No financial records!!!?…that’s stone-age business practice!

courage-compu.jpgI once asked a business owner how much profit or loss he made in the previous year. The expression I saw on his face was typical of a mathematics class where a student is asked a question and the question becomes a serious source of confusion to the student.

His answer was expected – “honestly, I don’t know.” I asked him that question because over the years that I have known him, I have never seen him record any of his sales (I belief the same happens to the other transactions). If he does not record his sales, it will be a miracle if he is able to tell me how much profit(or loss) he made last year, or any other time for that matter.

I have also witnessed him taking delivery of stock items. Similarly, he does not use to do any recording. I call this “stone-age business practice.”

Refusal to keep record of financial transactions is common place especially among small and medium scale enterprises. Usually, their excuse has always been the same – lack of funds to employ an Accountant. This is partially true. In addition to limited funds, experience has shown that the unwillingness to separate the owner’s private purse from business’ purse makes the need for too much recording unattractive.

Another reason is the convenience that comes with not keeping proper records – just sell and dump the money some where; and simply spend without stressing your self to do any calculation or recording.

But these are surmountable. As for the problem of cash, the business owner can outsource the accounting work to an outsider, without necessarily having to employ a full timer. All that the Accountant would do is to prepare accounts that reflects the near-status and needs of the business/owner.

As for the second problem, I have always stressed the fact that a business whose purse is inter-locked with that of the owner would definitely experience retarded growth, conflict of interests/priorities, occasional financial challenges on both ends and even collapse in severe cases.

As for inconvenience, a simple book keeping (recording of financial transactions) practice is a good starter.  More complex recordings can then be introduced over time.

As I moved around everyday, I see so many business that have either remained the same year in, year out, or are just struggling to stay afloat. Get close and you discover that their likely problem is mostly reckless and i-don’t-care financial management attitude !

But the fact  is that good financial record keeping assist businesses to :

*determine profit or loss
*determine the profitability or otherwise of products traded upon
*plan ahead
*monitor and control expenses
*forecast sales
*monitor quantity of stock items
*determine total sales value
*determine the amount of debtors and creditors
*determine the total value of assets
*run costs-benefit analysis for proposed investments
*monitor your income and bank account(s)
*reconcile cash book balance with bank statement balance
*check fraud
*prove their seriousness to customers and other stakeholders.
*negotiating with workers on salary/wage increases….the benefits are endless.

What a business owner loses by not keeping proper financial records is simply the reverse of what you have read above.

No doubt, the consequences of not keeping proper records greatly outweigh the “benefits” of not keeping proper records.

So, my advice ? This is the 21st century. Move with global business trends. No matter how small your business might be.

Thanks for your time.

Related posts:

It pays to separate your private purse from your business’ purse

First impression in business

Business start up 

Small business’ practices and the issues of stagnation and collapse 

Decision making : The most far-reaching function of a manager

 

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It Pays To Separate Your Private Purse From Your Business Purse

I have often been accused of allowing my Accounting and Business Management background to affect me in the way I reason, plan, and generally take decisions. One of the most popular being my often critical analysis of expenditures. They say those who have accounting background are stingy. Awww. That’s not fair !

Well, I have always argued that the quality of my actions and inactions, rather than my background, should be of top priority.

I once had an issue with a thriving business owner many years ago. It had to do with a 31-point memo I issued him upon his request. I actually did a business survey for him as he was experiencing a lull in his business. He was very impressed with all but one of my recommendations – the one that had to do with proper financial accountabilty.

I was of the strong opinion that one of the strongest enemy of his business growth, and the number one reason why his business was facing difficulties, was his refusal to strictly follow the “business entitity concept.” So many businesses, especially the SMEs (small and medium scale enterprises) are grappling with this problem.

This is an accounting concept that requires a business owner(s) to see himself as being different from the business, and that the Accountant should treat them as such. It sounds stupid for someone to tell you this. Isn’t it? Well, this is a major problem for countless businesses across the globe.

It was no surprise to me later when I heard that the company later developed serious financial problems, so much that they could not meet up with jobs given to them. Settling bills and payment of salaries became impossible and at the tail end of its crisis, the company went underground. It collapsed !

All the owner needed to do was to separate his business bank account/purse from personal bank account/purse. It also required strict recording of ALL financial transactions. That way, he would have been in constant touch with the realities of his business, and thus be able to know when he can and should not “deprive” the company of scarce business resources. It simply required financial discipline. Sadly, he was very comfortable with “the system that puts all the money on his table”.

What this translated to was for him to fix a particular amount that he can draw as salary. Salary ? Yep ! Every other money then belonged to the business – his business! Sounds odd, but financial discipline is one of the major secrets behind the enormous growth experienced by most businesses. And certainly, financial indiscipline or recklessnes is a major reason why so many businesses are experiencing stagnation, slow growth, fianancial stress and in extreme cases, business collapse!

So its a matter of choice ! Financial discipline Vs Financial indiscipline.

Thanks for your time.

 

Related posts :

Small businesses practices and the issues of stagnation and collapse

Decision making : The most far reaching function of a maanger 

Outsmart your competitors or they will kick you out of business

 

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