A practical guide to record-keeping for small businesses and startups

Introduction

Good record-keeping practices and a steady cash flow are essential for business growth. This distinguishes a clever idea, product, or service from a good business. In saying that, it is next to impossible to determine the accurate financial position or profitability of a business without proper records. As a result, a business owner or founder should be able to recognize the importance of proper record keeping from the start.

The need for proper business records cannot be overstressed. Every serious entrepreneur must be able to maintain proper records of business transactions. Proper financial record keeping is critical to the survival and growth of a business. Without it, the entrepreneur runs the risk of hitting cash flow difficulties, wasting resources, and missing expansion opportunities. By keeping proper records of your transactions, your company will be in a better position to conduct proper evaluation and analysis to see how it is performing concerning its own goals and those of other companies.

As a business owner, whether you have finance or accounting expertise or not, you must decide how to handle your financial records. The time and effort given to this activity may determine the long-term survival of the business. Depending on the type of business, the business goals, and the management requirements, the business owner must determine the “why,” “what,” “how,” and “who” of financial record keeping.

WHY? – IMPORTANCE OF GOOD FINANCIAL RECORD KEEPING

1. Better Decision Making: Reliable and accurate information used in making management decisions can only be derived from the available records. While the availability of proper records does not guarantee that the owners will make the best decisions, its absence reduces the ability to make good business decisions. It enables businesses to better plan by understanding their past activities and where they currently stand.

2. Oversee operational activities: Records can indicate whether a business is experiencing operational growth or decline. It adds an authentication layer that allows management to detect operational flaws and devise solutions. Financial records help provide financial data that allows a business to operate more efficiently, resulting in increased profitability.

3. Dealing with customers and suppliers: Relying solely on customers and suppliers to provide balance statements may result in a loss of money, particularly if there are no internal records to compare it to. Good record-keeping enables businesses to keep track of their debts and receivables for goods produced and services rendered, and it allows a company to know how much it owes before the supplier does.

4. Prepare management and financial accounts: The information needed to prepare accurate financial reports and accounts does not appear by magic! This is only possible based on the available financial records. A solid record-keeping system ensures that all relevant documents and information are available to generate profit and loss statements, balance sheets, and other accounting records.

5. Dealing with all stakeholders: small businesses and startups with proper records communicate information more effectively externally to people and organizations that use a company’s financial information, such as banks, tax authorities, suppliers, creditors, current and future investors, leasing companies, and so on.

6. Organization: When you are well-organized, you can quickly and easily find information on any topic related to business. This can be the thin line between winning and losing jobs.

7. Cash flow planning: Everyone needs to plan their cash flow. Good record keeping will be extremely beneficial in this regard, especially when it comes to liabilities that must be settled.

8. Properly file your tax return and save money: Tax authorities rely on records more than anything else. While an accountant, auditor, or any other stakeholder may be lenient in the absence of records, the taxman is not. In the absence of records, the taxman has the authority to issue a Best of Judgement Assessment, which is usually much higher than the assessment that would be issued if the records were available. The taxman will disregard any expenses or assets that do not have supporting documentation.

9. Record keeping complies with the law: good record keeping is a legal requirement. So, by being organized, you not only get all the benefits listed above, but you also stay within the law. When setting up a company, regardless of the size, there are requirements under the Companies and Allied Matters Act regarding the maintenance of books and records. It is critical for a business to be aware of the legal requirements and to be able to produce the necessary information.

WHAT?- THE FINANCIAL RECORDS THAT ARE TO BE KEPT

The financial records that are to be kept vary from business to business. To be safe, anything and everything that has to do with a business should be stored safely.

Some examples of the following should be meticulously kept:

• Company incorporation documents

• All contracts and agreements

• Bank records

• Sales invoices

• Delivery notes

• Credit notes

• Goods received notes

• Purchase invoices

• Goods return notes

• Inventory count sheets

• Fixed assets valuation records

• Cash receipts

• Quotations

• Estimates

• Work orders

• Job completion certificates

• Timesheets

• Expense claims

• Vouchers

• Management accounts

• Company valuations

• Financial accounts

 HOW? – THE MANNER OF KEEPING THE FINANCIAL RECORDS

The real question here is whether to adopt an automated or manual system of keeping the records. The sensible approach is to use an automated system. It is recommended because of its high speed, reporting flexibility, dependability, lack of routine work, increased accuracy, embedded controls, ease of backup and restoration of records. I wrote more about that here.

