Greetings. My name is Jeremy Powers and I’ve seen many SMEs fail because they didn’t keep an eye on their finances. I’m here to tell you why it’s important to have a good accounting system in place and to give you some tips on how you can do that.
If you’re the sort of person who considers accounting to be boring and unglamorous, first of all you’re wrong, and second of all, it’s still necessary. Inability to keep a record of your incoming and outgoing transactions can result in material losses you didn’t see coming, failure to pay taxes and any other charges on time and even breaking the law.
I can understand all the excitement that comes with launching your own enterprise, and I can certainly understand that you don’t want to do things that you might consider to be less exciting than creating new products and scoring new clients. However, believe me when I say this: it’s better to spend some time every day or every week on recording your transactions and then have a clear picture of the financial state of your company on paper at the end of the taxing period, rather than avoiding accounting until the last minute and then paying the price with losses much more substantial than a few minutes spent on “boring number-crunching”.
A good starting point would be not to throw away any of the bank statements, invoices, money orders and other financial documents. Keep them all on file (hard copies or electronic) and record each sum written on them – I’ll tell you about a good way of doing that in a bit. Keeping the documents on file would be very helpful at the time of VAT returns. There is no way you can remember every single expense incurred during the taxing period, and there’s no point in trying – the documents are there to help you have all the transactions in front of you.
Cash flow issues can also be prevented by keeping organised. If you have all the documents, you wouldn’t have to face any unpleasant surprises at the end of the taxing period and wonder why your money has been disappearing. Cash flow problems are one of the biggest causes of SMEs failure within their first few years of business; don’t be another statistic and stay organised.
It’s not easy to keep track of all the payments made by you and to you, but having all the documents on hand would help you with that. By conducting regular checks of your accounts in accordance with these documents, you would be able to see whether all of your clients paid their debts and whether you’ve paid everything you owe to your suppliers.
When you have all the documents, the process of keeping a record of all the transactions is quite straightforward. These records would be invaluable when you assess the performance indexation of your business and make forecasts for growth and expansion. After all, having real figures makes it much easier for you, as well as for any potential investors, to see how you’re actually doing. New ideas are great, and they are always needed, but you have to see solid evidence that your previous ideas are actually working, and the only way to do that is to assess all the incoming and outgoing transactions, as well as your capital.
Investors need to see that you’re worth investing into, and abstract ideas with no hard evidence consisting of market research reports, management reports, and accounting reports are unlikely to be impressive. The same applies to creditors – as a new business, you’re likely to need money at certain stages of your development, and they need to see whether you can repay the loans.
All the reasons above should make it quite clear that accounting is vital to a company’s success. However, many business owners don’t bother with it themselves and hire accountants instead. Accountants are generally very good at their jobs, but their job is very hard as it is and not many businesses are equipped with technology to make it easier. You should therefore, as a business owner, consider investing in accounting software in order to make the process smoother and less arduous.
Double-Entry Bookkeeping System
I’ve mentioned earlier that I was going to tell you about a good way to keep records of your incomings and outgoings, and I’ll do so now. Most accountants use a double-entry bookkeeping system, which has stood the test of time and has proven itself to be the most reliable. The essence of the system is that the accountant records all the outgoing transactions under one entry (DR) and all the incoming ones under another (CR), followed by calculating the total amount of money left on the bank account at the end of the time period. This system is also an integral part of most accounting software packages.
The nature of the double-entry bookkeeping system confirms what I said earlier – it’s important to keep all the documents on file, especially bank statements, otherwise there’s no certain way of telling how much money has come in and gone out. However, things do happen and bank statements sometimes get lost in the mail or generally can’t be found. For that reason, I recommend that you sign up for electronic delivery of bank statements with your bank, as well as postal delivery. It might sound excessive, but it’s better to be safe than sorry.
The latter statement generally applies to business bookkeeping and accounting. If you’re unsure about a transaction or the amount of money involved, it’s always better to double-check just in case. It might take a bit of additional time, but it would be worth it – if you end up losing a lot more than you expected solely because you decided to just “wing it and forget all about it”, you would come out looking unprofessional and feeling frustrated with yourself. Don’t let that happen to you and your company.
If you’re unsure about any accounting processes or software packages, it’s always a good idea to get some advice from a professional. There are many experts on the market who would be happy to help small businesses with their bookkeeping, and many experienced staffing agencies that specialise in recruiting accountants or in particular industries. Don’t hesitate to use their services if you feel like you could benefit from them – it’s better to invest some money in that now than to deal with losses and perhaps even legal issues later.
I’ve written this post hoping that it will give you some idea about why doing proper accounting is important for your company. If you take away anything from this post at all, I urge you to take my advice about staying organised and keeping the banking paperwork in order as seriously as possible. If you need more advice on the double-entry bookkeeping system, there are many free resources available online.