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Why SMEs must keep financial records

Business
A GREAT number of MSMEs close shop within the first year of operations.

A GREAT number of MSMEs close shop within the first year of operations.

BY Clive Mphambela

Most of the time, these businesses fail for very simple reasons, which have even simpler solutions.

One of the main reasons for early business failure is a result of poor business record keeping.

Inadequate records, leave an entrepreneur unable to monitor the business, therefore limiting his/her ability to detect and resolve problems early.

How does one tell if their business is making a profit or loss if they are not keeping any records?

Most business owners unfortunately take record keeping for granted, but it can make the big difference between success and failure in business.

As SME business owners, we need to develop the discipline of keeping track of all the sales, cash proceeds, and overall turnover of our businesses, as well as other vital business records such as bank account statements, and so on.

One of the many reasons why most small businesses sometimes collapse is because the owners would have failed to keep these basic business records.

The most common reason why small businesses tend not to keep records is the misplaced belief that it is expensive or very complicated to keep business records.

However, it may not be so complicated!

While it is true that additional diligence and effort by the proprietor or manager of a business is required, it certainly will not cost the SME enterprise a lot of money to keep its financial and other records in order.

Another myth is that record keeping requires specialised accounting skills. Not really!

Oftentimes, it requires just business common sense and the basic ability to read and write and of course the commitment of the business owner!

Today, I thought we should discuss some of the basics, that every small business owner must know about record keeping for small businesses: the methods, indicators and measures, as well as some of the benefits of basic record keeping for small businesses.

Why should every business keep records? There are numerous advantages to keeping proper records of transactions for your small business and here are some of them.

Makes preparation of financial statements easy.

Basic financial records will help you prepare financial statements that will become invaluable when you want to approach potential financiers or funders for the growth of your business.

For example, credible financial records are required to support your business proposal when one approaches a bank to apply for a bank loan.

Provides a business health check.

Assessing the health of your business is near-impossible without records.

Keeping basic records will assist the business owner gain greater control of the financial aspects of the business.

It becomes easy for example to determine which activities are costing the business in terms of losses and which areas are profitable and require more effort and investment.

Makes for clearer understanding of business cash flows, income and balance sheet items.

Basic records will help you to keep track of the cash flows of your SME business.

Cash is king and understanding which activities are generating cash within your business is key for the business owner, who can then adjust his efforts towards the cash-positive activities.

This information is extremely important to your bankers and other providers of finance, as they are also keenly looking at understanding your business cash-flows so that they can determine the nature and sources of funds for repayment of any loans they may consider granting to your business.

Assessing whether a business has a sound asset base is also made possible if one keeps an inventory of assets.

Enables good citizenry and compliance

Most small businesses avoid keeping records as a possible way of avoiding tax obligations.

However, most small businesses end up losing opportunity to benefits from tax rebates offered by the proper registration of your business for tax purposes.

This also robs many of our small businesses the ability to be recognised as responsible citizens who contribute to the fiscus, to national gross domestic product and employment in the country.

Helps the business build its own financial track record

Your basic business records, together with your bank statement, tell your business story.

From the day you started operations in earnest to today. After all numbers tell a story! Religiously operate a business bank account and where possible bank all receipts and record all payments against your bank account.

Your bank statements will provide potential lenders, (including your bank) a useful record of how your business has been running and will prove crucial in providing an insight into how it will run in future.

Because record keeping is crucial to almost all aspects of your small business, what is the optimal way of keeping records?

The following section discusses some tips for effective record keeping.

What is the role of your bank and your banker in this process?

Record keeping is crucial if you want to have a clear idea of your financial transactions.

If you need help with record keeping, you should talk to your banker.

Your bank should not be just a place where you deposit your money and get a loan in need.

Most banks in Zimbabwe have units that offer small business advisory services and they will help you along.

What are the critical business documents?

In addition to your bank statements, which perhaps are the most important financial record, as they provide a useful independent repository of your businesses financial data and history, cash register slips, and any other documents that represent proof of your income should be kept safe.

You need to file certain documents in the proper places, if you wish to maintain a proper record of your finances.

Purchases, sales, payrolls, and receipts must be preserved safely in a filing system.

Keep a separate file or folder for these documents.

Suppliers’ receipts document your buying and selling transactions. These receipts should also be filed separately.

Keep documents related to business expenses. Even small cash payments should be recorded, and you should always have a cash disbursement or petty cash payment voucher ready.

Documents related to assets, both movable and immovable, should be preserved so that it makes accounting for these easy.

If your small business employs other people, you should keep records of employee compensation.

This will assist you in the event of possible dispute with employees.

Clive Mphambela is a banker. He writes in his capacity as advocacy officer for the Bankers Association of Zimbabwe.

For your valuable comments and feedback related to this article, he can be reached on 04-744686, 0772206913, or [email protected].