Bookkeeping is a subset of accounting or financial management, but it plays an integral role, especially for small business owners, who desire sustained business growth. Bookkeeping (in accounting) is all about keeping and maintaining financial books. Some of the books and records you should be keeping are:
• Cash Book
• Inventory / Stock book
• Assets Record
• Profit and Loss accounts
• Payroll records
• Sales invoice
• Cash receipt
• Credit book
• Credit purchases/Debit book
• Cash payment vouchers
• Bank transactions
Relevance of bookkeeping in business
• It helps to plan for your business. With records of inventory available, for instance, a business owner can easily tell the time to re-stock, what quantity of stock are available to assist future purchasing plans.
• It helps small business meet deadlines and to make timely payments of loans, rents, bills, taxes and so on. Absence of bookkeeping could result in penalty due to default in rent or loan agreements, underpayment or non-payment of taxes etc.
• Effective cash flow management is possible with proper bookkeeping, and no business can stand the test of time without effective cash flow management.
• It helps to evaluate the performance of business to know if one’s business is stagnant, depreciating or growing. Where proper bookkeeping is maintained, you will know the performance level of your business, so you can strategise and make certain adjustments on your business.
• It helps you forecast the future of the business, set projections and goals for the business.
• It helps to know, for instance, when it’s time to increase labour or capital. Bookkeeping will help you know if your business can foot the extra expenses incurred by bringing in new employees.
However, no matter the stages of any business, because most start-up business owners are not of finance background, it becomes prudent that some common mistakes in accounting or bookkeeping are avoided by considering these:
#1. Engage skilled bookkeeping professionals
Being a Jack of all trades, they say, makes you a master of none, hence business owners should avoid the habit to frequently undertake the bookkeeping themselves or instruct an untrained worker, but such actions usually divert the business owner from focusing on business aims because of the attention it requires. Some also do not assess the cost of their time against the lower cost of outsourcing to a professional who is trained in bookkeeping, accounting, and tax. Hiring a skilled bookkeeping staff or a professional firm with bookkeeping services can improve accuracy, speed and proactive tax planning. You may say it is costly, but a cost-benefit analysis of such will make a lot of revelations to you as a start-up business owner.
#2. Keep well-managed business records
Properly keeping records can help with early information on the most profitable trends, such as identifying the biggest and smallest customers, but the absence of such could hinder same. With effective bookkeeping records, businesses can show how much is owed to suppliers, customer bad debt, tax to be filed, and the performance of employees.
#3. Maintain meaningful and transparent filing systems
To ensure smooth audit or settling of dispute with customers or at the court with regard to records, an efficient filing system must be maintained and should define between payables, receivables, bank statements and tax information. For instance, purchase orders, quotes, invoices, and receipts should be filed preferably by job. Once year end is completed, all files need to be archived in a secure off-site location.
#4. Proper reconciliation of bank statements
It is a common mistake to use same account(s) for business and personal activities, which is usually associated with poor cash flow issues. A business needs to provide transparent business records and distinct from its owners’ personal transactions. A generally accepted practice (esp. for audit purposes) is to have the business bank accounts (using the bank statements) reconciled with its cash book to identify and eliminate potential banking mistakes.
#5. Establish policies and processes
Existence of relevant accounting or bookkeeping policies ensures consistency and accuracy in transactions and it must contain procedures with embedded checks to ensure they are adequate and are followed. The policies must be clearly outlined and made available for every employee with associated responsibilities if any. Incorporating such culture early on in a new business means procedures will be intact once the business grows, hence in greater need for set processes within a larger workforce.
Like I indicated earlier, owners of start-up businesses need not become Jack of all trades and end up ignoring the core of its business existence. Bookkeeping has become a vital point to help start-up businesses sustain their growth and to ensure financial accountability. Start-ups should consider hiring professionals with skills in bookkeeping or an accounting firm, and should always ensure that accounting system encompasses not just daily transactions but procedures on how records are filed, archived, and backed up.
About the Author
A Financial Reporting/Analysis, Audit and Tax professional, a Consultant at Danisa Consult (Accounting, Audit & Tax) and a Facilitator for Accounting, Tax and Audit at Global Institute of Resource Development (GiRD), a Capacity Development and Training Institution. A member of the Institute of Chartered Accountant, Ghana; Chartered Institute of Taxation, Ghana; Association of International Accountants, UK; International Association of Accounting Professionals, UK; Association of Certified Fraud Examiners, US; Southern African Institute for Business Accountants, SA.