BOOKKEEPING FOR MICRO, SMALL AND MEDIUM BUSINESSES

Odunayo Adeniji

odunjoy.adeniji@gmail.com

It is interesting that a lot of small businesses show no steady growth. Some even get worse off over time. Sometimes, new funds are injected into these ailing businesses, yet after a short while, they are back to status quo. Nothing changes for the better as months and years roll by.

Many businesses fold up on a daily basis. Quite familiar are some micro business owners, who after suffering setbacks due to failure in one line of business, again venture into an all-together new business. With the portals of Africa freely open to ‘idolatry’, it is amazing that some even believe their businesses were ‘jinxed’, either by some evil persons from their villages, or by their competitors in the same market or industry.

Trend has however revealed that small businesses’ failure world over can be traced to poor accounting. This phenomenon is not limited to micro and small businesses alone. There are also many large organizations that have experienced major setbacks due to improper bookkeeping. 

Having a great passion, as well as the required resources for your business is not enough. Doing things right is the key to avoiding pitfalls or regrets. Therefore, it is essential that every business with the desire to thrive and grow into the foreseeable future must keep and maintain proper financial records. As a matter of fact, it is legally required that businesses keep accurate records of their everyday financial transactions.

What is Bookkeeping?

Bookkeeping is the financial accounting process with focus on capturing of financial transactions. Bookkeeping focuses on record keeping for accounting purposes, and is the foundation upon which all accounting processes rest. Without proper book-keeping, the preparation of any useful financial information from a business venture becomes a tough nut to crack.

Whenever a transaction occurs in a business, a document is generated. For instance, 

• When a sale is made, an invoice or receipt is generated.
• When money is paid out of a bank, a cheque is written.
• For every bank lodgment, a deposit slip is produced.

Invoices, receipts, cheques, and deposit slips are examples of source documents that substantiate in effect, the financial transactions that took place.

In accounting, the double entry principle is applied for every financial transaction of a business. The double entry principle states that, “for every debit entry, there must be a corresponding credit entry”. By implication, every transaction will involve at least two (2) parties because for every receiver, there must be a corresponding giver. So, while the account of one party is debited, the other party’s account will be credited. On the surface, it is that simple.

A Bookkeeper

A bookkeeper perform the functions of bookkeeping. That is, recording of the day-to-day financial transactions of an entity, including filing and safekeeping of all source documents. Proper record keeping by the bookkeeper aids the work of an accountant (if both roles reside with different individuals), who from the records generated by the bookkeeper is able to prepare the financial reports of an entity for a period.

Benefits of Bookkeeping?

Since bookkeeping is an integral part of any successful business venture, it is worthwhile to understand the underlying reasons why proper books of account must be kept and maintained. Some of the benefits of bookkeeping are explained below: 

• Bookkeeping is a Legal Requirement: It is legally required that a business keep and maintain its financial records. Every business that wants to be seen as law-abiding must embrace bookkeeping, thereby fulfilling the law. 

• Access to Accurate Information: Proper documentation of transactions and events is useful for reference purposes as there is a limit to what the human brain can store per time. Information not stored can be easily forgotten or wrongly quoted. Bookkeeping facilitates access to accurate information.

• Profitability Check: Without financial statements such as the Income Statement, it is impossible to know the true profitability state of a business. The Income Statement is prepared from data provided through bookkeeping; producing an understanding of how well or not a business is doing per period. 

• Growth Index: Data accumulated from bookkeeping gives access to compare a business’s performances over different periods. Business growth or decline can be easily tracked and trends observed for future planning and decision making purposes.

• Planning: With the financial reports generated from bookkeeping, the financial strengths and weaknesses of a business are revealed. An understanding of what obtained in the past often helps in strategic planning and projecting for the future, especially on areas such as financing or change in business focus. 

• Preparation and Payment of Tax: Micro and small business owners earn a huge part of their income from their businesses. This income is subject to personal income tax. Proper bookkeeping therefore aids access to the required information needed for the preparation and actual tax filing exercise.

• External Audit: When a business provides properly kept records of its financial transactions which are required for examination during an external audit, the time frame required for such an audit is minimized. Consequently, audit queries will be reduced; affording the bookkeeper or accountant more time to focus on other assignments of the business.

• Tax Savings: With proper bookkeeping, a business get to keep a close tab on its expenses which can be claimed against its income. Thus, profit is inflated and its tax burden is unnecessarily increased due to lack of substantiating documents on expenses incurred.

• Avoid Tax Audit Penalties: Keeping the business’s books in order makes tax audit easy and faster for tax auditors. Poorly kept financial records lengthens the tax audit process and may trigger penalties or fines from tax officials. 

Conclusion

While it may be okay as a business owner to keep your books of account by yourself, it is better to hire a person (whether on a part-time or full-time basis) with at least, the basic bookkeeping skills or an accounting professional to handle matters relating to keeping the financial records of a business. 

Engaging a book keeper who is dedicated to keeping proper and accurate financial records saves quality business time and money. This will further allow a business owner or manager to focus on the core deliverables of the business. 

So, whether you own a micro, small or medium business (the size of your business notwithstanding), proper and efficient bookkeeping should be embraced due to its attendant benefits.