We are well aware that accounting is often regarded as one of the most arduous aspects of managing a business. No one really likes the boring routine of bookkeeping and punching in numbers; but be it as it may, management accounting is a highly important hygiene for your lending business.
The income statement is an important element of your management accounting. It’s also called the profit and loss statement and it helps you monitor the overall profitability of your organization. This goes beyond reporting just the amount of loans you have disbursed which can often be a misleading indicator of profitability. An income statement, combined with a balance sheet and cash flow statement, give a complete picture of your businesses’ financial standing. However, we’ll focus on the income statement in this article.
Preparing an accurate income statement offers useful information about a company’s operations and managerial effectiveness. It also helps you to highlight underperforming functions within your lending business and your overall performance in comparison to your competitors.
The income statement comprises of several accounting lines which are highlighted below:
The interest income
This is the projected revenue for your lending business from loans disbursed. It’s typically a product of your loan value and your yield (or annualized interest rate). This is what you’d earn from giving out loans. It’s a projection so this item doesn’t account for the revenue actually earned from disbursing loans. It’s more of what you ought to earn, all things being equal.
The interest expense
The interest expense is how much is spent on servicing your capital raised to disburse loans to your borrowers. For instance, if you decide to use on-lending to raise funds for your lending business, the interest expense in this case would be what you pay to the on-lender in interest and applicable fees on the loan you got from them.
If you’re looking to access on-lending funds for a cash injection into your lending business, you can reach out to [email protected] to connect you with on-lenders.
Net impairment loss on loans
This item measures how much of the loan value and expected interest was lost due to bad loans. Loans are regarded as impaired when it looks more likely that the full value of the loan (principal and interest) won’t be realized by the lender.
Non-repayment of loans is probably high up on the list of a lender’s worst nightmares; unfortunately, if it does happen, the income statement will have to reflect that. Net impairment loss on loans provides insight into the value lost from non-performing loans (NPL).
Net interest income after impairment
This refers to the difference between the interest income and the sum of the interest expense and net impairment loss. It reflects how much of the projected revenue is retained after accounting for bad loans and the interest expense.
Fee and commission income
Lenders, especially those who offer loans via digital channels such as mobile and web applications or USSD, can offer their borrowers other products and services not related to lending. For instance, airtime and bills payments. The income earned from such transactions is recorded as fee and commission income.
Fee and commission income measures income to your lending business from other business activities separate from your core lending activity. E.g. commissions from sales of airtime, or fees from facilitating bill payments for third-party service providers via your platform.
Fee and commission expense
This measures expenses incurred in transactions leading to generation of fee from the other non-lending business activity. This may include the cost per API call to the billers’ end-point to facilitate payment.
Gross income
Gross income is the sum of the new interest income after impairment and net income from fees and commissions.
Operating expenses
This captures the costs associated with running your lending business on a daily basis. It accounts for other costs not directly linked to the loans you disburse. These costs may include: employee expenses, marketing expenses, professional fees, administrative expenses, etc.
Operating income
This captures the costs associated with running your lending business on a daily basis. It accounts for other costs not directly linked to the loans you disburse. These costs may include: employee expenses, marketing expenses, professional fees, administrative expenses, etc.
Profit before tax
This measures how much of the income generated by your lending organization remains after accounting for all expenses. This is your profit before deducting the value of all tax obligations. Interest expenses will also be accounted for here. The pre-tax profit is operating income less interest.
Sample of an income statement for your lending business
The presentation of income statements across organizations may vary as the income and expense structure also varies for lenders. However, below is a sample of a simple income statement to get you started.
***Kwik Kash Money Lending Services is a fictional lender created for the purpose of this demonstration.
For more information on the best business practices for your lending business, you can reach out to [email protected].
