Accounting & Book Keeping Basics...

Quite often small businesses fail when they run out of cash. As they say in the world of business- CASH is KING. A lot of businesses also fail when they are unable to show their ability to manage cash effectively to bankers and prospective financiers who may be willing to invest more cash into their business. A lot of this failure often stems from two things - the business owner's apathy towards accounting or book keeping, or his disinterest in it. Both ways you are potentially hurting your business. As a business owner on the path of running a successful business, you must pay attention to financial management. Here are a few introductory pointers to help you understand the what and why of book keeping and accounting:

Why Accounting:Accounting serves many purposes that can help you succeed as a business. It gives you valuable information about the operations of your business. For example for a shop owner or retailer, accounting helps you keep record of all the goods that you purchase for sale, the cost of each item and the price at which you sold each item. It also tells you the relative speed with which you sold the items, the quantity sold, and the amount of each item left unsold. Accounting information like this can be very valuable in deciding what levels of each item you should keep, how often you should re-stock, and even at what prices you should buy the items in future to sustain or improve your profits. This is just one example of how well accounting information can be used in enhancing the decisions you make as a business owner. Accounting has various applications - managing cost, pricing, managing inventory (stock), expense controls, managing the risk of fraud, tracking income and performance, budgeting, profitability analysis, investment analysis, bank account management, taxes etc.

Who Keeps the Records? :As a business owner, you have a number of options regarding accounting and record keeping. For example, at the beginning, a lot of small business owners improve their basic knowledge of accounting and keep their own accounting records using manual books or spreadsheets on the computer. As the business grows, the business owner may need to focus more on developing new products or business development and may decide to delegate the accounting function internally often to someone she can trust who is comfortable with numbers and can understand the basic accounting framework. It is quite common that after a while, as the business begins to grow even more, you will need the services of a professional accountant. Organizations may choose to sometimes employ a full-time accountant or finance manager or out-source this on a part-time basis to someone who comes in once in a week or so, and works with your in-house book-keeper to manage your financial records. There are no hard and fast rules when it comes to making arrangements for accounting and book-keeping in your organization, the important thing is that you make some arrangements rather than none, and that those arrangements are in line with the realities and needs of your business.

How Do you Keep the Books?:Depending on the realities and needs of your business, you will generally find that financial records can be kept in three ways or a combination of any or all of these ways 1) manually - in this manner, you will use paper records to capture all your accounting and financial information. For example, you can issue paper receipts and keep books where you record your sales and inflows each day as well as your expenses and outflows. 2) Spreadsheet - used in combination with some manual records that you keep, spreadsheets can be used on your computers to record and track all your inflows and outflows and other financial transactions that take place. 3) Automated Software - Building on your manual records and spreadsheets, you may   also use an accounting software or enterprise resource planning system that captures all your financial transactions on the computer system and processes them in a variety of ways in a simple and effective manner. 

The more automated your accounting system, the less burdensome it will be for you, and the better the quality of information you can have for analysis and decision making. Computer software is easy to install and use, and just like other software these days, they are menu-driven and quite customer-friendly. You will need someone with a good understanding of accounting to set-up the system for you the first time, but after that you can use it by yourself. Accounting software will cost you much more than spreadsheets or manual records, but they are not so expensive that they are out of the reach of small business owners like you. The immense capabilities that they possess can really make a difference to your business, so as you grow and your transactions become more sophisticated, you should consider investing in a computerized accounting system.

What Books Do you Need to Keep?:Regardless of how you keep your financial records - manual, spreadsheet, or accounting software, there are some basic records that every system must capture, and as your business grows in sophistication, you can use these basic records in different ways to analyze your business and take decisions. Across all industries, basic records will include: purchases of materials and goods, sales of goods and services, credit purchases, credit sales, indebtedness to third parties, movement in funds from and within  bank accounts, payments for services, payments for all expenses (including salaries), payments for taxes and other government levies, capital received, advances given and retired, loans received, loan repayments (principal and interest), purchases of assets, investments made in other companies, and income received from all sources (including disposals of your fixed assets). Your accounting system should therefore provide for each of these classes of transactions and the various individual transactions under each of these categories. The accounting framework categorizes financial transactions as having an impact on Assets (what you own); Liabilities (what you owe); Expenses (what you spend); Income (what you earn); and Capital (the amount invested in the company at its inception and reinvested over time). Each of your transactions will have an impact on these components of the accounting framework and will reflect in your company's financial statements - balance sheet, income statement and cash flow statement which we will discuss in greater detail in a subsequent chapter. 

What Could Go Wrong?:Earlier we spoke about the benefits of accounting and record keeping. It is also important to talk about the things that you will stand to lose if you do not keep proper financial records. Foremost amongst this is what we will call fraud and losses. You may make your business susceptible to fraud and operational losses if you do not have a proper way of accounting for and tracking your financial transactions. Your employees can pilfer and your suppliers and customers can also get the better of you, if you do not keep proper records. Another major drawback of inadequate record keeping is that you will not be able to take informed decisions about your business. While your gut feeling about certain things may prove useful in taking decisions, historical trends backed up with verifiable data are a much better basis for decisions. For example, if you needed to pay a vendor for a service today, you can check your records for how much you paid for a similar service a year earlier to help you make that decision, rather than just guessing that the price is right or not. 

Without financial records, potential clients and investors may not take your business seriously. For example, if you are looking for capital for expansion or to support your day to day operations (working capital), a bank will ask you for historical financial statements and financial forecasts. A lot of business owners miss out on such facilities because they do not keep proper business records. Some customers may also request to do some level of business with you based on your financial stability and track record evidenced by financial statements.

Without proper accounting and record keeping you may be unable to prove your capabilities to such investors and clients. Finally, regulatory compliance especially with employee benefits, insurance and taxes require you to keep proper financial records. Without these records, your compliance with these regulatory requirements cannot be ascertained, and you stand the chance of being penalized by the regulatory or tax authorities and even losing lucrative business transactions from Government and other customers who may insist on seeing evidence of regulatory compliance before engaging your services.

Accounting and book keeping are an important part of your business. Often times, business owners neglect this part of their business and pay dearly for doing so later on. Even if you do not have an accounting or finance degree you can learn about the most basic things required to set-up an accounting system for your organization by reflecting on these pointers, and you will be able to supervise your accountant more effectively.