Understanding Profit Loss and Starting a Microbusiness 

Dare to dream and become a business leader!

This blog is here to shed light on the business world and how to implement theory into reality.

The core concepts in a business are to make a profit and understand how to generate more; if not, then understand loss and strategies that can make the business preserver. Microbusiness is the lowest form of business type that is out there, and it is the most common one being executed by Batswana.

Financial literacy is crucial for small business owners to understand the key components of financial statements, such as the profit and loss (P&L) statement, which are essential tools for evaluating a business's financial performance and profitability.

Definition of terms

• Profit- the financial gain a business makes when its total revenue is more than its total expenses. Then there are different types of profit, which are: gross profit, operating profit and net profit. They are equally important. Net profit is the final gain after all expenses are paid.
• Loss- financial decline a business makes, in this case, the expenses exceed the total revenue over a specific period, resulting in a negative net income in a financial statement.
• Microbusiness- a small venture that usually has fewer than ten employees and makes an annual turnover of less than a hundred thousand (P100,000). This is the most common type of business that is found in Botswana.

Formulas and Financial Statements

To be able to calculate the profit and loss in any business form, it is imperative to know the formulas that get you the product of profit or loss.

Profit

The basic formula is:

Profit = Selling Price – Cost Price

Then, for net profit

Net Profit/ Net Income = Revenue - (Cost of Goods Sold + Operating Expenses + Interest + Taxes + Non Operating Expenses - Interest Income)

Note: Income taxes, interest income, and non operating expenses are included in this calculation. Income taxes reduce net profit, interest income adds to it, and non operating expenses (such as foreign exchange losses or miscellaneous costs) are subtracted as they do not relate to core operations.

There are three main financial statements a business should be able to produce because they all relate to each other.

This is the income statement, also known as the profit/loss statement, which is a summary of revenue, expenses, gains and losses over a specific period of time, then these show the net profit/loss made.

The company's revenue is the starting point for assessing profitability, and it is important to track different revenue streams separately for better financial analysis and management. Business expenses are categorized as either direct costs (Cost of Goods Sold, or COGS) or indirect costs (Operating Expenses).

COGS includes direct costs incurred in producing goods or services, while Operating Expenses include indirect costs such as rent, utilities, and marketing expenses. Operating income highlights profitability from core operations before interest and taxes.

The structure and format of these financial statements may vary depending on the company's business model and industry-specific requirements. Accurate financial reporting, based on generally accepted accounting principles (GAAP), is essential for transparency, compliance, and securing funding.

Using accounting software like QuickBooks, FreshBooks, or Xero can streamline the creation and analysis of these statements, ensuring accurate financial data for effective business finances and decision-making.

Key P&L factors for starting a microbusiness include tracking revenue, differentiating direct COGS from indirect operating expenses, calculating gross profit, and determining net profit.

Moving on, the Balance Sheet, with a new, improved name called Statement of Financial Position, shows what the business owns (assets) and owes (liabilities) at a specific point in time.

This provides a snapshot of the company's financial position, including assets, liabilities, and equity, which is crucial for understanding overall business health. Then lastly, the cash flow statement reflects the actual flow of cash in and out of the business.

A Representation of Profit/Loss Statement  

The explanation below is to give you an idea on how a P/L statement of a microbusiness would look like.

The most important pillar in the profit/loss statement is the revenue (the total amount of money flowing in from sales before you pay for anything).

The second one is the expenses, which include everything that has been bought. Marketing expenses are a key category to track and analyze over time, as they directly impact profitability and should be monitored for effective financial management.

Lastly, there is the net profit that shows what is left in your pocket after paying for bills. There will be instances you see statements having brackets; this is simply to show that there was subtraction of that particular money.

As elaborated, they are in that order and should not be mixed as this is a standard format used across in most parts of the world.

Monitoring revenue and cost trends in the P&L statement supports performance evaluation and helps assess the company's financial performance and growth trajectory. By regularly reviewing P&L statements, business owners can identify trends, variances, and inefficiencies, which assists in tracking profits and spotting financial trends.

Additionally, understanding gross profit margin the percentage of revenue remaining after subtracting COGS indicates production efficiency.

Net profit margin, the percentage of total revenue that remains as profit after all deductions, reflects cost management effectiveness. These metrics are essential for analyzing overall financial performance and making informed business decisions.

Why P& L Statement Matters

For a microbusiness owner this document is a navigation system that tells you:

Effective financial management and strategic planning rely on regular analysis of the P&L statement.

