Financial statements

Habari Mwanafunzi! Let's Decode the Language of Business!

Imagine you run the most popular Tusker kiosk in your neighbourhood. Every day, people come to buy sodas, bread, and airtime. Money is coming in, and money is going out. At the end of the month, you look at the cash in your drawer and wonder, "Am I really making a profit? Could I afford to buy a new fridge or even open another kiosk?"

How do you answer these questions for sure? The answer lies in Financial Statements! They are like a report card for your business, telling you exactly how it's performing and what its financial health looks like. They turn all your buying and selling into a clear story. Let's learn to read that story together!

Image Suggestion: A vibrant, modern Kenyan street scene. In the foreground, a confident young entrepreneur stands in front of their colourful 'duka' (small shop). Floating around them are glowing icons representing sales (KSh symbol), expenses (a KPLC electricity bill), assets (a delivery motorbike), and profit (a rising graph). The style should be bright, optimistic, and slightly stylized.

What Are Financial Statements?

Financial statements are formal reports that summarise the financial activities and position of a business. Think of them as the official scorekeepers. The two most important statements we will learn about are:

• The Income Statement: Shows if you made a profit or a loss over a period of time (like a month or a year).
• The Balance Sheet (Statement of Financial Position): Shows what you own and what you owe at a single point in time.

1. The Income Statement (The "Profit & Loss" Story)

The Income Statement is like a movie of your business's performance. It tells the story of how much money you made (Revenue) and how much you spent (Expenses) over a certain period to find out your final profit or loss.

The main goal is to calculate the Net Profit. Here’s the formula:

Net Profit = (Sales - Cost of Goods Sold) - Expenses

Let's break it down with a local example.

Example: "Maisha Bora Cyber Café"

Asha runs a cyber café in Nakuru town. Let's look at her business for the month of January.

• She made KSh 50,000 from printing, browsing, and agent services. This is her Sales (or Revenue).
• She spent KSh 10,000 on printing paper and toner. This is her Cost of Goods Sold (COGS).
• She also had other costs: Rent of KSh 8,000, an electricity bill from KPLC of KSh 4,000, and wages for her assistant of KSh 12,000. These are her Expenses.

Now, let's prepare a simple Income Statement for Asha's cyber café.

    MAISHA BORA CYBER CAFE
    INCOME STATEMENT
    FOR THE MONTH ENDED 31ST JANUARY

    -------------------------------------------------
    Sales (Revenue).......................  KSh 50,000
    Less: Cost of Goods Sold (COGS)....... (KSh 10,000)
    -------------------------------------------------
    GROSS PROFIT..........................  KSh 40,000

    Less: Expenses
      Rent................... KSh 8,000
      Electricity............ KSh 4,000
      Wages.................. KSh 12,000
    Total Expenses........................ (KSh 24,000)
    -------------------------------------------------
    NET PROFIT............................  KSh 16,000
    =================================================

Fantastic! Asha's cyber café made a net profit of KSh 16,000 in January. This is valuable information for her to know if her business is doing well.

  // ASCII ART: The Profit Journey

  [  REVENUE  ]   ---(minus Cost of Goods Sold)--->   [ GROSS PROFIT ]   ---(minus Expenses)--->   [ **NET PROFIT** ]
  (KSh 50,000)                                       (KSh 40,000)                                (KSh 16,000)

2. The Balance Sheet (The Financial "Selfie")

If the Income Statement is a movie, the Balance Sheet is a snapshot or a selfie. It shows the financial position of a business at a single point in time (e.g., on December 31st).

It is built on a very important rule called the Accounting Equation. This equation MUST always be true.

Assets = Liabilities + Owner's Equity

Let’s understand these terms:

• Assets: Things of value that the business OWNS. (e.g., computers, cash, building, delivery vehicle).
• Liabilities: What the business OWES to others. (e.g., a loan from Equity Bank, money owed to a supplier).
• Owner's Equity (or Capital): What the business OWES to the owner. It's the owner's claim on the assets of the business.

The Balance Sheet always has to... well... balance! What you own must equal what you owe.

// ASCII ART: The Balancing Scale

       [ WHAT YOU OWN ]          =          [ WHAT YOU OWE ]
           (Assets)                            (Liabilities + Owner's Equity)
        __________                                __________
         /        \                              /        \
        /__________\                            /__________\
             |                                        |
      ---------------------------------------------------------
                           ▲ (Must Balance!)

Image Suggestion: A clean, modern diagram of a balancing scale. On the left pan, place icons of assets: a computer, a stack of Kenyan Shilling notes, a small office building. On the right pan, place icons for liabilities (a bank building with "LOAN" text) and owner's equity (a person icon with a plus sign). The scale should be perfectly balanced.

Let's create a Balance Sheet for "Maisha Bora Cyber Café" as at 31st January.

Example Continued: "Maisha Bora Cyber Café"

As at 31st January, Asha's business has the following:

• Assets: Computers worth KSh 80,000; a printer worth KSh 20,000; and Cash at the bank of KSh 25,000.
• Liabilities: She has a Sacco loan of KSh 30,000 that she is still paying.
• Owner's Equity: Her initial investment (Capital) was KSh 95,000.

Here’s how her Balance Sheet would look.

    MAISHA BORA CYBER CAFE
    BALANCE SHEET
    AS AT 31ST JANUARY

    -------------------------------------------------
    ASSETS
      Computers.................. KSh 80,000
      Printer.................... KSh 20,000
      Cash at Bank............... KSh 25,000
    -------------------------------------------------
    TOTAL ASSETS................. KSh 125,000
    =================================================

    LIABILITIES & OWNER'S EQUITY
    Liabilities
      Sacco Loan................. KSh 30,000

    Owner's Equity
      Capital.................... KSh 95,000
    -------------------------------------------------
    TOTAL LIABILITIES & EQUITY... KSh 125,000
    =================================================

See? It balances perfectly! Total Assets (125,000) = Total Liabilities (30,000) + Total Owner's Equity (95,000). This proves the financial records are in order.

How Do They Connect?

You might be wondering how the two statements are related. It's simple! The Net Profit you calculate in the Income Statement is added to the Owner's Equity (Capital) in the Balance Sheet. A profit makes the owner's stake in the business grow!

So, that KSh 16,000 profit Asha made would be added to her Capital for the next period, making her business even stronger.

Why This Matters to You

Understanding financial statements isn't just for accountants! This knowledge is a superpower.

• For Your Future Business: Whether you want to start a farming project, a tech company, or a fashion brand, you'll need these statements to manage your money and get loans.
• For Investing: Want to buy shares in big companies like Safaricom or KCB on the Nairobi Securities Exchange? Their financial statements will tell you if they are a good investment.
• For Your Career: Every manager, marketer, and leader needs to understand these basics to make smart decisions.

You've taken a huge step today in learning the language of business. Keep practising, stay curious, and you'll be able to read the financial story of any company. Well done!