Key Concepts

Habari Mwanafunzi! Let's Talk Business!

Imagine you've just started a small business selling smokies and boiled eggs after school. You're making some money, but how do you really know if your business is successful? Is it growing? Are you making a profit? To answer these questions, you need to speak the language of business, and that language is built on a few key concepts. Today, we will learn this language together!

Think of these concepts as the building blocks for understanding any business, from a local duka to a big company like Safaricom. Let's get started!

The Golden Rule: The Accounting Equation

Everything in business finance balances. The most important rule is the Accounting Equation. It's the foundation for everything! It states that what a business OWNS must equal what it OWES to others plus what the OWNER has put in.

Assets = Liabilities + Capital (Owner's Equity)

Imagine a weighing scale. It must always be balanced. On one side, you have the Assets. On the other side, you have the Liabilities and Capital. They must always be equal!

        What you OWN                How you paid for it
      +---------------+      +---------------------------------+
      |    ASSETS     |  =   |   LIABILITIES  +     CAPITAL    |
      +---------------+      +---------------------------------+
           / \                          / \
          / _ \                        / _ \

1. Assets: What the Business OWNS

An Asset is any resource with economic value that a business owns or controls with the expectation that it will provide a future benefit. In simple terms, these are all the valuable things your business has.

• Current Assets: Things that can be converted into cash easily (usually within a year). E.g., cash itself, M-Pesa float, stock of goods to sell.
• Fixed Assets (or Non-Current Assets): Things that are used for a long time to help the business operate. E.g., a building, a delivery truck, a machine.

Example: Boda Boda Business

James runs a boda boda business in Nakuru. His assets would include:

• The motorcycle itself (a Fixed Asset).
• Cash from the day's fares (a Current Asset).
• His M-Pesa float for receiving payments (a Current Asset).
• A helmet and reflector jacket he owns for the business (Fixed Assets).

Image Suggestion:

A vibrant, colourful digital art illustration of a Kenyan marketplace. In the foreground, a young woman proudly stands next to her modern fruit juice kiosk. Clearly visible assets are: a shiny new blender, a colourful display of fresh mangoes and pineapples (inventory), a cash box (till) with some shillings visible, and a smartphone displaying the M-Pesa app screen. The style should be positive and aspirational.

2. Liabilities: What the Business OWES

A Liability is a debt that the business must pay back to someone else (a creditor). It's what your business owes. Think of it as a promise to pay in the future.

• Current Liabilities: Debts that must be paid back soon (usually within a year). E.g., a short-term loan, money owed to a supplier.
• Long-Term Liabilities: Debts that are paid back over a longer period. E.g., a 5-year bank loan for a vehicle.

Example: Mama Mboga's Kiosk

Mama Wanjiku runs a vegetable kiosk. She took a KSh 5,000 loan from her chama (a women's group) to buy more stock. She also gets her potatoes from a farmer on credit and pays him at the end of the week. Her liabilities are:

• The KSh 5,000 loan from the chama.
• The money she owes the potato farmer.

3. Capital (Owner's Equity): What the Owner INVESTS

Capital is the money or other resources invested in the business by the owner. It represents the owner's claim on the assets of the business. It’s the value that is left for the owner after you subtract all the liabilities from the assets.

From our golden rule, we can rearrange the formula to find the capital:

Capital = Assets - Liabilities

Example: Starting a Cyber Café

Fatuma wants to open a small cyber café. She uses KSh 50,000 of her own savings to start. She also gets a loan of KSh 30,000 from a Sacco to buy an extra computer. She uses all the money (KSh 80,000) to buy computers and furniture.

• Her Assets (computers, furniture) are worth KSh 80,000.
• Her Liability (Sacco loan) is KSh 30,000.
• Her Capital is her initial investment of KSh 50,000.

Let's check if it balances using our formula!

  Assets = Liabilities + Capital
  KSh 80,000 = KSh 30,000 + KSh 50,000
  
  It balances perfectly!
  

Now let's look at the concepts that make the business move! These are the things that happen day-to-day and affect your Capital.

4. Revenue (or Income): Money COMING IN

Revenue is the income a business earns from its normal business activities, usually from the sale of goods and services to customers. It's the money you make before any costs are taken out.

Image Suggestion:

A close-up shot, in a realistic photography style, of a hand receiving Kenyan shilling notes over a counter. In the background, a smiling customer is holding a freshly made chapati. The focus is on the transaction, symbolizing the inflow of cash (revenue).

• For a matatu driver, revenue is the fare collected from passengers.
• For a farmer, revenue is the money from selling maize at the market.
• For a shopkeeper, revenue is the total sales from all items sold in a day.

5. Expenses: Money GOING OUT

An Expense is the cost of operating the business to earn revenue. It is the money you spend to keep the business running. It's the "cost of doing business."

• For the matatu driver, expenses are fuel, salary for the conductor (makanga), and county parking fees.
• For the farmer, expenses are the cost of seeds, fertilizer, and labour.
• For the shopkeeper, expenses are the rent for the shop, electricity (KPLC token), and the cost of buying the goods she sells.

Bringing It All Together: Finding the Profit!

So, how do Revenue and Expenses affect your business? They determine if you made a Profit or a Loss. Profit is what's left from your revenue after you have paid all your expenses. A profit makes your business (and your Capital) grow!

Profit = Total Revenue - Total Expenses

Example: One Day at the Smokies Business

Let's go back to your smokie business. In one afternoon:

• You made KSh 1,000 from selling smokies (Revenue).
• You spent KSh 400 to buy the smokies, KSh 100 on kachumbari ingredients, and KSh 50 on charcoal (Total Expenses = 400 + 100 + 50 = KSh 550).

What is your profit for the day?

  Profit = KSh 1,000 (Revenue) - KSh 550 (Expenses)
  Profit = KSh 450
  

Congratulations! You made a profit of KSh 450! This amount increases your Capital in the business.

Well done! You have just learned the five most important building blocks of financial statements. Understanding Assets, Liabilities, Capital, Revenue, and Expenses is your first big step to becoming a business expert. Keep practicing, and soon you'll be able to understand the financial health of any business you see!