I asked a number of small business owners if they knew how much money they were making each year. Frighteningly, the majority did not know exactly. As long as there was cash in the bank, they did not bother themselves with much else as regards the financials of the company. So if an employee finds a way of defrauding them, they would have no way of detecting it.
Lack of accounting and financial control systems is a big problem among SMEs. They cannot measure their success, growth and efficiency. With no budgets and cash flow management systems, business decisions are made in the dark and on an ad-hoc basis. An accounting system helps in managing finances, maximising returns on investments while improving the competitiveness of businesses.
Your accounting system should provide an accurate picture of your business and how it is performing. Setting up a good accounting system and understanding the numbers produced can make a major difference in how your business fares in the long run. The financial statements produced from your accounting system will help you in several ways.
HOW TO KNOW IF YOU ARE REALLY MAKING MONEY
A good accounting system should tell you how much money you are making in terms of total sales, the cost of the goods sold, expenses and net profit. Success in business is measured in financial terms. The financial results at the end of a period will reflect how successful the business was in the given period. Comparing the financial results over time will show if the company is growing and improving in efficiency.
Price your products correctly
Pricing correctly is one of the critical matters in business. We all know that in order to make a profit, you have to set a selling price which is higher than the cost of a product. Simply put, you just need to add a certain mark-up to the cost to get a selling price. But how big a mark-up?
To get an answer you need to know your overheads; which are all the other costs apart from those incurred in producing or procuring a product. The financial system should record all costs and give you the correct amount of overheads that need to be covered from the gross profit.
KNOW YOUR CASH FLOW SITUATION
Cash is the lifeblood of every business. Most of the businesses closing down today do so because they run out of cash. Some business people are even committing suicide when the pressure from creditors overwhelms them. A good accounting system will inform you of the cash position regularly. Regular cash flow projections will warn you of cash deficiences so that you can take corrective action before they happen. This saves you a lot of headaches and allows you to sleep soundly at night. In fact, one of the cash projection models developed by international financial expert and author of the book Never Run Out of Cash, Phillip Campbell, is called “The peace of mind schedule.”
MAKE DECISIONS FASTER AND MORE ACCURATELY
Business owners are always making decisions: Which stocks to buy? In what quantities? When? Should we buy new machines? Should we recruit more staff? Can we reduce our prices? Should we borrow money for expansion?; and so on.
Some use guesswork or trust their instincts. But this can result in too many mistakes or in you missing profitable opportunities. An accounting system will give you the information you need to weigh various options and make informed decisions so as to maximise profitability.
For example, when submitting bids or negotiating orders, accurate accounting information will enable you to set variables that show how low you can go in pricing without making a loss and avoid unprofitable deals.
BE PREPARED FOR THE TAXMAN
Tax is one of those facts of life we cannot run away from. If your books are done regularly and properly, you will know in advance how much tax you will be paying in coming periods. This allows you to do tax planning so that you can either pay on time and avoid penalties, or use the various legal ways of avoiding tax. But for that to work you need good accounting information.
As you grow your business, taking it to levels higher than “entrepreneurial employee” or “one-man business” stage, you will have to change from managing finances from your pocket to having an accounting system that works and controls your finances efficiently.
You can download materials from the Essential Financial Skills for Entrepreneurs training workshops that I have been facilitating at my blog http://chichonip.wordpress.com. Wish you the best of success in your business.
lPhillip Chichoni is a business planning and financial management consultant who works with SMEs and entrepreneurs. He may be contacted on email: firstname.lastname@example.org.