TODAY, I want to look at the importance of a business financial document which is prepared by financial consultants like accountants.
The fact is that small businesses often fail to engage professional accountants to prepare their financial books due to lack of resources to pay for the services.
Most small businesses have humble beginnings with limited resources poured in for investments.
These businesses mostly outsource accounting services once in a year mainly to prepare accounts to answer tax queries and this is not enough for the entire business administration at all.
It must be appreciated that financial statements in a business can only be prepared by trained personnel in that area.
Because of this inadequacy in the presentation of these business records, owners find it difficult in interpreting financial records because there is no one to guide them.
In our talk today I found it necessary that we look at one of the financial statements that matters most to business owners in order to understand the business profitability.
We will look at the income statement.
This is a statement which organises itself by pairing the business gross income in a business against the business expenses to arrive at a profit or loss.
Before I introduce this statement to the business owners as part of business management, I would like first to look at direct and indirect expenses respectively, as part of the formation of the business income statement.
It is important to understand that for a business to record gross sales, it must first incur the business expenses and this measure may result in either the business making profit or a loss or rather expenses equaling the sales, the situation which is known as the breakeven point in business circles.
Any business which is run for profits has two types of expenses which are direct and indirect.
Direct and indirect expenses are the pattern of expenses that are met in any kind of a business for profits.
In this country where most of the businesses are run as trading businesses, this is buying of already finished goods on the other hand and selling the same finished goods on higher price to record a mark- up, the trading and the profit and loss account, is the type of the income statement which is prepared.
In this case, direct expenses are the purchasing of goods which are later resold on higher price to register a mark-up.
It must be noted that the expenses that go with the purchasing of goods such as transportation of goods, insurance in transit, excise duty in case of imported goods are also classified as direct expenses.
This is so, because the goods will be grouped together to inflate the purchase price in a bid to recoup them.
In a trading business, the goods available which are marked for sale in a period is set against the gross sales in the same period.
However, before this is done it is important that the business removes the physical stocks of goods that are not yet sold to arrive at the cost of goods sold.
This is removed from the gross sales to arrive at what is known as gross profit in a situation where the business has made profits or the gross loss and also in a situation where the business has made a gross loss.
Direct expenses are part and parcel of sales in that without them, sales cannot take place as they are directly linked to the sales.
They are termed as trading expenses and are the basis of determining whether a business has made trading profit popularly known as gross profit or the opposite.
Indirect expenses are second class of expenses we have to look at.
For a business to successfully run, needs to be assisted by the second string of expenses.
This will include office expenses for administration, warehouse expenses for stocking the goods, fuel for running vehicles, electricity and water, telephone expenses for communication, among other expenses.
These expenses are termed as indirect expenses in that they are not directly connected to the principal activities of the business.
They are there to facilitate the smooth efficiency of running a business and they are also referred to as operational expenses which are removed from the gross profit to arrive at what is known as net profit before tax consideration.
The income statement becomes a very important financial tool as it gives an insight on whether the business is on the health path or not in as far as profit making is concerned.
The income statement also gives an idea to the business of how to control the expenses that are eating too much into business profits.
For example, if business accommodation is too high, management may come up with the suggestion to look for cheap accommodation.
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