Keeping Track: the Need for Records
The three most important functions essential to any small business (actually these apply to any size business) are:
- Buy low
- Sell high
- Keep track
The first two are intuitive and they refer to the recipe for profitability.
The last one is necessary to adapt to the way modern business is conducted. That is, unfortunately, complicated and rather confusing.
Let me explain:
If business was done on a cash basis only and nothing could be sold or purchased on credit. If you pay for everything you purchase with cash at delivery and you collect at the point of sale in cash. If you sold on the same day all your stock and therefore you don't have any stock . If you didn't have to worry about taxes and if you don't intend to ever pay any taxes. If you don't have any employees, then forget all the foregoing.
Then there would probably be no need to keep records. You would just have to count the cash at bank and in your pocket and that would be equal to the profit you made. If you want to know more about the differences between cash and accounting, click here to read an article on the subject.
But, of course, that is not the way business is conducted today. As we will see, it's important to keep records not just for staying on top of cashbook entries but also to understand what's happening in your business financially. Keeping truck is a must to grow your business.
You need to be able to work out how much you are selling on a daily, weekly and monthly basis and what expenses you are incurring in doing so, what your overheads are (even when you are not selling anything), how profitable each of your various business activities is and which customers are actually costing you money.
When you have this kind of information available, you can choose more effectively what to focus on and where you need to troubleshoot before financial problems really manifest themselves.
This information is condensed onto one place and forms the basis of the business accounts. That's essential so that the business owner can have the complete picture in front of him on one page rather than being all over the place in all the books and records of the business. 'That makes it easier to have control over finances and make easier business decisions. So, from now on we can safely substitute the word accounts for the word records for the purpose of this article.
There are three things to remember about your business' financial statements if they are going to serve as a business monitoring tool. You need to generate them regularly, make sure they are accurate (and therefore reliable), and make sure you understand them.
According to a survey between small business owners in the USA, unfortunately, the vast majority of the small businesses do not produce regular financial statements.
Generate them regularly means that getting accounts as part of your annual tax return, once a year and a year after the end of your business accounting year doesn't exactly qualify them as regular!Far from it!
It's no good if the business owner waits for 10 months after the end of the accounting year to have financial statements. By that time it will be too late for any problems that developed in the middle of the accounting year to be tackled and for any favourable opportunities to be taken advantage of.
Don't forget this: financial information is like produce; the older it is the less it's worth! And 15 months old numbers are worth about as much as 15 months old head of lettuce. If you want to know more on the importance of timely information please click here.
So, what's regular? Monthly is best but if you are a small company quarterly will do. For further information on the topic of the importance of the need for timely information you can read the relevant article by clicking here.
If your numbers are NOT accurate, they won't show the true picture of your business. If that is the case, you won't know where you went wrong in the past.
For example, you might be relaxing on unbelievable gross profit until the moment your accounts show that your stock is piling up at the back . You can't fool your inventory.
While you are salivating over surprisingly low operating expenses, unpaid payroll withholding may be a train wreck waiting to happen.
And while you are devouring your delicious bottom line numbers, your banker is calling you to tell you that you are seriously overdrawn. You can't fool your cash flow.
Now that you have your regular and accurate accounts, you need to UNDERSTAND them.
Accounts present the financial position and the results of a business. Unfortunately, they are prepared in figures and not in plain and understandable narrative text. Figures are symbols and as such they need to be explained, they need "translation". And unless you do understand them, you won't know:
It's only by understanding the inter-relations between the figures in the accounts and the implications of those interactions that you will be able to make the RIGHT business decisions to solve any problems or take maximum advantage of any opportunities as disclosed in the accounts.
And one thing vital to your success is that you MUST learn the difference between cash and accounting. Click here to read an article on the subject.
Now, it's a fact of life that business owners are business owners and accountants are accountants. For that, business owners should not be expected to act like accountants. Business owners are the bosses that run the show. They are the people that employ workers, grow businesses, make work for other people and create wealth with their hard work.
Although some of them do, not all of them have any basic foundation and knowledge of accounting. As such, they need some sort of support. Who is better positioned because of their trade than accountants to step in? Accountants spend many years studying these subjects, sit exams and spend many years acquiring experience with many businesses. They are not just bean-counters as some people might think of them. After all, a second opinion, coming from a person well placed to give it, is always welcome because of its competence and impartiality.
But, unfortunately, accountants tend to speak "technical". (Same applies to other professionals like doctors, lawyers etc).
Business owners do pay for this information when their accountant prepares their accounts for filing with the authorities. And in exchange for their money they should be able to get understandable, accurate and timely information. They have a right. But, they won't get it unless they ask for it!
How can accountants communicate the information so as to make it understandable and therefore suitable for decision making?
There are many ways. One of them is to be shown in graphs. There is also a variety of useful ratios that can be used to interpret the financial health of your business, whether it's providing a worthwhile return on the investment of your capital and time, and so on and so forth.
Ratios and trends enable comparisons of significant figures with previous periods and with industry and economic yardsticks. Without these comparisons business owners wouldn't know how well or how badly their businesses are performing. And of course, they won't be able to steer their businesses towards achievement of their goals.
Each industry has its critical ratios, accounts and figures. I will give you a small example from my experience. I have a client in the recruitment industry. Two very important figures for monitoring are telephone charges and advertising. Those have to be monitored closely, interpreted and conclusions be drawn and decisions be taken.
After all, you don't eat old lettuce; so don't manage with old numbers. That is, unless you accept shells.
Please feel free to use all the information that you will find on the web site.
If you have questions, please feel free to contact me personally at any time. You can call, e-mail, fax or write to me and I will be happy to answer any and all of your questions.
Good luck in your business ventures!
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