Dr Sanderson Abel
How do you tell if your business is making a profit or a loss if you are not keeping any records? Most of our small business owners unfortunately perhaps take record keeping for granted, but it can make the difference between success and failure in business. SME business owners need to develop the discipline of keeping track of all the sales, cash proceeds, and overall turnover of their business as well as other vital business records such as bank account statements, and so on.
One of the many reasons why most small businesses sometimes collapse is because the owners fail to keep these basic business records. The most common reason why small businesses do not keep records is usually the belief that it is expensive or very complicated to do so. Maybe but this may not be so actually. Whilst additional diligence and effort by the proprietor or manager of a business is required, it certainly will not cost the SME enterprise a lot of money. Another myth is that record keeping requires specialized accounting skills. Often-times, it requires just business common sense and the basic ability to read and write and of course the commitment of the business owner We discuss today some of the basics, that every small business owner must know about record keeping for small businesses: the methods, indicators and measures as well as some of the benefits of basic record keeping.
Benefits of good record keeping There are numerous advantages to keeping proper records of transactions for your small business and here are some of them. Preparation of financial statements Basic financial records will help you prepare financial statements that will become invaluable when you want to approach potential financiers or funders for the growth of your business. For example, credible financial records are required to support your business proposal when one approaches a bank to apply for a bank loan.
Business health check
Assessing the health of your business is near impossible without records. Keeping basic records will assist the business owner gain greater control of the financial aspects of the business. It becomes easy for example to determine which activities are costing the business in terms of losses and which areas are profitable and require more effort and investment.
Understanding your business cash flows, income and balance sheet items Basic records will help you to keep track of the cash flows of your SME business. Cash is king and understanding which activities are generating cash within your business is key for the business owner, who can then adjust his efforts towards the cash positive activities. This information is extremely important to your bankers and other providers of finance as they are also keenly looking at understanding your business cash-flows so that they can determine the nature and of the sources of funds for repayment of any loans they may consider granting to your business. Assessing whether a business has a sound asset base is also made possible if one keeps an inventory of the business assets.
Enabling good citizenry
Most small businesses avoid keeping records as a possible way of avoiding tax obligations. However most small businesses end up losing opportunities to benefit from tax rebates offered by the proper registration of your business for tax purposes. This also robs many of our small businesses the ability to be recognised as responsible citizens who contribute to the fiscus, to national GDP and employment in the country.
Establishing a sound financial track record Your basic business records together with your bank statement tell your business story. From the day you started operations in earnest to today. After all numbers tell a story. Religiously operate a business bank account and where possible bank all receipts and record all payments against your bank account. Your bank statements will provide potential lenders, (including your bank) a useful record of how your business has been running and will prove crucial in providing an insight into how it will run in future. Because record keeping is crucial to almost all aspects of your small business, what is the optimal way of keeping records? The following section discusses some tips for effective record keeping.
Role of your bank and your banker
Record keeping is crucial if you want to have a clear idea of your financial transactions. If you need help with record keeping, you should talk to your banker. Your bank should not be just a place where you deposit your money and get a loan in need. Most of the banks in Zimbabwe have units that offer small business advisory services and they will help you along.
Daily updates keep the business owner from being swamped under a mountain of paperwork at the end of the month or at the end of the financial year. It also avoids issues being buried and forgotten and the business owner having to rely entirely on memory to reconstruct events. Update business records daily, even if it means recording in a diary or hard counter book for eventual transfer to a proper business record book.
Keep all receipts and invoices Keep copies of all receipts and invoices issued by your business. This helps you to keep track of who gave you which payment, how much it was and why and when. This also helps keep track of your businesses sales and creates a basic financial trail. Also keep a record of expenses; all payments made. Make it a habit to ask for a receipt whenever you spend money on behalf of the business. Keep all payment documents in a well annotated or labelled file preferably in date order. If you own more than one small business, keep separate records for each.
Important business documents
In addition to your bank statements, which perhaps are the most important financial record as they provide a useful independent repository of your businesses financial data and history, cash register slips, and any other documents that represent proof of your income should be kept safe. You need to file certain documents in the proper places if you wish to maintain a proper record of your finances. Purchases, sales, payrolls, and receipts must be preserved safely in a filing system.
Keep a separate file or folder for these documents Suppliers’ receipts document your buying and selling transactions. These receipts should also be filed separately. Keep documents related to business expenses.
Even small cash payments should be recorded, and you should always have a cash disbursement or petty cash payment voucher ready. Documents related to assets, both movable and immovable, should be preserved so that it makes accounting for these easy. If your small business employs other people, you should keep records of employee compensation. This will assist you in the event of possible dispute with employees.
Dr Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on [email protected] or on numbers 04-744686 and 0772463008.