For every business to thrive it is important to have products and solutions that speak to customer needs, employees who embrace teamwork and efficient system and processes to deliver services to customers. But what is of most importance is to have proper books of accounts that will help the business owner in decision making. As Thomas Watson Sr. states ‘’to be successful, you have to have your heart in your business and your business in your heart”. This will only be possible if an entrepreneur is able to have an overview of the business performance, and this can only be achieved through proper bookkeeping.
Majority of businesses fail before they attain their third year, sadly not due to lack of innovation and creativity to grow the business, but due to poor bookkeeping or not keeping accounting records at all. Proper bookkeeping is a requirement for every business, and as an entrepreneur, you don’t need to start making profits to keep financial records. With proper book-keeping, you can monitor how you are utilizing your capital, how much savings you need to accumulate or the kind of loan you need to borrow. Warren Buffet states that “You have to understand accounting and the nuances of accounting. It is the language of business and it is an imperfect language, but unless you are willing to put in the effort to learn how to read and interpret financial statements you shouldn’t select stock yourself”.
Every business is required to keep proper books of accounts including some legal requirements based on the nature of the business. Below are some of the basic books keeping accounts every business is supposed to maintain;
- Sales – This tracks all the sales done in a period and also tracks revenues generated by the business. The business should be able to generate enough revenue to cover all expenses, pay the stakeholders and save some amount for future use. In this regard, the pricing of products is important to ensure that both the direct and indirect cost is well covered as well as the profit margin. Revenue can be recognized either through cash basis or accrual method; it is at the discretion of the business owner to decide the method that works well for their business. When the business owner adopts a certain method, consistency is key to enable proper financial analysis and comparison between various financial periods.
- Purchases -This tracks the cost of the goods bought for re-sale and the cost of the raw materials in case of manufacturing businesses. Every business should strive to keep the cost of production low by engaging in innovative and cost-efficient methods of production.
- Expenses – This is the cost incurred in generating income. For easier tracking, the expenses can be broken down into four categories i.e Sales and Marketing, Administration cost, Human Resource cost and Finance cost. It is important to take note of all expenses, including the little expenses because they can pile up and become unmanageable. As an entrepreneur is important to keep watch of your cost to income ratio and maintain it at a manageable level. The expenses can be recognized using the cash basis method or the accrual method, both methods are acceptable but the principle of prudence dictates that all the expenses accrued in a certain period need to be recognized in the same period to avoid underestimating the expenses.
- Assets – These are resources that help in generating revenue and they have economic value or future benefits. Assets are often classified into three; Fixed asset, Current asset and Intangible assets. Fixed assets are non-current assets with a useful life of more than one year, these include machinery used in production, and they are recorded in the financial statement net of depreciation. Current assets include cash and cash equivalents, receivables, inventory and marketable securities and intangible assets include goodwill. It is important for a business to monitor its current ratio to ensure that the business is able to cover its current liabilities. A current ratio of 2 is considered healthy for business.
- Liabilities – These includes the debts that the company owes and can be both long term and short term. Short-term debts are referred to current liabilities since they are payable in a short period. It is important for business owners to ensure that the business has the capacity to repay the borrowings by ensuring effective cash flow management. It is important to select a viable source of the loans that will suit the business and as well as the amount to borrow to avoid excess or under funding.
- Shareholders/Owners Fund – This represents a shareholder stake in the business. It is comprised of the initial capital used while starting the business and any retained earnings over the course running the business. This is equivalent to the amount of money the business would return to shareholders if all the assets were converted to cash and after payoff of its debts.
Businesses often seek for funds to finance their business and it is a requirement by most financial institutions that the business maintain and submit books of accounts before they can be accorded any financial assistance. Springboard Capital Limited offers free financial advisory to clients on bookkeeping and debt management to ensure that their businesses are thriving amid the challenges faced by many entrepreneurs in Kenya.
Our business loans are available from a minimum of Kshs 100,000 upwards. Click here to view the requirements and Apply.
Article written by Stephen Mburu (Finance Manager) – Springboard Capital Ltd.
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