Recent studies have shown that one of the biggest contributors to the failure of SMEs in South Africa (and globally) is the lack of proper record keeping. But, knowing what to focus on – and which records are important – can be tricky when starting out. So, what do new entrepreneurs need to know?
The reality of record keeping
Let’s use a real-life example to unpack these issues. Samuel Zulu has been running his business for the last two years but despite working extremely hard he never seems to be able to take his business to the next level. While he is constantly ordering new stock and taking more orders, he’s not really sure if his business is actually profitable or not.
Now he’d like to approach the bank for a loan so that he can expand his premises, but they’ve asked him to provide a set of financial records and he’s not really sure what they mean – nor where to begin.
This story is sadly not an uncommon one. While many business owners work very hard, they may not be running their business in the most effective manner if they don’t have a good understanding of the financial health of their business.
Financial record keeping – or accounting – is the systematic recording, reporting and analysis of financial transactions of a business. Keeping such records allows the business to analyse important indicators such as net profits and cash balances to make projections for the future.
Importantly, record keeping is also a legal requirement in many contexts. For example, the Companies Act and the Income Tax Act makes it the responsibility of the directors of the business to keep accurate records. In addition to this, certain types of companies need to be reviewed by an accounting officer or audited by a registered auditor.
Becoming financially sound
Here are some tips to ensure that your business is on the financial straight and narrow:
- Open a separate bank account: Each business should have its own bank account in the name of the business. While it may seem simpler to use a personal current account to do business transactions, personal debit orders and ad hoc withdrawals may make it more complicated to keep track of the current ‘business’ balance. There is also the risk of spending more than the business is generating which means that an entrepreneur will not have any reserves to plough back into their business, ultimately limiting the growth and potentially leading to the demise of the business.
- Pay yourself a salary: In order to successfully separate your personal finances from the finances of the business, you need to view yourself as an employee of your business and pay yourself a salary. If you have a monthly income from your business, then the temptation to dip into the business funds to cover personal expenses will be reduced.
- Draw up a budget and stick to it: Realistic budgets should be set and compared to actual results on a regular basis to provide accurate information with regard to cash flows.
- Keep detailed records of all income and expenditure: A business may have a high turnover, but that does not necessarily equate to high profits. Keeping receipts, and recording amounts spent and amounts brought in, will give you the entrepreneur a true reflection of how your business is progressing. Without all the information, it is harder for you to exercise discipline and change your spending habits.
- Keep it simple: Management should produce records in their simplest form that will it make it easier, not only for them, but also for external stakeholders to understand. Regular appointments must be made with the external accounting officers to check the accuracy and the relevance of the record keeping.
- Be accountable: Ultimately the success or failure of a business depends on you the entrepreneur. On our programmes, we have observed the difference it makes to have a mentor to hold entrepreneurs like you accountable for making sure things are done the right way in your business. Entrepreneurs starting out would do well to find a mentor, who amongst other things could hold them accountable for managing their expenditure.
As complicated as it might seem initially to get your structures and processes in place and ensure you have a basic understanding of record keeping, it is an area that simply cannot be ignored. Without this pillar, your cash flow will be under strain and the sustainability of your business could be under serious threat. Don’t delay, start today and obtain peace of mind from being more in control financially of your small business.