Financial matters have been a daunting task to many of our entrepreneurs.
Yes, that why many of us have a phobia when it comes to this area from a household to national level.
Surprisingly, we are always making financial decisions in our various perspectives yet we do not want to take a basic appreciation of the debit and credit of our finances for entrepreneurial business viability.
Even in the advent of artificial intelligence (AI) where financial modeling has been made easier we should be able to interpret the generated reports for effective decision making and business re-engineering.
In this edition we have found it imperative to share some basic financial/accounting practices for appreciation by our entrepreneurs.
Financial decisions either make or break the business venture as they are futuristic in nature.
We usually do not decide on what has already happened, but in finance/accounting we strike a balance as we use historic data merged with current to influence the future.
Hence financial decisions are simulated through data as figures do not only talk but direct.
Even with Dolly Parton’s song “Yesterday is gone but tomorrow is forever” historical initiate effective financial decision making for our entrepreneurs
As discovered in our various start-up businesses they operate at a loss without the entrepreneur realising it as they tend to be satisfied with cash received and not look beyond the sales to incorporate all costs incurred.
That is the same reason why in the previous edition we emphasised on average costing of fixed and variable costs against sales revenue. Many are spending what they don’t have as profits.
Furthermore, it is also possible for entrepreneurs to fail to leverage their venture’s potential by not recognising idle financial resources which could be harnessed to finance growth, development or further investment.
Therefore, in order to fully appreciate financial reporting/ accounting, it is essential to go back to the drawing board and deduct from the simplified framework upon which it is based.
To start with the objective of financial reporting is to provide information to users on the business’ financial wellness which reflects its financial performance as well as financial position of the entity.
Users are basically those individuals/ companies who are interested in knowing about your business and whose decisions, based on this information, will have an effect on the enterprise’s operations.
The most obvious user of the information is the entrepreneur who, among other decisions, decides whether to continue investing in the business, diversify the business operations, follow a growth strategy or disinvest.
Lenders use the information when deciding whether to give the business a loan as well as the conditions/ terms to be included with the debt offer depending on the credit worthiness as well as the financial wellness of the business.
Creditors also find the information useful when considering the business’ ability to pay for goods/ services offered on credit.
Although there are other users, business owners (investors), lenders and creditors are considered the key users to consider when preparing financial information as they provide resources which finance the business entity. Information provided is used by these users to make financial decisions affecting the financing of the business (that is the business’ potential and existing sources of finance).
As such, accounting information is expected to have two characteristics; that is relevant and faithful representation.
Information that is relevant is significant (material) such that it prompts you to take action either in the immediate or near future (thus there is need to make a few predictions) after verifying/ confirming it.
Thus relevant information is such that if omitted or erroneously included will affect the decisions of the user.
For example for a person who makes a ten dollar investment, an omission of five dollars is significant; on the other hand for a thousand dollar investor the same omission will be insignificant.
Relevant information can be confirmed/ verified as there will be evidence to show that the event it is portraying did indeed occur; hence the reason accountants always insist on receipts, invoices to support transactions.
In addition, relevant information can be used to make predictions about the future; this is done using data analysis techniques the simplest being trend analysis as well as ratios.
The predictive nature of relevant information makes it useful for forecasting, budgeting; thus facilitating decision making.
Information that has been faithfully represented is free from bias/ objective/ neutral; meaning that the preparer’s (in this case you as entrepreneurs) or any of the users’ perceptions should not influence how or what is being included in the financial reports.
Faithfully represented information is also free from errors and is complete; that is it includes all the events and transactions within the period being reported.
Financial reports containing relevant and faithfully represented information enable entrepreneurs to rely on them when making decisions.
That is where most of our entrepreneurs are hitting a brick-wall.
As their reports have errors which do to not comply with the expected good faith in practice and destroys the trust in business as expected by investors and other key stakeholders.
Secondly, it is important for the entrepreneur to appreciate the essence of financial performance and financial position.
Financial performance can be related to a video capturing an event; viewers are able to watch the event from the start to the end.
Financial performance shows users what has transpired from the first day to the last day of reporting and therefore includes totals of revenues earned and expenses incurred.
The financial performance of an entrepreneurial business should be captured in three distinct financial statements: Statement of Comprehensive Income (previously known as the Trading, Profit and Loss Account), Statement of Cash-flow and Statement of Changes in Equity.
The Statement of Comprehensive Income informs us of all revenues earned (even if not received for example if we have sold on credit the revenue is included in the statement).
- Dr Farai Chigora is a businessman and academic. He is the head of management and entrepreneurship at the Africa University’s College of Business, Peace, Leadership and Governance. His doctoral research focused on business administration (destination marketing and branding major, Ukzn, SA). He is into agribusiness and consults for many companies in Zimbabwe and Africa. He writes in his personal capacity and can be contacted for feedback and business at fariechigora@gmail.com, www.fachip.co.zw, WhatsApp mobile: +263772886871
- Ngonidzashe Elizabeth Chirima is an entrepreneur and a seasoned academic, currently a Doctor of Business Administration candidate (Binary University, Malaysia) whose research focus is financial retirement planning, She is a lecturer in the Accounting and Finance Department at Africa University in the College of Business, Peace, Leadership and Governance. She writes in her personal capacity and can be contacted on ne4liz@gmail.com , +263772811598.