As a business owner, nothing is more important than understanding the financial aspect of your business. According to the FATE Foundation/Agusto & Co 2015 Research Report, most small and growing businesses struggle to succeed in business because of poor bookkeeping processes and a poor understanding of accounting fundamentals[1].
Also, an MSME study carried out by KPMG in 2014 revealed that a lack of proper records was a major reason for loan rejection[2] as most banks found small businesses credit unworthy because of a lack of proper accounting records. A good accounting system however, gives you better control of your business and puts you in a better position to attract funds to scale your business from banks or investors.
While the topic of accounting may be inexhaustible, the following simple steps can get you on your way to proper accounting:
- Leverage accounting software: Technology has greatly impacted the process of accounting. With tons of online bookkeeping templates, budgeting templates and cloud based accounting systems and software, handling the accounting aspect of your business just got easier. From paid accounting software like Sage and Quickbooks to free accounting software like Wave and GnuCash, technology has made it possible to access accounting software regardless of your budget.
- Track your expenses: The basis of any successful business is an effective expense tracking system built on strong record keeping. This is a crucial step that allows you monitor the growth of your business, prepare financial statements and aid in tax compliance. From meals and entertainment, out of town business travel, equipment purchases to vehicle repairs/servicing, fuel purchase etc, it is important to record every single transaction. Also, keep invoices and receipts of transactions.
- Keep personal transactions separate: As with most small businesses, it is easy to mix up business and personal finances. To help with separating personal and business finances, consider opening separate accounts with separate credit cards for your business and for yourself. This makes it easier to separate personal transactions from business transactions.
- Dedicate time to balance your accounts: Set aside 15 – 20 minutes to organize your finances weekly and ensure you make this an ultimate priority. While the challenges of running a small business can be overwhelming, setting time aside to organize your finances weekly will enable you organize your accounts, make more informed financial decisions, sort your taxes and generally make you more productive.
- Invest in acquiring accounting knowledge: As a business owner, it is important you know and understand every aspect of your business including the accounting and financial aspects of your business. While you may hire someone to handle your accounts, it is important to acquire accounting knowledge so that you can provide oversight accounting-wise and check the activities of your accounts person to forestall any maneuverings. Again, you can leverage technology in this regard as there are tons of free online accounting and bookkeeping courses that you can take.
Benefits of a good accounting system
A good accounting system would help you:
- Evaluate the position and performance of your business: With proper accounting records, you can easily see the financial position of your business and evaluate the performance of your business to ascertain if the business is running at a profit or loss.
- Make better financial and business decisions: It is easier to make informed financial or business decisions when your accounting records are in place. For instance, you can decide to discontinue a product line or tweak your marketing and sales strategy for the product based on the information your records reveal. Your accounting records will also help you monitor your expenses and cut out unwanted expenditure.
- Manage your Cashflow: Information from your accounting records would help you manage cash that comes in. You will be able to allocate cash to priority areas as revealed by your records and meet up with deadlines. Your accounting records also reveal when bills like rent etc need to be paid.
- Evaluate and set new goals: Your accounting records provide information on how well you were able to hit set targets and provide insight on setting new goals.
- Attract funding and investment: As a small business owner, finance could be a challenge but proper accounting records put you in a better position to attract funding. Nothing impresses an investor more than a small business with accurate and up to date accounting records; you are taken seriously as a business person.
From the foregoing, it is important to note that no business can run successfully without proper accounting or financial records, instituting a good accounting system early on in your business is therefore pertinent to forestall complications in the future.
[1] A Review of the Nigerian MSME Policy Environment, Agusto & Co/FATE Foundation, http://fatefoundation.com/msme-policy-report/, Pg 138, accessed June 6, 2016
[2] Strengthening Access to Finance for Micro, Small and Medium Enterprises in Nigeria, KPMG, http://www.csrinaction.org/downloads_file/MSME%20Banking%20Study%202014.pdf, Pg 22, accessed June 6, 2016
Photo Credit: Hermann & Loll