Most start-up businesses face several difficulties which sometimes shut down their startup business in the initial years of operation. It could be failure to meet tax requirements, failure to identify leakages in cashflow, failure to identify creditors or recognise deficiency in financials. This is because most startup business owners overlook the role of financial information or book-keeping at such stages of their business, and recognise it as only a need for the ‘big’ business.
Book-keeping is a subset of accounting or financial management, but it plays an integral role especially for small business owners who desire sustained business growth. Book-keeping (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 Book-keeping 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 is available to assist future purchasing plans.
- It helps small business meet deadlines and to make timely payments of loans, rent, bills, taxes and so on. Absence of book-keeping could result in a penalty due to default in rent or loan agreements, underpayment or non-payment of taxes etc.
- Effective cash flow management is possible with proper book-keeping, and no business can stand the test of time without effective cash flow management.
- It helps to evaluate the performance of a business, to know if one’s business is stagnant, depreciating or growing. Where proper book-keeping is maintained, you will know the performance level of your business so you can strategise and make certain adjustments on it.
- 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. Book-keeping will help you know if your business can foot the extra expenses incurred by bringing in new employees.
However, no matter the stage of any business – because most startup business owners are not of a finance background – it becomes prudent for some common mistakes in accounting or book-keeping to be avoided by considering the below:
#1. Engage skilled book-keeping professionals
Being a Jack of all trades, they say, makes you a master of none – hence, business owners should avoid the habit to frequently undertaking the book-keeping themselves or instructing an untrained worker to do so. Such actions usually divert the business owner from focusing on business aims because of the attention they require. Some also do not assess the cost of their time against the lower cost of outsourcing to a professional who is trained in book-keeping, accounting and tax. Hiring a skilled bookkeeping staff or a professional firm with bookkeeping services can improve accuracy, speed and proactive tax planning. You might say it is costly, but a cost-benefit analysis of such will make a lot of revelations to you as a startup 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 audits or settling of dispute with customers, or at the court with regard to records, an efficient filing system must be maintained and should differentiate 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 the same account(s) for business and personal activities, and this is usually associated with poor cashflow issues. A business needs to provide transparent business records that are 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
The existence of relevant accounting or bookkeeping policies ensures consistency and accuracy in transactions, and they 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 a culture early on in a new business means procedures will be intact once the business grows – and hence is in greater need for set processes within a larger workforce.
As I indicated earlier, owners of start-up businesses need not become ‘Jacks of all trades’ and end up ignoring the core of its business existence. Book-keeping has become a vital factor in helping startup businesses sustain their growth and ensuring financial accountability. Startups should consider hiring professionals with skills in book-keeping or an accounting firm, and should always ensure that the accounting system encompasses not only daily transactions but also procedures on how records are filed, archived, and backed-up.
About the Author
He is 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. He is also 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.
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