The Why
A famous quote goes, “There are no secrets to success. It is the result of preparation, hard work and learning from failure.”
One of the best learning and preparation tools for small businesses are reports. Not only do they present outcomes from past actions for evaluation, but they also enlighten users (e.g. owners and investors), for proper decision-making.
Types of Reports
This article focuses on four major financial reports needed by small businesses in Kenya. These are:
- Sales Report
It is a snapshot of sales activities and can be prepared daily/weekly.
Manual reporting includes writing down all transactions and their modes of payment (e.g. cash, m-pesa or card), then calculating the total revenue generated.
While this is useful, modern alternatives such as Point of Sale (POS) software automatically and accurately generate reports since they update statistics in real-time after each wireless sale. We welcome you to read our articles on inventory management and business process automation, which include examples of POS software in Kenya.
- Income Statement (Profit & Loss)
The economic objective of any rational entrepreneur is profit maximization and this is therefore the most important financial report.
Its preparation involves deduction of all business expenses from the sales revenues calculated through aforementioned sales reports. This is useful as it helps in assessing what is or is not working, and making necessary changes, especially when prepared monthly as we recommend.
It is also useful when filing tax returns as it allows accurate calculation of tax payable according to official rates, after factoring in all taxable incomes and allowable expenses. Failure to this attracts penalties from the Kenya Revenue Authority.
- Balance Sheet
It shows the business’ assets vis-à-vis its liabilities.
Assets generate future benefits and could be short-term such as cash-in-hand and debtor accounts, or long-term such as land and equipment.
Liabilities generate future obligations and could be short-term such as outstanding expenses and creditor accounts, or long-term such as mortgages.
The positive difference between total assets and liabilities is equity, which represents how much the owner claims in the enterprise. Small businesses in Kenya can use such information when pitching to investors or applying for loans from institutions.
- Cash Flow Statement (CFS)
Liquidity/cash availability is important for several business processes such as purchases and debt repayments. The CFS tracks changes in amounts of cash and cash equivalents throughout operating, investing and financing activities.
It is complementary to but different from other reports because it focuses on cash presently held, not including future incoming/outgoing cash recorded on debit/credit.
Most cash flows come from operating activities, which are mostly sales. Such can easily be monitored and reported by POS software. Investing activities include transfers of equipment and other assets, while financing activities are cash receipts/payments involving investors and other financiers.
