Studies have shown that many small businesses fail to maintain financial records. This has resulted in avoidable business failures and stagnancy. Two contributing factors are the lack of priority attached to proper record keeping by business owners and a lack of basic business management skills.
These business owners think there is no need to keep records as it exposes their financial position and could lead to them paying more taxes. They also think it is too difficult to maintain a financial recording system as it is expensive, time-consuming, and requires technical knowledge.
Five Key Benefits of Keeping Proper Financial Records are as follows:
1. Improve Accessibility to Finance
One of the major concerns of small business owners is access to finance. In a recent survey conducted by the Small Business Development Unit in St. Kitts, 70% of the respondents think that this is the greatest obstacle to growth. This is a valid concern, as many small businesses fail because they lack funding. To survive and grow, small businesses must be able to attract and secure financing.
While opportunities exist, it is hard for these business owners to access finance from financial institutions and investors mainly because they need proper financial records, which they lack. Providers of finance rely on the information in these records to make decisions on whether to extend credit or not.
Banks, for example, need to know whether the business can pay the principal and interest of the loan, and investors will only provide funds if they are assured they will not lose their investment. It is, therefore, important that an adequate financial recording system that can generate the information needed to improve access to finance is implemented and maintained.
2. Helps in planning for profits and making effective management decisions
To achieve growth, small businesses MUST use a system of financial recording where information is available in an organised manner. Such systems are the most effective tools in planning for profits and making effective management decisions. Once information about the various business transactions is organised in an orderly manner, business owners, their advisors and other professionals will have accurate information such as sales volumes, profit and loss, assets, and liabilities at any given time on which to make decisions as to how to grow your business.
3. Helps to reveal employee theft, fraud and errors
Financial records can be used as a form of control in business, which helps to detect fraud carried out by employees. It also helps to maintain good accountability over a business's assets, such as cash, inventory, and other movable items. Proper recording systems will ensure that opportunities for misappropriation and theft are minimised.
4. Better Management of Cashflows
Small businesses generally have unstable cash flows; they can, however, rely on short-term borrowing or implement strategies to mitigate the effects of a lack of funds. Unfortunately, many small businesses record their transactions randomly without an established system, making it challenging to track cashflows and manage short-term problems.
Good cash management, whether a business has excess cash or experiences a cash shortfall, is, therefore, critical to the success of any business, and this starts with proper financial recording.
5. Shows the health status of your business, which is critical to business survival and success
The importance of accurate financial information to business owners for measuring performance cannot be emphasised enough, the lack of which has consequences such as the mismanagement of resources. Proper financial records are, therefore, crucial in tracking all aspects of the business. It tells what is happening in the business regarding what products or services are profitable, the costs involved, and whether selling prices leave a suitable margin against cost.
You will also have an accurate picture of operating results and be able to compare results over the years of operations. To enhance the profitability of small businesses and to increase the chances of survival, there needs to be proper financial record-keeping that will help owners track their business's performance.
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Research has shown that many business owners are aware of the importance of financial records; however, they remain reluctant to use standard systems to run their operations. If the thought of accounting or financial record keeping frightens you because you lack knowledge, engage a professional accountant for guidance.
Not knowing how your business performs will lead to stagnancy and could also result in failure. As previously mentioned, the cost of business failure far outweighs the cost of maintaining a financial recording system with the assistance of a professional accountant.
In part two of this edition of Pinnacle Insights, we will examine the two types of financial recording systems, Manual Record-keeping vs Computerised Accounting systems and discuss which type will be most beneficial to your business.
References:
Amoako Kwabena Gilbert. "Accounting Practices of SMEs: A Case Study of Kumasi Metropolis in Ghana. International Journal of Business and Management"; Vol. 8, No. 24; 2013 Available at: http://dx.doi.org/10.5539/ijbm.v8n24p73
Asaduzzaman, Md. 2017. “Accounting and Financial Reporting Practices of SMEs: Bangladesh Perspective”. Malaysian Journal of Business and Economics (MJBE) 3 (1). Available at: https://doi.org/10.51200/mjbe.v0i0.544.
Oluoch Otieno Joseph. “The Impact of Cash Management Practices on Performance of SMEs: A Survey of SMEs in Eldoret Central Business District” ISSN: 2321-5925.Volume 7, Issue 6 Ver. III (2016), PP 01-07.
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