Beyond being an accounting and commercial buzz word, bookkeeping is important as business cannot be efficiently run without having the ‘books’ in order. It is “analogous to wishing to drive a car without a fuel gauge or a map (now google)—sooner or later you’re going to get lost or run out of gas.”
Unfortunately, many entrepreneurs operating big or small businesses often overlook the bookkeeping aspect of their enterprises. Without proper business records, it becomes difficult to predict the future of your business since there is no clear information that stipulates the financial health of your business. Recent research has indicated that majority of business failures have been as a result of lack of proper bookkeeping practices despite having brilliant business ideas.
These were part of views from Akin Fatunke, a chartered accountant and communications consultant, who was the guest on this week’s Freelanews Leadership Session, FLS, held on Tuesday, when he lectured on the topic, “Finance & Bookkeeping: The importance of tracking habits for entrepreneurs.”
Experts agree that in any business entity, the most common business records that should be kept includes cash book, profit and loss account, balance sheet, sales invoice, debit book, cash payment vouchers, bank transactions, assets records, inventory and payroll records among others. This is where bookkeeping comes in.
Assuring participants at the FLS that the subject matter wasn’t not esoteric and certainly no rocket science, he defined bookkeeping as “the process of tracking all of your company’s financial transactions, usually by entering them into accounting software or a physical set of books. It allows you see exactly where your business is spending money, where your revenue is coming from, and which tax deductions you’ll be able to claim.” Additionally, bookkeeping refers to the practice of recording all the financial transactions such as purchases, revenues, sales, receivables, payables and receipts in an orderly manner as per the accounting procedures so as to facilitate sound financial planning. Explaining further, he explained that at its basest form, it originates from diary of transactions dated, with short descriptions, and monetary value carried. Even a basic exercise book can do, for starters!
Fatunke continued by giving five reasons why booking is important. The first, he explained to be taxes. Bookkeeping is important for filing your personal tax return. As a business owner, a large part of your income comes from your business. In order to know how much your profit is, you have to know what your business earned first. With a bookkeeping process in place, you can have financial information ready for tax time. Instead of scrambling for receipts or invoices, all of your financial information is organized on one central system.
“You need to know your net profit in order to do your taxes, and to figure that out, you need to know your total income and expenses. And the only way to know that for sure is to have accurate, up-to-date books or records or tracking,” he said.
Secondly, he noted that bookkeeping tells where money is going.
“Getting your books together and producing financial statements is the only way to gauge the financial health of your small business.
“Are sales, pitches, orders and or adverts up? Are your shipping costs (cost of sales) too high? Will you have enough money next month to cover payroll? Is cash flow increasing or decreasing? The only way to know for sure is to start bookkeeping and tracking.”
Additionally, the account guru explained that bookkeeping ensures that you don’t miss out on tax deductions. “Keeping an accurate, up-to-date set of books is the best way to keep track of tax deductions (expenses that you can deduct from your taxable income). The more information (and supporting documents) you can give your accountants or consultants at tax time, the more deductions you’ll be able to legitimately claim, and the lesser your tax return will be. The FIRS or SIRS also has pretty stringent record keeping requirements for any deductions you claim, so having your books in order can remove a huge layer of stress if you ever get audited.”
He further added that bookkeeping comes in handy in days when one is in need of a loan.
“If you need to borrow money from someone other than friends and family, you’ll need to have your books together. Doing so lets you produce financial statements, which are often a prerequisite for getting a business loan, a line of credit from a bank, or seed investment. Lenders and investors want a clear idea of your business’ financial state before giving you money. They can’t do that without looking into things like revenue, cash flow, assets and liabilities, which they’ll search for on your balance sheet, income statement and statement of cash flows,” he explained.
On a last note, he explained that it helps one catch errors quickly. If you wait until the end of the year to reconcile or get your financial transactions in order, you won’t know if you or your bank made a mistake until you’re buried in paperwork at tax time. Regularly organizing and updating your books can help you catch that erroneous overdraft fee today, rather than six months from now, when it’s too late to bring up.
While fielding a question from a participant who inquired how one can measure when a company is big enough to engage an accountant for proper finance tracking, Fatunke replied, “Simplistically, when your customers expand well over your immediate catchment area, when your suppliers/imports are growing in quantum, when you discover you need more hands to take on shifts in production, marketing and sales, when you acquire more sophisticated machines to keep up your order, when you now have to look at security, insurance and other loss-prevention, disaster management like COVID-19 as an example, and when you begin to think of succession plan for your business after you, then you are ready (sic).”
