The Importance of Good Record Keeping for Your Business

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By: Site Engineer, Staff

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The session on basic record keeping and accounting systems emphasizes the barest minimum financial recording, which must be used by owners and managers of small and medium enterprises.

This article is intended primarily for proprietors of small business who are interested in selling up basic records which can be maintained by persons with little or no experience or training in bookkeeping or account.

The record keeping discussed in this article is so simple that it can be kept and maintained by the small business owner himself or by an employee with ordinary clerical ability.

Importance of Record Keeping

For both potential and existing business owners, experience has clearly indicated that an adequate record keeping system helps to increase the chances of survival and reduces the probability of early failure.

Similarly, for the established industrialists, it has been clearly demonstrated that a good record keeping system increases chances of staying in business and of earning desirable profits.

Record keeping can help entrepreneurs of small enterprises keep their business on a sound basis. Many small businesses seem to have the potential for success; many owner-managers are good craft men and offer services or products, which attract customers. In many cases their sales are good but because of poor record keeping, some of these businesses fail.

In most cases, the poor business operation has been attributed to inadequate or inexistent business records. In some cases, the records may be good but the owner-managers lack the ability or experience to use them. But before you use this valuable information, you must first make a timely recording of them.

Many at times, some entrepreneurs do not know the current score of their business, because of the inadequate records or because of not keeping records up to date.

Requirements of a Good Record System

A good record keeping system must satisfy the following requirements:

  • It must be accurate
  • It must be consistent
  • It must be reliable
  • It must be easy to understand
  • It must be designed to provide information on a timely basis
  • It must be simple to use

Minimum Record Required

Everyday bits of information flow into a small business. As customers are served, pieces of information are generated about sales, each, equipment, purchases, expenses, payroll, etc. The followings are the basic records, which should be kept in your business.

  • Payroll Records: Used to record the wages of employees and their deductions, such as those of income.
  • Equipment Records: Used to record a firm’s capital assets, such as equipment, office furniture, office furniture, motor vehicles, etc.
  • Cash Receipts Record: Used to record cash which the business receives.
  • Cash Disbursement Record: Used to record a firm’s expenditure, other than those relating to purchases.
  • Cash Sales Record: Used to record incomes from cash sales.
  • Cash Purchases Record: Used to record the cash purchases of merchandise bought for processing or resale.
  • Inventory Record: Used to record the firm’s investment in the stock of materials, factory suppliers, etc.
  • Petty Cash Fund Record: Used to record payment of small amounts not covered by invoices. To keep this record, you should, first of all, enter the preliminary details of such expenses in the Petty Cash Fund Record, which is usually referred to as Petty Cash Book.
  • Credit Sales Record: Used to record credit sales, i.e., those concerning debtors. Another name for this record is sales journal.
  • Credit Purchases Record: Used to record credit purchases in respect of a debt owed creditors and suppliers.

There are more recordings to be made as you progress in your businesses. Note, the basic ten financial records mentioned above when properly kept, updated and organized by yourself or a qualified bookkeeper or accountant will enable you to have a picture of your business operation.

Who Keeps the Records

Once a system of record keeping has been set up, the question is “who will keep and maintain the records?

Seven possibilities are open:

  • If you have the time and inclination, you can keep the books yourself.
  • The public accountant who has set up your books may keep them himself and provide the greatest accuracy. But you must weigh the cost because he will normally charge for his time, operating expenses and profit. However, his professional advice can frequently increase your profits to more than cover his expenses.
  • It is not unusual that in small business, the wife looks after this record keeping aspect.
  • Then, of course, there is the freelance bookkeeper who works fulltime but allots his time among several firms within the area.
  • You can employ the services of an Accounts clerk if the volume of records to be kept necessitates this.
  • Your clerk/typist can combine this clerical job with his typing duties.
  • Another possibility is hiring a woman who works part-time while her children are in school.

Delegation of Authority

It is obvious that you, as a businessman, cannot do the entire recording above, in addition to taking vital business decisions, supervising the work and coordinating the activities of your subordinate stall.

Otherwise, you may end up with hypertension unless you are exceptionally hard-working, and possess a rare type of mental and physical health.

You, therefore need to allocate some of the jobs to your subordinates like the Administrative Officer, Production Manager; depending on the size of your business and the volume of work to be performed. By so doing, you will be able to devote your usually precious time, to taking vital business decisions and coordinating the activities of the various departments.

You will then need feedback from the officers to whom such assignments have been delegated, by way of reports statements, and so on.

Records as a Picture of Your Business

Your various records, which may, later on, be combined into a set of books by yourself, a qualified bookkeeper or accountant is like a roll of exposed film. The latter must be developed before you can see the picture. Similarly, your records contain facts and figures, which make up a picture of your business. Three basic financial statements that you must have, understand and use in running your business are:

  • Trading, Profit and Loss Statement (sometimes called income statement).
  • Balance Sheet (a consolidated record of what your business has, how much owed creditors and how much of the business you own personally).
  • Cash Flow – while the two above-mentioned financial statements are important, they fall short in one very essential aspect. They tell little about cash flow-the lifeblood of any venture.

In most cases, you will need the services of an auditor or accountant to prepare these basic financial statements for you. An auditor is a professionally qualified accountant who checks the accounting records and documents of his clients and prepares the financial statements, which will show a true and fair view of the financial position of the business.

Analysis of the Business Picture

Consider this illustration, when you see the photograph after it has been developed and printed, you either judge it as a beautiful or bad picture. If it is stained, you may think it is due to too much lighting or lack of lighting. If it is unclear or hazy, you might say, the object moved during the picture taking process. Based on this analysis, you try to do better next time.

