Introduction

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For many entrepreneurs, financial statements can feel like something only accountants or bankers care about. But the truth is, understanding these reports gives you power, the power to make better decisions, access funding, and confidently steer your business forward.

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If you are applying for a loan, whether from a bank or a private lender like Pumpkn, you will likely be asked for your last three years of financial statements. This is not just paperwork. Lenders want to assess two key things:

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• How your business has performed in the past
  
  
• Whether it looks financially healthy enough to repay a loan in the future
  
  

To do this, they will focus on three core financial statements:

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• The Balance Sheet
  
  
• The Income Statement (also known as the Profit and Loss Statement)
  
  
• The Cash Flow Statement
  
  

Let us unpack what each shows and why they matter.

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1. The Balance Sheet: What You Own vs What You Owe

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The balance sheet is a snapshot of your business’s financial position at a specific point in time. It shows:

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• Assets – what your business owns (cash, inventory, equipment, vehicles)
  
  
• Liabilities – what your business owes (loans, unpaid supplier invoices, taxes)
  
  
• Equity – what is left for the owners after debts are paid
  
  

👉 Why it matters:

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Your balance sheet reveals how financially stable your business is. Are you building value over time? Are you overly reliant on debt? Lenders use it to assess your capital structure and risk profile.

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Tip: If you are unsure how to read or interpret your balance sheet, seek help from your bookkeeper, accountant, or financial advisor.

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💡Examples of key ratios to monitor:

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• Current Ratio = Current Assets ÷ Current Liabilities
  Indicates your ability to cover short-term obligations. A ratio above 1.5 is generally healthy.
  
  
• Quick Ratio = (Current Assets – Inventory) ÷ Current Liabilities
  A stricter liquidity test. Aim for 1.0 or more.
  
  
• Debt to Equity Ratio = Total Liabilities ÷ Total Equity
  Shows your reliance on borrowed funds. A ratio below 1.0 is usually considered prudent.
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Tracking these ratios helps you stay financially resilient, detect risks early, and improve your business’s credibility with funders.

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👉 Why lenders care:

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Lenders want to see that you are not over-leveraged and that you have enough liquid assets to weather tough periods such as slow sales or production delays. They also evaluate the quality and value of your assets and whether there is sufficient collateral in case of repayment issues.

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2. The Income Statement: Are You Making a Profit?

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The income statement shows how your business performs over a period (typically a month, quarter, or year). It breaks down:

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• Revenue – income from sales or services
  
  
• Cost of Goods Sold (COGS) – direct costs of producing goods or services
  
  
• Gross Profit = Revenue – COGS
  
  
• Operating Expenses – fixed and variable costs (e.g. salaries, rent, marketing)
  
  
• Operating Profit = Gross Profit – Operating Expenses
  
  
• Net Profit – what is left after all expenses, including tax and interest
  
  

👉 Why it matters:

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This statement answers a key question: Are you actually making money? It shows if your sales cover your expenses and whether your margins are sustainable.

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Tip: If these terms feel unfamiliar, speak to your accountant or financial advisor to help you interpret your numbers.

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💡Examples of key ratios to monitor:

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• Gross Profit Margin = [(Revenue – COGS) ÷ Revenue] × 100
  Measures how efficiently you produce or source your products.
  
  
• Operating Profit Margin = (Operating Profit ÷ Revenue) × 100
  Shows how well you manage business overheads.
  
  
• Net Profit Margin = (Net Profit ÷ Revenue) × 100
  Your “bottom line” — how much profit you keep from every rand earned.
  
  

Tip: Review these monthly. Trends over time can help you adjust pricing, control costs, and improve profitability.

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👉 Why lenders care:

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Lenders assess whether your business is profitable and consistent. They examine trends in revenue and expenses and assess whether you generate enough income to break even and cover interest and repayments. A strong income statement reassures lenders that your business can grow and meet its financial obligations.

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3. The Cash Flow Statement: Can You Keep the Lights On?

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Profit does not equal cash. The cash flow statement tracks the movement of money in and out of your business, and it is crucial for understanding liquidity.

It is divided into:

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• Operating Cash Flow – cash from daily operations
  
  
• Investing Cash Flow – cash used to buy or sell assets
  
  
• Financing Cash Flow – cash from loans or equity, and repayments made
  
  

👉 Why it matters:

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You can be profitable on paper but still run out of money. This statement shows if you have the cash to cover salaries, rent, input costs, and avoid missed payments.

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Tip: Your bookkeeper or accountant can help you prepare and review a monthly cash flow statement if you are not already doing so.

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💡Examples of key ratios to monitor:

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• Operating Cash Flow Ratio = Operating Cash Flow ÷ Current Liabilities
  Measures if operations generate enough cash to cover short-term obligations.
  
  
• Cash Flow Coverage Ratio = Net Operating Cash Flow ÷ Total Debt
  Indicates your capacity to service all debt from annual cash flow.
  
  
• Cash to Current Assets Ratio = Cash ÷ Current Assets
  Reveals how much of your liquid assets are truly cash.
  
  
• Cash Conversion Cycle (CCC) = Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding
  A shorter CCC means faster cash generation and better liquidity.
  
  

Tip: Monitor these monthly with the help of your bookkeeper or advisor to avoid surprises.

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👉 Why lenders care:

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Lenders closely review your cash conversion cycle and operating cash flow. They want to know if your business generates cash fast enough to handle repayments and day-to-day costs. Efficient cash management means you are less likely to default and more likely to qualify for larger loans with better terms.

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Getting Started:

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✅ Work with what you have – Even basic financials are useful. Ask your bookkeeper, accountant, or financial advisor to help prepare them.

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✅ Review monthly – Do not wait until year-end or a funding application. Make financial reviews a habit.

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✅ Ask questions – You do not need to be a finance expert. You just need to understand what the numbers mean for your business.

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✅ Looking for funding? At Pumpkn, we finance growing businesses in the agri and food value chain. If your financials are in order, you are already one step ahead.

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These are not just reports, they are your business’s dashboard. Once you understand them, you gain control, boost your funding chances, and make decisions with confidence

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