Keeping track of income and expenditure
Every business, no matter how small, needs to record its transactions regularly in a systematic way. This is not just good business practice - it is the basis on which you and your business must comply with the law.
As a sole trader or a close corporation, you may not need to submit annual financial accounts for inspection; but everyone has to pay tax, and it can get messy when your personal finances are mixed up with your business finances. You or your tax adviser must be able to unravel the transactions of the past year to make an accurate tax submission to the SA Revenue Service.
Accurate accounts are also crucial for the correct payment and reclaiming of Value-Added Tax (VAT). Paying VAT on all your business's income is a legal requirement once your turnover exceeds a certain amount. Even if your business is too small to worry about VAT at the moment, it won't be long before you've got to think about it. Registering for VAT also has the advantage of allowing you to claim back the VAT that you spend on your materials and other inputs.
So get a system, even if it is a manual one in which you enter and describe your daily expenditure in one column and your daily income in another column.
Your ability to keep detailed, accurate financial records will also be used (especially by banks and funders) as an important measure of your competence and reliability. When you apply for a loan or any sort of funding, one of the first requirements will be to present an account of your past trading record. This will be contained in your financial accounts. Lenders will normally want to see that you are making a good profit from what you do, but the starting point is to get the figures down on paper or on computer.
Keeping your transactions recorded in an orderly way is also the only way you will be able to test the health of your business performance. You are often paying money out for supplies long before you get money in from customers, and it is not always possible to tell whether your business is profitable just from looking at your bank account.
Reporting your finances to partners and shareholders
Another important reason for keeping good records of your financial transactions is so that you can keep your business partners, shareholders or financiers informed of your performance. As stakeholders in your business, you owe a legal and moral obligation to them to update them regularly on the financial state of the business.
Benefits of being computerised
This means that you need to not only keep a regular account of your transactions, but you must also have useful summaries of these figures available at short notice. This is where computer-based book-keeping programs are very useful. They do take some time to get the hang of, and you may need to employ someone (if only a few hours a week) to operate it for you. But they allow you to print out, at any time, the essential information you need to 'test the temperature' of your business. This capacity is very handy when you've got regular (sometimes surprise!) visits by your stakeholders, when you want to give them impromptu updates of the business's financial position.
The figures to watch
Book-keeping is not an end in itself. The figures that are entered in your record book or computer program need to add up to something useful, to tell you how your business is doing and to indicate where improvements might be required.
Traditionally, there are three main 'indicators' that your book-keeping needs to produce:
- Profit and loss account. This summarises all your expenditure and income over a certain period - say, the last month or the last year. It is the simplest way of working out whether you are making a profit or not, and is the most important information to give to your partners or shareholders on a regular basis.
- Balance sheet. This give a summary of what your business is worth at any given time, by giving a total of how much money you owe and how much you are owed (as well as how much your business assets are worth).