A CASE FOR FINANCIAL RECORDS 1

Many of us have cultivated the habit of speaking positive words about ourselves or our businesses. This is commendable as it is important to maintain a positive outlook. However, we must note that the real language of business/(business people) is not words but numbers. Every people group (tribes, professional bodies, religious sects, age groups e.t.c.) has a peculiar language of its own. In business, the internationally acceptable medium of telling your business story is the Financial Statement. As business people, it is very important that we learn this lingo. This is what the bankers, investor, financial analyst, funding bodies e.t.c. understand.

The best layman’s definition of the financial statement is – a set of reports telling the financial story of a business; or a means of conveying financial information to users. It is made up of 3 major reports discussed below.

The Profit and Loss Statement: This is a report that gives details of profit related transactions that caused retained profit to change over a period of time. It should be noted that only activities that affect profit are reported in this statement. Consider these 2 business women.
Miss Dominion is the MD of Dee Pictures. Her retained income for 2007 was N20m. Dee Pictures earned N170m during the year by selling stocks worth N95m and spent N55m on running expenses. It has N20m left over as retained profit.
Miss Ninaji is the MD of Newman Films which earned N200m by selling stock worth N90m in 2007. The Company’s total operating expenses was N35m leaving her with N75m. However, she spent N65m on renovation of her factory (which was set ablaze by hoodlums during the elections) and therefore has N10m left as retained profit.

These details were extracted from the P&L statement of the companies. From this, it is clear that the profit volume alone is not a true indication of the company’s health. If you compare N12m retained earnings with N5m, you could easily conclude that Miss Dominion is a better business woman. However, Newman Films has done better on the whole despite the gap in the retained earnings. But for the N65m capital expenditure, they would return a much higher profit than Dee pictures. The cost/income ratio is better and they are on top of their operating expenses.

An accountant would analyze these figures further to understand the under listed amongst other things.
Ø Volume of trade Vs Retained Earnings
Ø The quality of the trade i.e Trade Cost Vs Income; Investment Vs Earnings e.t.c.
Ø Exceptional activities i.e. huge income or expenses that is not likely to be repeated.

The Cash Flow Statement: This summarizes the transactions that cause a change in the company’s cash balance over a given period. The Net Cash Flow (NCF)is the difference between the cash flowing in and out of a company. Sometimes a company does very profitable business, but has no cash. This report is the most effective tool to manage the difference between the profit and cash flow.