Routinely completing a P&L statement enables business owners to ask and answer complex questions about their business and supports the business's financial health.

Small businesses should perform P&L analysis monthly to monitor financial performance and ensure they are on track to meet their goals.

If you are pricing your product/ service, this will show in the statement while making comparison to labour, expenses.

Gaps in the business, if some expenses are worth spending on and if not, you can cut them out and reduce cost or find less costly alternatives.

A good relationship with paid taxes can make your business go a long way without being shut down.

Math is a fundamental process of producing the financial statement, as the owner of a microbusiness, it is not often accountants are hired to do the job hence you have to do it.

P&L statements provide valuable insights into financial performance, facilitating decision-making and strategic planning. Understanding your break-even point where total revenue equals total expenses and there is no profit or loss is crucial for microbusinesses to assess sustainability and plan for growth.

Cash Flow Management

Cash flow management is at the heart of every successful microbusiness.

While your profit and loss statement (P&L statement) gives you a clear picture of your revenue and expenses over a specified period, it’s the cash flow statement that reveals the actual movement of money in and out of your business.

Together, these financial documents provide valuable insights into your company’s financial health and help you make informed decisions for long-term financial stability.

Understanding the relationship between your P&L statement and your cash flow statement is essential. The P&L statement shows whether your business is profitable during a specific period, but it doesn’t always reflect when cash actually enters or leaves your accounts.

For example, you might record a sale as revenue, but if the customer hasn’t paid yet, that cash isn’t available for your day-to-day operations. This is where the cash flow statement comes in it tracks all cash inflows and outflows, giving you a real-time view of your liquidity.

Effective cash flow management means regularly monitoring both your income and expenses, planning for short-term expenses, and ensuring you have enough cash on hand to cover your obligations.

This practice helps you avoid cash shortages, pay suppliers and employees on time, and invest in growth opportunities when they arise.

By comparing your profit and loss statement with your cash flow statement, you can spot trends, identify potential issues early, and take action to maintain your business’s financial stability.

In summary, mastering cash flow management is crucial for any microbusiness owner. It not only supports your company’s financial health but also empowers you to make smarter business decisions, weather unexpected challenges, and build a foundation for sustainable growth.

Microbusiness 

As mentioned above, a microbusiness is comprised of less than ten employees including the owner, and is considered a type of small business.

With an expected turnover of P100,000 (hundred thousand pula), microbusinesses play a vital role in the economy.

In some cases, the business owner is a sole proprietor, being the CEO and the janitor. Understanding business operations the activities, processes, and expenses involved in running your company is essential for long-term success and profitability.

It's also important to note that cash flow management is crucial for microbusinesses, as profitability does not always mean cash is available to cover expenses.

Given the unemployment rate in Botswana of 27.6% in 2024 according to Statistics Botswana, it is imperative that as a people of specific nations to decrease this rate, less than ten employees do make a difference.

Yes, there are many motivations to become a business owner. At the top of the list we have the freedom of being your own boss; Shanya Waltower suggests this theory, and with freedom comes fallibility. Some reasons may be because of wanting to have financial freedom or sharing your passion. Stay tuned on.

Benefits of Starting Your Own Business

Asset Building

Starting your own business allows you to build valuable assets over time. These assets can include physical property, intellectual property, and brand equity. As your business grows, these assets can appreciate in value, providing long-term financial security and opportunities for expansion or sale.

Flexibility

Owning a business offers the flexibility to set your own schedule and work environment. This freedom enables you to balance personal and professional life more effectively, tailor your work to your strengths, and adapt quickly to changes in the market or your personal circumstances.

Making a Positive Meaningful Impact

By starting your own business, you have the opportunity to solve real problems and meet the needs of your community or target market. This can lead to a meaningful impact, whether through creating jobs, offering innovative products or services, or contributing to social and economic development.

Personal Development and Learning New Skills

Entrepreneurship challenges you to continuously learn and grow. Running a business helps you develop a wide range of skills, including financial management, marketing, leadership, and problem-solving. This personal development can enhance your confidence and open doors to new opportunities beyond your current venture.

Steps to be taken before building.

Several factors and test are to be done to see if the business idea can be converted into something practical. Passion alone is not enough to start; hence I am here to help you see if the idea you have now is viable.

An essential part of preparing to start a microbusiness is financial planning, which involves creating financial forecasts, setting up budgets, and analyzing financial statements to guide your business toward growth and compliance.

First you need to have a basic understanding about your roles as an entrepreneur of a microbusiness. Know the different attributes and differences between management duties and owner’s duties.

