Today let me share with you a write-up I first shared about four years ago.
In the words of Andrew Griffiths, the famous Australian entrepreneur, ‘I remember my first visit to an accountant. I had three years’ worth of business records crammed into three shoe boxes. My poor accountant! Since then I have well and truly learned the lesson of keeping good records.’
Now, many small and even some medium scale business owners do not see the need for record keeping. General record keeping and bookkeeping sometimes appear to be a bother – of course, you think you can always get an accountant or someone at the end of the day to do the job for you. If you have ever had the experience of handling huge fee notes – the type that makes you feel real pain – from the accountant, for something you could have done easily but ignored, then you know what I’m talking about. You don’t need an accountant to maintain basic books of accounts and other records for you. However, why all the talk about bookkeeping?
- Bookkeeping is simply common sense as far as business is concerned. Why do you start a business in the first place? The majority will tell you they start due to the profit motive. You may claim you have a very good product or service, you desire to serve people, whatever – but without profit and growth you go the way of dinosaurs. You can only know you are making gain through records. Short of that – you can close shop and go and relax.
- Financial and other records you keep help you to know how you are performing in relation to your plans (budget), previous periods, competitors etc. Are you working for an annual profit of 100,000 dollars for example? You need records to know that you have made 75,000 dollars and you need extra effort in the coming year. You need records to know that your sales are way behind your competitors. You need records to know that this year you have performed better than the previous year. Records provide a sense of direction for your enterprise.
- Books of accounts enable you to know where your cash is coming from and where it’s going. If you maintain records, can’t you tell which product or service is bringing in more cash? Can’t you tell which expenditures, possibly salaries or distribution costs etc, take the bulk of your cash? If you don’t understand the only language that cash speaks then you can ignore bookkeeping.
- Bookkeeping also provides safeguards for your enterprise resources. How can you, for example, know that your cashier is helping himself to part of your cash without records? Ever considered the importance of those cash machines at many places? How can you know that some purchases have not been delivered or paid for without records? How can you account for fixed asset items in your business without records?
- Legal and other statutory requirements also demand for bookkeeping. While certain forms of enterprises such as sole proprietorship may not have stringent requirements for records, some like limited companies have guidelines and requirements dictated by the law. An external auditor for example needs records before he can form an opinion on your financial statements. Now, if you want trouble with the law, I leave it to you.
- How about the taxman or rather tax collector. They indeed know how to collect. And they collect money. Your money. Sometimes the system is fair but sometimes it’s painful – like blood being drawn out of your arms. Quoting Benjamin Franklin, ‘In this world, nothing can be said to be certain, except death and taxes.’ Just try avoiding record keeping and let those tax guys give you the Best of Judgement (BOJ) assessments. You will learn how to keep records in one day – to avoid a repeat of the BOJ.
- Many decision making cases in your business require records. Your knowledge of the rate of consumption or sale of stocks can guide your purchasing. Your knowledge of monthly expenditures can guide your cash flow plans and also other plans for working capital. Analysis of your financial statements such as income statement and balance sheet can give you much more insight into your business and you can make lots of decisions based on these.
- How about financiers, investors etc? Just try going to any bank to ask for a loan, and then tell the bank manager that you don’t maintain books of accounts. You will not only look dense, but you will straightaway spoil or indefinitely defer your chances of getting the money. Financial records help you obtain financing from banks, investors etc.
I guess those are enough reasons for you to take bookkeeping seriously. The opportunity cost of not keeping books is very high. Common books of accounts such as the cash book, sales book, purchases book, fixed assets register, and also subsidiary books such as debtors and creditors ledgers are vital. Other records depend on the nature of business.
Of course in this computer age you can easily opt for a computerized system to do this. It doesn’t need rocket science to use simple ones. But don’t use the unavailability of computers or appropriate programs to avoid keeping books of accounts.
Remember – don’t keep records in shoe boxes. File documents. Write or maintain books of accounts – computerized or manual – and do it consistently. Beyond books of accounts you also need other records. Seek guidance if you need it.
The Wise Entrepreneur