Importance of Book Keeping to Small Businesses

Book Keeping and Accounting help small businesses to determine the financial position and accurate assessment of their financial performances.

Book keeping must not be handled with levity in business. Whether you are comfortable with numbers or not, you must have the basic understanding of the financial aspects of your business. You have to know accounting. It’s the language of practical business life, said Charlie Munger. You may say that I am biased towards accounting because of my profession as an accountant. Yes, this may contribute to it. But the question I want to ask is that, have you ever seen any successful organization whether profit oriented or non profit oriented that does not maintain proper book keeping of its financial transactions? Your answer will definitely be “No”. If all successful organisations have good book keeping and accounting system, why do you think that your own business would be an exemption? I believe one of the reasons you are reading this book is that you want your business to be successful. In other words, you don’t want your business to me listed among the failed businesses. Then, it is logical and rational to do what the successful organizations do to succeed.

If you maintain proper book keeping, you will be able to accurately answer some of the questions that require your answers as an entrepreneur or a business owner.

Why Book keeping?

With book keeping:

  • You know the right amount to charge your customers.
  • You know how much business is being done.
  • You know how much cash you have on hand.
  • You know how much is tied up in receivables, and how old are these receivables.
  • You know whether you should continue extending credit to customers.
  • You know whether debt collection action should be taken.
  • You know your expenses by categories.
  • You know the amount you owe bank or suppliers.
  • You know the important business ratios that should be analyzed.
  • You know whether sales, expenses, capital, and profits showing improvement over previous periods.
  • You know your break-even point.
  • You know how much tax you need to pay.

Some business questions seem simple but I wonder how one can provide answers to them without having good book keeping and accounting system in place. With good book keeping and accounting system you can still do some further analysis. So, let us see how accounting can provide answers to some of these questions.

How much to charge customers

How do you determine the price of your products or services if you don’t have good book keeping in place? Do you charge customers arbitrarily? Do you just charge price because that is what your competitors charge? You need to have a good yardstick for charging your customers? Your competitor’s price can actually help you in fixing your price. But the truth is that there is no way you can have the same cost structure. Your costs will be influenced by many factors such as source of supplies, your location, the volume of goods you buy, the mode of payment (cash or credit), other overheads etc. Without proper record keeping, pricing is reduced to guesswork. You will either overcharge or undercharge. When you undercharge, you deny yourself profits and it can even lead to loss. If you overcharge, some customers will have to look elsewhere. Do you know that knowing your cost structure from your accounting records can help you discover that you have a cost advantage over your competitor? This can afford you to sell at lesser price or to offer discount to your customers and this will drive more customers to you. You will enjoy larger share of the market.

Read Also: How to Determine Price of Your Products or Services

Volume of business being done

Form your book keeping activities; you can easily ascertain the volume of income generated within a time frame, e.g. daily, weekly, monthly, quarterly or yearly sales. You will be able to see clearly whether your sales figure is increasing or decreasing. Then, this can make you to probe further by asking yourself:

  • Why the increase? Could it be the result of marketing activities?
  • Why decrease? Is your sales seasonal and you are off peak period. Any loss of customer(s)?
  • What can you do to maintain the trend (if positive)?
  • What remedial actions can you take to correct any unpleasant trend?

Ascertaining Cash Availability

Holding a particular amount of money is relative. Having a good sum of amount in your bank account seems good but looking into your accounting records through accurate book keeping may reveal that the money does not belong to you. It might just be customer deposits for the services you have not rendered. By the time you look at your stock level, you may soon discover that the money you think you have is not even sufficient to replenish your stock. It might be that you need the money to pay a loan that is due for repayment or for supplies which credit terms have expired.

If there is no immediate need for such amount, then you can be thinking whether to invest it in a short term investment or whether it will be available for the acquisition of fix assets.

Analysis of receivables

We agree that there is no way you can have all your sales paid for immediately. Some will buy on credits and want to pay later. In business, it is not just as simple as you think. If you don’t maintain good book keeping of all customers that buy goods on credit from you, the chance is that you may forget some or you don’t remember the exact amount involved. Somebody said that a short pencil is better than a long memory. No one can remember all details. Documenting your receivables is necessary. You will not only know the amount of receivables you have, you can determine the customers that are owing you and how long the debts have been outstanding. This can prompt you to embark on debt collection exercise. Having customers paid back their debts is not enough; your records will tell you those that pay you within the credit term limits. This can guide you to come up with a credit policy. You will know those you can extend credit to, the amount and the period for repayment.

Read Also: Effects of Selling on Credit to Small Business

Analysis of expenses by categories 

Why do you need to know your expenses by category? Which of your expenses are fixed or variable? If you don’t know how much and which item you are spending your money on, the probability is that your business will end up in a loss at the end of the year. For instance, having too much fixed expenses without commensurate revenue is a sure way to a loss. Most of the time, business owners spend much money on what is not important. Because they don’t know how much they spend on such, they don’t see any reason for controlling it. If you know how much you spend on telephone or entertainment every month, you may be surprised you actually spend that much. You can successfully control your expenses only when you keep proper accounting records. It is an expert opinion that if you cannot measure your business indices, you cannot understand it. If you cannot understand it, you cannot control it. And if you cannot control it, you cannot improve it.

Read Also: Preparation of Financial Statements for Small Businesses

Let me leave the remaining for you to ponder on. The truth of the matter is that you don’t know the harm you are causing your business if you don’t keep accounting records. Could it be that those who refuse to have good accounting records are ignorant of the importance of doing this? Could they claim that they don’t know how or have time to write the book? No reason is genuine enough. When there is a will, there is always a way. If you don’t have the skill required or time for the book keeping, you can always get somebody to write the book for you. You can employ a full time accountant or outsource the functions.

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