Be well informed, research and inquire about the business environment you are thinking of landing into, if you want it to be in the digital market space or offline market.

Step 1. The identification and development of business ideas

Here we talk about generation of business ideas, creativity, brainstorming or even improving existing ideas. It is always better to draft as many as possible, this gives you many options and to cancel and pick the best.

You can think by yourself or have family even friends help you in this process. Find other ways to come up with ideas, since we are living in the digital world of Artificial Intelligence, you can derive from there also. 

Not all business ideas can make it in the long run, so it is better to scout your environment. In every area the is a problem that can be solved, hence identify the need and turn it into a business idea.

Now you have a list of business ideas and have cancelled out a few and given each priority, from number one to the last.

We now evolve on the idea; we test and ask meaningful questions such as who are the main customers and is this what people really need?

These tests lead us to the next step.

Step 2. Feasibility 

The measure of this test is to determine if “Should you carry on?” to get a view from all angles, you need to look at four factors that will give the go-ahead. You will have to pick the boxes below. 

• Market feasibility: proof that people are willing to pay for your product/service and who these people are, mass market, niche market. See if you already have competitors and how to take advantage of their weaknesses and make it something you can consider adding.
• Resource feasibility: thoroughly check to see if you have a physical asset needed if not are they easily accessible to you. Where you will source your raw materials from.
• Financial feasibility: is it possible for you to acquire startup capital and from were exactly. See if the venture can generate more than it spends. 
• Operational feasibility: since we are looking at a business of very small scale, see if you do have the equipped skills to run the business.

Step 3. The viability of the idea

This is a reality check, to see if it can run long term.

Beyond the numbers of seeing the business financial health if it can cover all expenses, but rather this exam is to see durability of the business model. To investigate that if this need id needed now will it still have the same demand or more. 

Ultimately business is only viable when it proves it can generate a consist return in the long run. 

Step 4. The business plan

Now that you have tested theory and made research, now as an entrepreneur you should draw up a business plan. Think of it more than just a formal boring document but rather a GPS for the business. It does not need to be 50 pages long, covering the important sections in detail.

The contents of your business plan will have the following subtitles as you write: Executive summary, company description, market analysis, marketing and sales strategy, financial plan and critical risks.

The plan can also be used when applying for loans from different stakeholders. 

How to apply for a business in Botswana

The business documentation not yet finished, here you will be equipped on the step-by-step process of making your business legit and be recognised by the law. This process is carried out by the Companies and Intellectual Property Authority (CIPA)

• From the beginning we have established that you are a sole proprietor, which means you are one legal entity with your entity. 
• Every business has a name, a unique name. Instead of physically going to the (CIPA), you can login onto the CIPA portal. There you can search if the name you have chosen isn’t already taken. With a cost of around P20 (twenty pula only), for name reservation. You carry on with the required process and an additional P150 for the business name.
• Once you receive a certificate of registration you MUST fulfil the legal requirements of registering for tax with Botswana Unified Revenue Service (BURS). Get a trade licence depending on your business sector/activity, you get this one from your local district council. Finally, you have to get health and safety inspections by the council also.

We have succeeded in informing you about the basics of becoming a business owner, now the ball is in your court to start!!

Continue learning more about business and keep up with politics, economic activities, and news surrounding business.

Enrol in different online courses to broaden your knowledge. Here is a wonderful, recommended book so you need to have a look at: Entrepreneurship Successfully launching New Ventures by Bruce R. Barringer and R. Duane Ireland (2022), the other book is Frank Wood’s Business accounting 1, the tenth edition.  

Frequently Asked Questions (FAQs)

How often should I check my profit & Loss?

At the end of every set period and more advisably every month. This will be to see if you are in the right track. 

What would happen if I do not apply for my business at CIPA? 

Your business will be regarded as illegal hence a crime which you can pay a fine or imprisonment. 

How do I know when to pivot or persist with my venture?

You continue if you are making a profit, but it is not always that microbusinesses make a profit, if you have loyal, happy consumers of your product/service, and your revenue is growing, it is safe to say stay in business. Pivot when revenue is declining and when projections are made, there is no hope for getting back up. This is when you go back to the business plan to view what might have gone wrong.

Should I pay myself first or take whatever is left over?

The best practice out there is to set a fixed salary for yourself. Paying yourself first is important. If the business cannot afford to pay you then that means the is fixing to be done. 

Can I take money from the business whenever I want?

No. Even though you are one with the business, it is possible to go bankrupt. Be different, most of the microbusinesses in the villages have the same issue, so be educated and dodge a bullet.