common-size statement
Common Size Statement is a financial statement where every line is shown as a percentage of a base figure, so businesses of any size can be compared fairly.
In plain English
Two women sell rice at Mile 12 market, side by side. One's stall does ₦2,000,000 in sales a month, the other's does ₦200,000. Ask them who is making better use of their money and most people will point at the bigger stall without thinking twice, because bigger naturally looks better.
But bigger is not always better managed. Maybe the small stall keeps ₦40,000 of every ₦200,000 as profit after costs, while the big stall only keeps ₦100,000 out of ₦2,000,000. In percentage terms, the small stall is running at 20 percent profit and the big one at 5 percent. Suddenly the small stall is the sharper business, and you would never have seen that just by staring at raw naira figures.
That is exactly the trick a common size statement plays. It takes an income statement or balance sheet and turns every single line into a percentage of one base number, usually total revenue for the income statement, or total assets for the balance sheet. Cost of goods sold is no longer a big scary figure in naira, it becomes 'cost of goods sold is 60 percent of revenue.' Suddenly you can lay a small company's statement next to a giant's and actually compare like with like.
This is why an investor in London looking at a Nigerian bank's annual report alongside a UK bank's report finds common size statements so useful. The Nigerian bank might report in billions of naira and the UK bank in millions of pounds, completely different currencies and completely different scales, yet once both are converted to percentages of total assets or total income, the comparison becomes fair and readable.
A Nigerian person in Canada sending money home to help run a family shop can ask for a common size version of the shop's monthly figures instead of raw numbers, and immediately see if rent is eating too much of revenue, or if profit margin is slipping, without needing to be an accountant to notice it.
A small shop has revenue of ₦500,000, cost of goods sold of ₦300,000 and net profit of ₦50,000. On a common size statement, revenue is set as 100 percent, cost of goods sold becomes 60 percent of revenue, and net profit becomes 10 percent of revenue. Now this shop's percentages can be compared directly with a much bigger shop's percentages, even though the naira figures are worlds apart.
Questions people ask
What is the base figure used in a common size statement?
For an income statement, the base is usually total revenue or sales, with every other line expressed as a percentage of it. For a balance sheet, the base is usually total assets, with each asset, liability and equity line shown as a percentage of that total.
Why would a small business owner in Nigeria bother with this?
Because it strips away the distraction of size and shows what percentage of your money is going to rent, stock, salaries and profit. A shop owner in Aba can use it to compare this month's performance to last month's, or to compare two branches of the same business, even if one branch earns far more naira than the other.
Is a common size statement the same as ratio analysis?
They are cousins rather than twins. Ratio analysis compares specific figures to each other, like profit to sales, while a common size statement restates an entire financial statement in percentages at once, giving a fuller consider in one document rather than one ratio at a time.
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