When you’re in the throes of building your empire from the ground up, you’re often so busy working ‘in the business’ that there’s little time to work ‘on the business’. As a result, accounting records are often the last thing on your mind. So long as there’s money coming in and your bank manager doesn’t have you on speed dial for the wrong reasons, you’re happy to keep going, right?
But here’s the thing. Accurate records of Revenue and Expenses – even in the most basic form – are vitally important and shouldn’t be one of those tasks relegated to the ‘when I have time’ folder. They contain - or should contain - the information to help you to make informed financial decisions and provide you with insight into areas of potential problems.
The most obvious reason is to be able to keep track of the cash flow situation of the company and know what the financial situation is at any given time. Not a more or less of what you think is coming in and out, but the real numbers, in Rands and Cents, of all revenue generated and expenses incurred.
Naturally, if more money is going out than what is coming in, there’s a risk of the business running out of the cash needed to keep the doors open. With updated records of Revenue and Expenses, you’ll be able to keep a close eye on the financial pulse of your business and foresee when additional capital may be required or when frivolous expenses need to be reconsidered.
If your business allows customers to pay on credit for goods or services, it’s even easier to lose sight of the true financial situation. One too many customers lapsing on credit payments can pose a serious threat to cash flow. It’s crucial to be able to see which customers have been invoiced on what credit terms and monitor that they’re paying within their agreed payment terms. Aim to have debtors pay you within 30 days to manage cash flow effectively.
Similarly, it’s important to understand your own credit situation and what payments need to be made when. Keeping to your credit terms with suppliers will ensure that you’re never in a position of paying unnecessary interest or collection. It's good pratice to pay your creditors within 30-60 days.
The nature of expenses will vary from company to company, but it’s crucial to understand how much is being spent on what type of expense. Do variable expenses differ marginally or do you need to cater for a wider discrepancy month to month? Are your production costs increasing? Or can you look at reducing certain fixed costs?
Without detailed records of Expenses, you’ll be hard pressed to be able to see what percentage of spend is going to which category of spend. These numbers will be able to provide a comprehensive view on business expenses and where that translates into direct revenue or are considered necessary associated costs.
Profit margin is a critical metric when it comes to the performance of your business. While profit itself is of course important, profit margin is a more accurate measure of how much you’re making on each sale and therefore a clearer indicator of overall business position. A weaker profit margin can leave a business at risk if production costs escalate, while a stronger profit margin can offer a little ‘breathing room’ for the business.
With clear accounting record you’ll be able to monitor and determine a profit margin that allows you to remain competitive despite unforeseen changes to external factors, and provide more accurate forecasts of growth with internal adjustments.
If your intention is to grow your business by raising investment at some point, accounting records are a non-negotiable. Any practical potential investor – be it a bank, specialised network, family or friends – will ask to review your prior accounting records before making a decision about investing in your company.
When you can demonstrate that your incredible business plan is backed up with accurate and up-to-date financial information, you’ll find investors far more approachable. After all, these are ‘numbers’ folks and – let’s be honest – aren’t all that bothered about what you do, but rather that their investment is a sound one. The best way to win these guys over is with sound financials that show you’re on top of all aspects of your business, most especially those where money is involved.
Last, but by no means least, we can’t talk about the financial records of a business without mentioning tax. Notwithstanding the need to pay VAT on a monthly basis, as well as any employee tax, when applicable, you’re required to complete an annual tax return for the company, with comprehensive detail about your Revenue, Expenses, Deductions, Capital Gains (or Losses) and taxes paid for the period. This task becomes near impossible to complete accurately without access to accounting records.
While these are only just a few examples of why a business owner should have a firm understanding of the financial performance of his or her business, the bottom line is that in order to have this information at hand, you’ll need to maintain comprehensive accounting records. And when we say comprehensive – we don’t mean a pile of slips and invoices stuffed in a shoe box! All information should be recorded in a system that allows for easy calculations, cross-referencing and the ability to draw balance sheets and income statements. The nature and size of your business will determine whether you’d be able to get by with a simple spreadsheet, or if you’d do better with specialised software. Either way, as long as you’re keeping proper accounting records for your company, you’re already a few steps ahead of much of your competition.
