The success of every business primarily depends on the quality of decisions made by the owners and managers. Decision making in business is usually strategic and complex with many permutations that lead either to growth or destruction. These decisions can broadly be categorized as financing, investment and profit distribution (dividend) decisions. Financing decisions refer to how the required funds for the business are acquired and managed i.e. should I go for a loan or rely on personal funds (equity). Investment decisions refer to how the business resources are allocated to generate maximum profit/wealth for the business owner. For example, should the business build, buy or rent its premises? Lastly, profit distribution talks of how much profits earned from the business are distributed to the owners.
The primary basis for these decisions is data that is processed into information. Without data, decisions become subjective and will often lead to inaccurate choices. This is where accounting and the need for proper record keeping comes to the fore.
Accounting health check for your business
My experience in accounting practice points to the fact that poor record keeping is prevalent among a number of businesses and results in avoidable loses. Accounting is said to be the language of business and every business irrespective of the size or industry require some level of accounting.
The following are a few accounting health check questions every business owner needs to ponder over;
- Am I able to readily provide accurate information on my revenues? Which of my products/services generate the highest and lowest revenues?
- Am I able to readily provide accurate information on my expenses? What cost items generate my highest and lowest expenses?
- How much profit or loss is the business making per week, month, quarterly and yearly?
- Who are our creditors and debtors? What are their account balances in our books? Do our creditors and debtors have the same balance in their books?
- Are monthly management account generated and used for decision making?
- What are my tax obligations? How can they be avoided if possible?
- What controls are in place to mitigate loses and theft?
- Do I pay myself or I take money from the company as and when it is needed?
The effect can be wealth draining
Poor accounting records can be costly for any business no matter how promising the business idea. A business which is seen to be profitable may prove otherwise when subjected to accounting scrutiny. Some businesses are unable to determine their profits accurately and end up eroding their working capital and eventually lead to its collapse. I have come across businesses that incurred huge tax liabilities due to improper record keeping and had to engage tax consultants at additional costs. Losses may arise from inaccurate payable and receivable balances, there could be pilfering from petty cash and inventory as a result of inadequate controls. The business will struggle to secure external funding when needed due to the lack of information about performance. Crucial business decisions will be based on whims and caprices rather than accurate data and information.
The way forward
Business endeavors are generally undertaken for profit and wealth creation. After nurturing that promising business idea, an entrepreneur with the long term success of the business in sight must be decisive on establishing systems to ensure the availability of accurate data to track business performance and growth, minimize loses and maximize profits. The following are a few steps the entrepreneur can take;
- Talk to a consultant friend about basic guidelines you need to manage the business finances. This may not only be limited to book keeping but also business registration processes, requirements and the relevant tax laws in the chosen area of business.
- Get an accounting software or alternatively a simple excel spread sheet for the start. There are accounting softwares available at low cost or free depending on your business needs. Keep records, no matter the challenge.
- The option of an outsourced book keeper is available. This can either be local or cloud based. Outsourcing the companies financials can be an attractive choice for business owners with low accounting skills or detests crunching numbers. The entrepreneur will then have the time to focus on other aspects of the business.
- As the business grows and becomes stable, an accountant can be engaged to manage the finances. Aside managing the day-to-day finances, a qualified accountant can advise on company structuring matters, implement cost saving strategies, payroll management, engage the Ghana Revenue Authority (GRA) during tax audits, develop internal controls and contribute to the financial details of your business plan/strategy.
In well-structured companies, accounting and financial reports form the basis for top management decisions regarding investments, financing and profit distribution. Adhering to good accounting practices is essential for the success of any business, irrespective of the size or industry. Savvy accounting and financial analysis is key to measuring the business success in terms of profits and growth. Poor financial records impair profit, leads to stagnated growth, theft, financial crimes and ultimately, collapse of the business. While you proceed with that exciting business idea, think about accounting.
About the author:
He is a Chartered Accountant and a Practitioner licensed to issue audit opinions on company financial statements. He has managed teams to conduct assurance, accounting, taxation and advisory services across a variety of industries. He is an entrepreneurship enthusiast who takes keen interest in the growth trajectory of start-ups and SMEs and provides advisory services in that regard.