22 August 2009

Top 6 reasons why proper book-keeping is important

The other day I went down to the city to meet my friend Z. A classmate during my MBA days, she has now opened her own consulting company and also does some business coaching and book-keeping for small businesses.

"Do small businesses in Australia actually spend money on a business coach?" I wondered and asked her.

Well, as it turns out, one of her offerings is to arrange financing. She has contacts in the banking industry and helps businesses build their financial statements to present to the bank and structures different ways in which they can access more funding. Tradies and other small businesses who need the cash but are not confident enough to do financial statements on their own come to her, but many of them are already too late. After years of erroneous book-keeping, normally rushed through while doing the BAS/tax returns, it is extremely difficult if not totally impossible for anyone to set everything right. Z was unable to correct the accounts of a builder who recently came to her and he will probably file for bankruptcy.

According to
CPA Australia, 32% of businesses fail due to financial mismanagement and out of failed businesses 12% have poor or no records/books . We are lucky that I am well qualified to understand and keep books and analyse/manage finances while Geoff concentrates on the operational side of the business. However, if you do not have the expertise, please do not hesitate to pay at least a book-keeper for the business. The importance of book-keeping cannot be stressed enough, and I will jot down just some of the reasons why it is so important for the health or even life of your business.

  1. Better financial analysis and management. I start every morning by checking MYOB to see bills we need to pay and overdue customer payments. At the end of the day either Geoff or me prints the invoices required for the day so they can be sent off the next day. For a young business like ours, or actually for most small businesses, cash flow management is one of the most important things to keep an eye on. Irrespective of how busy you are, delaying invoices, not following up on cusomer payments or falling out of a supplier's good books due to constant delays in payments can bring you down crashing!
  2. Tax returns made easier. We do not have to rush to find all bills or try putting expenses down from memory come tax time. A simple click on MYOB is all it takes to create BAS statements  or view reports of Profit & Loss , Balance Sheet  or Cash Flow . This also makes it easy for our tax advisor to concentrate on just giving us tips to save tax and not spend his (very expensive) time on creating or correcting financial statements
  3. Asking for funding/ loans from a bank requires financial statements. Eventually, if you want to sell out and exit - you need financial statements for at least a few years. Messy or erroneous statements will cause every buyer to run a mile away!!
  4. Once a week, Geoff and me sit down to check our Balance Sheet and P&L and compare against our budgets and estimates to see if we are on track. The well-kept books makes business planning so much easier.
  5. Not separating personal and business funds causes a lot many businesses to be penalised by the ATO or even fail. Using business cash to shop at Coles may seem perfectly logical to a sole proprietor - after all he is the only employee and only owner. But a jumbled mess of transactions over the long term will make you miss deductions you are entitled to, or put in wrong ones and be penalised, or take on much more risk with your hard-earned personal savings than you realised and lead to personal bankruptcy! My next post on financial discipline  gives tips on how to do this.
  6. Record-keeping required by law for 5 years after the transaction occurs or they are prepared (as per the ATO ). We have a file with A4 size plastic sheet holders for each month and every bill/invoice, however small they might be, goes in here. This makes it easy to search for and retrieve them when required or if audited. Apart from this, electrical safety certificates and our main supplier's invoices each have their own folders.
I appreciate that most small business owners will be extremely busy just running the business. Geoff works very long hours taking calls, travelling out to provide free quotes for jobs, scheduling jobs and completing them. Many of the jobs require coordination with inspectors, electricity retail/distribution companies and take more time. Then there are calls from job seekers, advertisors, wanna-be suppliers. When he comes home the last thing he wants to do is to do book-keeping. However, given how extremely important this function is to a business, I think investing in a professional book-keeper is something all businesses should do. If you keep all bills and invoices, and make sure to keep your business and personal finances separate - a professional will not take much time to prepare the books each week/month depending on how big the business is, and will definitely pay for itself over the year.