Your success in business will rest on good record keeping practices and solid cash flow management. Without good records, it is simply impossible to determine the financial condition or profitability of your business. As a small business owner, you should be familiar with and recognize the importance of proper record keeping requirements and cash flow planning. When setting up a company, regardless of the size, there are requirements under the Companies Act regarding the maintenance of books and records. It is important that you are aware of the legal requirements and ensure that you are able to produce the required information.
The specific records your business will need depends on a number of factors, such as the type of enterprise, the company goals and your management needs. Based on the relevant factors, your accountant can help you determine what records to keep and what information they should provide. Your accountant will also inform you if and when an annual audit is required.
Keeping Records
Accurate financial record keeping will be crucial to your business in the following ways
- Monitor the progress of your business
- Prepare your financial statements
- Identify sources of your income
- Keep track of your expenses
- Prepare your tax returns
- Support items reported on your tax returns
1. Monitor the progress of your business
You need good records to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changes you need to make. Good records can increase the likelihood of business success.
Prepare your financial statements
You need good records to prepare accurate financial statements. These include income (profit and loss) statements and balance sheets. These statements can help you in dealing with your bank or creditors and help you manage your business.
- An income statement shows the income and expenses of the business for a given period of time.
- A balance sheet shows the assets, liabilities, and your equity in the business on a given date.
3. Identify sources of your income
You will receive money or revenue from many sources. Your records can identify the various sources of your income. You need this information to monitor and track your the payment status of your invoices and how much your business is owed
4. Keep track of your deductible expenses
Unless you record them when they occur, you may forget expenses when you prepare your books. It is important to record your business spending as they occur, that way you will track your expenses to be sure that they are within budget
5. Prepare your tax return
You need good records to prepare your tax returns. These records must support the income, expenses, and credits you report. Generally, these are the same records you use to monitor your business and prepare your financial statement.
6. Support items reported on your tax returns
You must keep your business records available at all times for inspection by the tax authorities. If the tax office examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination
Basic Record Keeping Systems
Your record keeping system, whether on paper or on a computer, should be simple to use, easy to understand, reliable, accurate, consistent and designed to provide information on a timely basis.
Manual vs Computerized Systems
The difference between keeping manual records and using accounting software is information management. Information are easily processed and retrieved using accounting software unlike manual where you have to gather data from various source documents which can be tedious and time consuming.
Both approaches have their pros and cons. Among the advantages of manual accounting is the independence from machines. The disadvantages include: reduced speed, increased effort of accountants, relatively slower internal control reporting and the repetitive nature of the work. The main advantages of computerised accounting include accesibiltiy, collaboration, high speed and flexibility of reporting, reliability, no routine work, increased accuracy, internal control system of increased productivity, easy back-up and restoration of records. The disadvantages include dependence on machines.
Cash Flow
To be competitive in todas business world, you will have to prepare for all future events and market changes. This preparation is carried out through careful cash flow planning. Failure to properly plan cash flow is one of the leading causes for small business failures. Cash flow analysis should show whether your daily operation generates enough cash to meet your obligations and how your major outflows of cash to pay your obligations relate to major inflows of cash from sales.
