trace behind.

Another way they scam people is by manufacturing and selling fake or low-quality health products. Everyone wants to get their hands on a cure, or something that can at least protect them from the virus, and scammers are meeting their needs by providing just that.

READ: China joins WHO vaccine programme as it fills huge gap left by United States

The World Health Organization currently approves only one vaccine, and any other thing outside it is outrightly fake or just a supplement that will help your body. Currently, only the Pfizer vaccine is clinically tested and approved to work. Be sure to not throw your money in the wind by purchasing some of these fake drugs around.

Lastly, scammers create systems to extract a patient’s personal information, thereby having access to the person’s true identity. It could be in the simple form of opening a registration portal where you supply all your details.

Therefore, only give information to approved bodies and not any random online site that appears legit. These fraudulent individuals can do a lot of damage to your identity. Stay vigilant, only communicate with approved bodies, and always ask questions if you are not sure or suspect foul play.

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The place of electronics in COVID-related scams

These fraudsters usually reach out to you through the digital sphere. Hence, watch out for cold calls, text messages, or emails requesting donations to certain bodies. The best way to confirm the legitimacy of such a message is to visit the organisation’s official website in a different browser. Never follow the link in the mail or text directly, as it can be easily embedded with spyware. Therefore, a single click could see them extract all your personal information, including bank details.

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Also, please stay away from those who claim to have a cure, and accompany it with testimonies of people who have used it. They are low graders desperate for your money. Vet them by searching online and see what people are saying. In all, always look out for suspicious messages, and opt out if you are sceptical.

In a nutshell, you should not believe any cure, vaccine or supplement that the World Health Organization does not approve of.

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Conclusion

The government or legit health institutions do not cold call citizens to request donations or coerce them into making one. If you receive a call out of the blues, chances are it’s a scam, which is why they mostly try to hurry you to donate before you realise it. Always consult the institution in charge of health-related matters to confirm any fishy information you come across.

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