Many entrepreneurs believe that focusing only on sales and operations is the only way to having a sustainable business. Wrong. It is equally essential to have clean and optimal books. If growth must be achieved in a business, proper accounting of the enterprise must never be treated as an afterthought. This article highlights bookkeeping and accounting tips for successful management of small and medium scale enterprises.
First things first. The handler (manager) of the enterprise must be able to understand the basic rules of business management – simple rules of profit and loss (PNL), book reconciliation, etc.
Accounting plays a vital role in businesses of every size. Sad to know that most small business owners take it with levity. They prioritize the sales, operations, and general upkeep aspects over proper accounting of their business.
Maintaining balanced books can never be overestimated in the daily runnings of a business, more so if the business is partly running on a bank SME loan. Here are few things that MUST be in place to ensure a healthy company financially.
Always Double Check on your Receivables
Getting value for your services/goods sold is sure a great part of running a business. However, managing potential payments from clients is very crucial in achieving stable books. When you issue an invoice to a client, you log in a receivable. This means you enter a record that a client now owes you money. This record helps you to keep tabs on defaulters, it also helps you to do accurate follow-ups with the actual figures you are being owed.
When you are eventually paid, the log MUST be marked out as ‘paid’, and the credited amount applied to their invoice.
This will help save a lot of time spent trying to track ’who paid what’. Also, this habit will save you from overpaying taxes, because if you leave un-applied received receivables in your revenue, you will have to pay taxes on them as they will appear as profits.
Keep an Eye on Your Cash Flow
A cash flow statement basically focuses on your income direction, in a particular given periodic pattern. Looking at it, you must be able to deduce your seasonal and capital expenditure in a given period. Monitoring of cash flow should be periodic (weekly/monthly) for proper efficiency.
Understanding your cash flow’s actual, average, and projected levels is very important when handling a small or medium scale business. These numbers are very vital to the growth/relegation of your business as they give you a vast understanding of cash movement within and outside of your enterprise.
Cash flow statements can give you the knowledge you need to anticipate expenditure which will help you to appropriately allocate your resources. They are also useful when building short and long term financial projections.
There are a lot of tools on the internet that can help generate a cash flow from your inputted income and expense metrics.
Learn the Basics of Bookkeeping
As earlier indicated, the handler of a business that has taken a bank SME loan must understand the basics of bookkeeping. Someone who knows not to mix revenue with operating costs. Else, the cream will come like an avalanche.
Keep a Record of your Expenditure Receipts
A lot of cash flow, tax, and bookkeeping issues arise from the manager’s inability to save copies of their expense reports.
Imagine buying an equipment a second time because you did not know that you already have one in the store. That’s hard-earned money being wasted right there. In fact, keep an electronic indexed version for easy searching when needed.
The best way to solve this issue is by saving a receipt of every purchase that your business makes.
Besides, you should endeavour to ensure that all your expenditures come from ONLY ONE account, separate from the one used for your receivables and income. You can even instruct the bank to put your SME loan on a credit card, and keep a virtual copy of ALL receipts as you buy things.
Record Cash Expenses
When you are an entrepreneur it is crucial that you track all the expenses related to your business. That way these costs can be subtracted from the amount of your total income when it comes time to do taxes.
This will give you a more accurate sense of your overall profitability for the year. It is easy to look past expenses paid for in cash. Ask for a receipt from your vendor or log the expense immediately to ensure that it makes it on the books.
Keep your Personal Funds Away
While there is absolutely nothing wrong to dip deep into your personal pocket to get resources to help your business, you must also record the source and use of the money properly. It should be recorded as owner’s equity. What is even worse is when the business owner dips hand into the business’s pocket for personal spending – yeah, this has to be the most common and worst mistake of most owners.
Use only business accounts for business purposes, and personal accounts for personal purposes. Document any interaction between the two accounts thoroughly to avoid tax and bookkeeping issues.
We recommend the use of a sole credit card/account for expenditure; rather than use cash. Movement of money through cards and accounts is easier to track and reconcile. Cash expenses might be hard to reconcile if not immediately taken out in the company’s books.
Know the Difference Between Invoices and Receipts
It is way too common for entrepreneurs to mix up invoices with receipts.
Simply put, an invoice is a document that you send alongside your delivered goods and services. Its job is to serve as a reminder to the customer that s/he is still owing your company. After you send your invoice, follow ‘number 1’ and keep tabs till payment is made.
While a receipt is a document that confirms that your payment has been received from the customer. A proof of payment. It’s what you give your customers after the transaction is complete.
You will have issues balancing your books if these two are mixed up just even once.
Consult with a Tax Expert
In order not to overpay/underpay your due taxes, we recommend that you hire a professional to handle your taxes for you. To cut down costs of their salaries, you can simply consult them on a periodic basis.
If you consult with them, regularly and periodically, you should be fine. They will also help keep you up to date with extant policies of the country to ensure your enterprise’s compliance.
Prepare Financial Statements
In previous accounting tips, we have looked at the different kinds of financial statements a business prepares. Some examples of this are the balance sheet, income statement, and cash flow statement.
Always Plan for the Future
Always keep yourself abreast of all the happenings in the industry where you operate. Do not isolate yourself/your business.
In fact, draw guided strategies for the next 3-6 months in accordance with the present and future happenings of your industry or industries that might affect your sector.
This enables the enterprise to take opportunities early on and also judiciously use expenses appropriately.
Only Hire when a Task cannot be Fully Automated
Where the cost of using technology to solve a problem or handle a task is lesser than hiring an employee, we recommend that you use technology.
There are a lot of advantages in using technology as it delivers timely expectations in a routinely organised manner. Unlike humans that are seldom inconsistent with results, tech could prove to be faster and better.
Of course, this is not to ask entrepreneurs not to hire employees, but try automation first and weigh the options.
Some of the simple bookkeeping concepts to note:
- Account Receivable (money clients owe you after you have issues invoices)
- Accounts Payable (money you owe someone else e.g loan repayments)
- Sales (record your revenue here)
- Purchases (supplies)
- Salary expenditure
- Owners’ Equity (The money you put into the business)
- Retained Earnings (your profits)