Guiding participants through the session, the resource person gave a seven-step presentation on the bookkeeping process. The first of it is what he termed ‘Separate your business and personal expenses.’
“The first step to mastering your business finances is pretty simple; get a business bank account and separate your business and personal expenses. Why? Liability is one big reason. If you’re running an enterprise or a PLC and there isn’t sufficient distance between your personal and business finances, there’s a chance that you could be held personally liable for any debts incurred by your business. Mixing together personal and business expenses in the same account can also result in unnecessary stress when you need to file taxes or do your bookkeeping,” he stressed.
The second step is what he termed ‘Choose a bookkeeping system.’
“There are two main bookkeeping methods; single-entry and double-entry bookkeeping. Under single-entry, journal (or data) entries are recorded once, as either an expense or income. Assets and liabilities (like inventory, equipment and loans) are tracked separately. If you’re just starting out and doing your books on your own and are still in the hobby stage, single-entry is probably right for you. It’s simple, fast and good for really basic bookkeeping. Double-entry is more complex, but also more robust, and more suitable for established businesses that are past the hobby stage. Under double-entry bookkeeping (AKA Debit & Credit), all transactions are entered into a journal, and then each item is entered into the general ledger twice, as both a debit and a credit (the famous “balancing” concept).”
In step three, he advised participants to ‘Choose an accounting method: Cash or Accrual.’
“You have another important decision to make when setting up your bookkeeping; whether to make your accounting process cash or accrual based. Under cash accounting, you record transactions only once money has exchanged hands. If you bill a customer today, those naira don’t enter your ledger until the money hits your bank account. Many small businesses opt for the cash basis of accounting because it’s easy to maintain, doesn’t require you to track receivables or payables, and tells you exactly how much cash you have on hand at any given point in time.
“Using the accrual accounting method, you record income when you bill your customers, in the form of accounts receivable (even if they don’t pay you for a few months). Same goes for expenses, which you record when you’re billed in the form of accounts payable. Generally speaking, accrual accounting is better for larger, more established businesses. It gives you a more realistic idea of your business’ income and expenses during a period of time and provides a long-term view of the business that cash accounting can’t provide,” he emphasized.
For step four, he advised to ‘Make Sure Your Transactions Are Categorized.’
“Every transaction you make needs to be categorized when it’s entered in your books. This helps your bookkeeper catch more deductions, and will make your life easier if you get audited. Six months later, an unmarked receipt for lunch at a restaurant might not mean much to you. Was it a client lunch? Did you treat your employees after a successful quarter? The way you categorize transactions will depend on your business and industry. “
For the fifth step, he advised participants to choose a system for storing documents.
“At tax time, the burden is on you to show the validity of all of your expenses, so keeping supporting documents for your financial data like receipts and records is crucial. Diamonds may be forever, but the ink on your expense receipts is not. Since the taxman accepts digital records, it’s smart to use a cloud-based system like Dropbox, Evernote, or Google Drive so you never have to deal with smudged receipts. You can also use apps like Shoeboxed, which are specifically made for receipt tracking.”
Fatunke advised participants to organize their deductions as the sixth step. “The IRS’ golden rule on deductions is that they must be both ordinary (a common expense in your field) and necessary to your business. For example, pens would be an ordinary expense for a writer, but a N900 pen might not fall into the category of “necessary.”
“But even if an expense is ordinary and necessary, you may still not be able to deduct all of it on your taxes. Just because you do most of your work from your dining room table doesn’t mean that you can deduct your entire monthly rent. Luckily, the IRS has put together a comprehensive guide on business deductions that you can consult if you’re ever unsure about a deduction.”
Lastly, he advised all to make book keeping a habit.
“If you’re a busy small business owner with a million things to do, it’s easy to let bookkeeping fall by the wayside. One way to avoid that is to make it a habit. Try setting aside and scheduling a ‘bookkeeping day’ once a month to stay on top of your financials. Use that day to enter any missing transactions, reconcile bank statements, review your financial statements from the last month and make any major changes to your accounting or bookkeeping. If you’re months or years behind, you might want to get a bookkeeper to do some catch-up bookkeeping for you (Kronikla & Associates can help with that),” he concluded.
Freelanews Leadership Session, Freelanews.com and theHeute.com.ng are properties of Freelart Limited.