A business can adopt a simple and intuitive accounting software suitable for small businesses and startups to automate the accounting process and store records.

Many small business owners choose to use business software to keep track of various aspects of their business; others do it manually; however, a smart approach will combine the most effective aspects of both. The key to taking full advantage of bookkeeping software is to determine if it saves you time and frees you up to concentrate on running your business.

WHO? – RESPONSIBILITY FOR FINANCIAL RECORD KEEPING

The ultimate responsibility for record-keeping rests with the business owner as the CEO (Chief Everything Officer). Some record-keeping tasks, on the other hand, are best left to a professional accountant. While the business owner needs to retain record-keeping and a thorough knowledge of the business by reviewing your books frequently, an accountant should be hired to handle it so that the business owner can concentrate on growing the business.

BONUS- TIPS TO BETTER HANDLE FINANCIAL RECORDS

1. Distinguish All Commercial Activities

   When personal expenses are mixed in with business expenses, it becomes difficult to track which records are for which. A few business owners have multiple businesses and mix up activities for each one, such as paying one business’s rent from another business’s bank account. Financial discipline is required to keep separating all business records.

   The easiest and most practical way to separate a business is to register it and open separate bank accounts specifically created for the business.

2. Reduce your reliance on cash.

   As much as practicable, eliminate the use of cash for business expenses because it lacks the proper documentation needed for financial recording. Without proper documentation, it is easy to forget how and where money was spent. It is recommended to use a card, cheque, or online transfer instead of cash as there is a paper trail to follow and this practice will help to keep track of expenses. When using cash instead of other forms of payment, make sure there is a proper audit trail of what was spent.

3. Participate in the mapping of the Functional Chart of Accounts

   A chart of accounts gives a blueprint of how the entire accounting recording system works. It works as a high-level directory for “where” transactions should be recorded. While there are a few accounting conventions to consider, such as separating assets from expenses, every business owner/startup founder should have a general idea of how they want their financial records to look. The main advantage of using a chart of accounts is that it allows for quick analysis of business transactions and their consequences. Management should be able to see at a glance, for example, how much sales have been made, how much rent has yet to be used, or how much has been spent on travel in a given period. Only a functional and realistic chart of accounts can guarantee this.

4. Establish Standard Financial Record-Keeping Policies And Procedures

   Establish policies and procedures for record-keeping, including financial records. As previously stated, while there are a few accounting conventions and practices regarding financial record-keeping methods, one does not need to be an expert finance professional to have good record-keeping processes in place for their business. The overall goal is to ensure that all information and documents about a business or startup are securely stored for future reference and can aid in the generation of financial reports that show where a business stands at any given time. For instance, a policy in place might be to have contracts for all credit sales.

5. Review records on a regular basis.

   Make it a habit to keep your records up to date on a regular basis. Depending on the volume of transactions, it could be daily, weekly, or monthly. Creating a schedule will help you stay on top of your financial records, give you an overview of how your business is doing, and allow you to control your cash flow.

6. Use the Right Accounting Software

   Take the time to assess the right accounting software that will be the most beneficial for your business. If you are unsure about which software to use, consult with an accountant who can provide professional advice. Cloud-based software allows for access to accounting information anywhere there is an internet connection. The online software will continually back up your files to cloud-based storage, but it is still recommended that business owners maintain physical copies as well.

7. Keep a Complete Record of Accounting Documents

   Businesses are required to keep accounting records under legal record requirements. Not only must the records be kept, but they must also be sufficient to show and explain the business’s transactions. Accounting records for your business must include a record of all the assets and liabilities of the company, and daily entries of all sums of money received and expended by the company, as well as the matters for which the receipt and expenditure occurred.

8. Invest in an Experienced Accountant

   Depending on your company’s structure and accounting requirements, you may need to outsource it or hire an experienced and trained finance professional in-house. Business owners can have the time to focus on growing their business with the knowledge that records will remain updated.

CONCLUSION

Accounting for startups and small businesses involves keeping accurate records of financial transactions and examining the finances to identify opportunities for growth and improvement. It is essential for startups and small businesses to build a solid accounting foundation to stay organized, increase efficiency, obtain financing, control expenses, and identify possible risks and opportunities for the business.

Do you have any issues with financial record keeping? Talk to us today.