Importance of keeping financial records
Published On January 24, 2018 » 4554 Views» By Evans Musenya Manda » Business, Columns
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TODAY, we take a look at financial reports.
Financial reports are generated from financial records and it is important that basic financial records are kept by any business.
It is important to know that one of the fundamental business management requirements for managing businesses whether small or big is to read and understanding business financial reports by business owners who are non-financial managers.
Understanding financial reports by business owners gives them power to make financial decisions.
For example understanding a bank statement prepared by the bank where a business maintains the account is important.
This is so because the business owner may follow financial business activities knowledgeably.
Understanding the reports generated from the balance sheet is important to the business owners in that they are able to understand the financial position of a business at any time.
A balance sheet in simple explanation is a financial position which is attained at any time and mostly is looked at, at the end of a financial period which in most cases is one year period adopted by most businesses.
A balance sheet is looked at as a specific date covering a specific period in which business activities have been covered.
It is referred to as a still picture taken and brings out the image of a business assets and liabilities specifically on that day at which it is taken.
In this case a balance sheet on one side will show all the assets acquired by that date including liquid and fixed assets.
Liquid assets will include cash kept at banks, cash kept in offices, stocks pending to be sold or used, money being owed by customers (debtors) and money which the business has paid in advance for anticipated services (prepaid).
They are liquid in the sense that, they are quickly used within a period of one year.
Fixed assets will include motor vehicles purchased, office equipment such as computers, furniture and fixtures, purchase or construction of office buildings or workshops.
They are fixed in the sense that their usage and lifespan, go beyond one year period.
It is important for the entrepreneurs to know that the usage of fixed assets apportioned in a year is the tear and ware usually referred to as depreciation which reduces the value of the asset.
On the other side these assets have been financed from various sources as earlier on alluded to such as trade creditors, bank loans, business profits, capital pumped in by the business owners also known as equity, accrued expenses such as unpaid water bills and unpaid salaries and electricity.
In short the balance sheet equation is represented by assets equaling liabilities.
The balance sheet represented through assets shows the position of a business in its strength in terms of property acquisition and this is one area which interests the banks when appraising the loan for approval.
The liabilities side will show the weakness side of a business especially if the source of finance is from the borrowing portfolio such as huge bank loans and huge amount of creditors and accrued expenses.
This is so because these liabilities will have to be paid at one stage using the assets acquired especially the liquid assets.
A strong balance sheet will show the liability section of the improvement in the equity side represented by the profits generated internally as this money is not subject to outside influence and it remains circulating inside the business circles.
Accountants usually analyse the balance sheet through ratios to make comparisons and measure its strength.
Equally other outsiders like the banks or other lending institutions may be able to gauge the strength of the business entity through analysing the balance sheet.
Another interesting financial report that is of interest to business owners is the income statement because it shows the actual performance of business and how it is making profits or not.
It provides the platform to the business owners to make business informed decisions on the way forward to a business.
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