Poor business practices, particularly lack of documentation and proper bookkeeping, are obstacles in SMEs’ growth and development, Robert Bakayaga writes.
Small and Medium Enterprises (SMEs) are the stepping-stone for sustainable development of the economies towards industrialisation.
Best business practices steer businesses towards competitiveness, which is a key to survival in the seamless markets of globalisation culture. Conversely, it has been identified that poor business practices, particularly lack of documentation and proper bookkeeping, are obstacles in SMEs’ growth and development. Maintenance of books of accounts is important in any business especially SMEs. Sad to say, most SMEs often neglect this, which has a direct effect on the business.
All businesses regardless of the size should have proper books of accounts for the following reasons:
To prepare a proper financial statement
Statement of financial position (balance sheet), statement of comprehensive income (profit and loss account) and statement of cash flows, are the key elements for reporting to the investors, financiers/bankers on crucial information about the financial status of the enterprise.
To prepare these financial statements, you need books of accounts.
Fulfilling tax obligations
If you want to do business, you have to pay taxes such as income tax, excise duty and import duty among others.
To know the correct amount of tax obligation and settle business/legal litigations, you should have adequate and accurate books of accounts.
Better financial management
At present, better financial management provides a better picture about the health of a company. To make forecasting of financial requirement, acquiring necessary capital and to analyse investment decisions, you should have adequate records of business transactions.
Determining what price the product or service should be sold is the biggest issue for SMEs.
Price of most products has been fixed at cost plus margin basis and to ascertain the cost of a product, you should have proper records of cost elements of the product.
Maintaining books of accounts
For simplicity, accuracy and security of books of accounts, SMEs can maintain their books in electronic mode. There are many software systems available in the market for the maintenance of books of accounts at affordable rates. MS Excel, for example, is the simplest that can be used. While keeping books of accounts, every transaction must be recorded according to applicable accounting standards and principles, hence SMEs need to consider the following aspects while preparing books of accounts.
Double entry accounting system
This serves like an error identification system. According to this system, every transaction has two parts. Therefore, it affects two ledger accounts while recording a transaction. It involves a debit entry in one account and a credit entry in another account. If the sum of debits does not equal to the corresponding sum of credits, then it means an error has occurred. It also ensures accuracy of recording transactions.
Accrual basis accounting
This provides a more accurate measure of the business’ profitability, as it takes into account all revenues and expenses irrespective of cash collections and expenditures. For example, an expense incurred in a period for which no invoice has been received at the end of that period, is considered an accrued expense, and is still recognised.
Every business transaction whether it is a purchase or sale, expense or income, payment or receipt must be recorded on a daily basis into the books.
There must be a document for each transaction that describes the business transaction such as sales invoice, a supplier invoice, a supplier payment, bank payment and receipt among others. These documents provide the audit evidence for each transaction and are an important part of maintaining accurate records in the event of an audit.
Robert Bakayaga is the financial accountant at dfcu Bank.