In the same manner, the financially qualified pictures that can be taken from the recordings of your small business operation may show some aspects of the firm that may stick out like a sore thumb.

Some of the questions are simple, but an adequate system of records would answer are:

  • What are my expenses, including those not requiring cash outlays?
  • How much is tied up in credit sales?
  • How much business (cash and credit) am I doing?
  • What are my collections? What are my losses from credit sales? Who owes money? Who is delinquent? Should I continue to extend credit to delinquent accounts? How – much cash do I have on hand and in the bank? Does this amount agree with what records tell me I should have, or is there a shortage? How much is my investment in merchandise? How often do I turn my inventory? Have I allowed my inventory to become obsolete?
  • How much merchandise did I take out of my store for my personal or family use which affects my gross profit calculations?
  • How much gross profit (margin) did I learn?
  • What is my monthly payroll? Do I have adequate payroll records to meet the requirements of the government, such as Pay As You Earn (PAYE), etc?
  • How much do I owe my suppliers and other creditors? Have I received all my outstanding credits for returned merchandise?

Advice and Assistance

While you the small industrialists may learn the basics and intricacies of small business record keeping, there may be some financial aspects of your business for the time being, that you cannot fully cope with; for that reason, you will need some advice and assistance from professionals.

Within your immediate area, there are surely qualified bookkeepers and accountants. You may either hire them or benefit from their services on retainership basis.

These experts, bookkeepers, accountants, etc., in addition to analyzing the profit and loss statement and pointing out areas which need control in your business, can also advise you on other aspects of your business; financial management, production management, marketing management, technological development and all other aspects of your business operations.

Even with the presence of these various types of assistance, before they can give you the necessary assistance, they will need some information about you and your small business. Your record keeping is the most essential source of information.

Financial Statements

Having recorded all financial transactions of your business the need then arises, to logically arrange the data generated in such a way that they can be meaningful and useful to your business or any other user.

This logical arrangement is mainly in the following two forms of financial statements:

  • Income Statement: Which is a financial statement that reports income and its determinants summarizing the results of operations for a period of time; in other words it is a “flow” report. It tells us how the company has progressed during the period.
  • Balance Sheet: This is a financial statement that reports the financial condition of an entity at a certain point in time; in other words, it is a “status” report.

1. Income Statement

The accounting report that summarizes the revenues and the expenses of an accounting period is called the income statement (or the Trading Profit and Loss Account). Statement of earnings or statement is subordinate to the balance sheet because it shows, in some detail, the items that together account for the change arising from operations during an accounting period in one balance sheet item, i.e retained earnings.

Nevertheless, the income statement is regarded by many to be more important than the information on the balance sheet, because the income statement reports the results of operations and indicates reasons for the company’s profitability or lack thereof. There is, in practice, considerable variation among companies in the format used for the income statement. The following illustrations are two conventional income statements.

2. Balance Sheet

This is defined as a classified list of the debt and credit balances remaining on the books after the preparation of the Trading, Profit, and Loss Account, including the closing stock, such balances are assets and liabilities. The purpose of preparing a Balance Sheet is to present a true and correct view of the financial position of the business at a given date.

Items of the Balance Sheet

Liabilities: Under the liabilities are listed businesses or owners’ interest otherwise known as:

  1. (a) Capital or equity

(b) The balance of Profit and Loss Account

  1. Long-Term Liabilities – Loans not repayable within 7 years or more.
  2. Current Liabilities:
    • Creditors (those business proprietors owed for materials and expenses) also known as Account Payable.
    • Taxation and Dividends (if any) due but not yet paid, (e., accrued charges).
    • Bank overdraft

Assets

  1. Fixed Assets – These refer to assets held in running a business and not for sale. They have a long but nevertheless limited life:
  • Motor Vehicles
  • Goodwill, trademarks, and patents
    • Land and buildings
    • Plant and Machinery
  1. Current Assets – These are items, which in the normal course of manufacturing and trading, the business seek to convert into cash in order to earn a profit:
  • Prepayments (payments made in advance)
  • Cash
    • Stock
    • Debtors (also known as Account Receivable)

In the balance sheet, the total of the Fixed Assets plus Current Assets are equal to the totals of the liabilities plus share capital and reserves.

Other Items and Terms

  • Depreciation: Loss of fixed assets due to wear and tear. Remember depreciation provision.
  • Intangible Assets: Are assets that have value but are not represented by tangible hardware, examples are goodwill, trademark, and patents.
  • Work in Progress: Work yet to be completed at the balance sheet date.
  • Obsolescence: Loss of fixed assets not necessarily due to wear and tear but to technological change.
  • Working Capital:
    • Net Working Capital – The total of current liabilities
    • Gross Working Capital – the total current assets

A typical Balance Sheet is presented in a “two-sided” or “horizontal” form. The balance sheet can also be presented in a “vertical” form. The vertical form of presentation is preferable for the following reasons:

  • The current liabilities are deducted from the current assets; if this result is favorable, i.e., the current assets exceed the current liabilities; it is an indication that the business will be able to meet obligations to creditors as and when they fall due.
  • It is often confusing for the non-accountant to find “capital” added to the creditors. Since account should aim to help rather than confuse, the creditors are shown as a deduction from the assets.
  • The vertical form/highlights the funds, which the owner has supplied, referred to as the “net capital employed.”

The difference between the two is often referred to as the “net working capital”.

Since it is the primary objective of any prudent entrepreneur to make profits, the management of the assets (fixed as well as current), must be given adequate attention. It is equally very important to manage these assets efficiently in order to serve both the equity capital and loan capital of the business.

 

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