Why do you need a good accounting system? It is important for entrepreneurs to capture and track all financial transactions in a business. This enables them to track business performance on a real time basis. As result, they are able to make profitable decisions by looking at their debtor and creditor numbers, revenues and costs.
The other importance of recording and tracking financial information is that it’s easy, especially if investors have invested in your business, to quantify the value of return. Remember, they have injected funds into your business and would like to measure what the return of their investment is. Also, if you’re also looking potentially to the future, having investors come into the business, it is paramount that you have proper records because proper bookkeeping gives a story. It gives you a journey of where you are and where you’re going. If an investor wants to invest in your business, they would require you to give them proper financial information during the due diligence process.
Up to date financial information is important for tax planning purposes and filing purposes. Assume you need to file tax for the prior year and your financial information is not up to date, where do you begin as an entrepreneur? This can cause a lot of anxieties and loss if you are not able to account for, let’s say, expenses that you incurred that would have reduced your tax burden. But if you had a proper financial system, it’s easy to retrieve, and you’re able to file your tax return on time.
The other aspect is tax planning, where you are able to categorize your business transactions such as revenues; separate your personal expenses and business expenses. If you don’t have a good financial system, your organization will not be able to take advantage of what we call allowable expenses, and these results in huge tax burdens.
A good financial system also aids in budgeting. As a business, you are able to forecast your expenditure and track it to know whether you are over or under spending. This allows you to take corrective action early enough in case the expenditure is beyond the budgeted figures or even identify expense items that may be causing it.
Common Mistakes Entrepreneurs Make
1) Not having a proper bookkeeping system; as a result, they are not able to record all financial transactions that a business engages in or capture the transactions in the right categories.
2) Not reconciling; some entrepreneurs don’t reconcile bank and accounting system transactions. This is a document that you need to ask your accountant for every month because reconciliation is able to tally the transactions that have happened through the bank statement and the transactions that have been recorded in the accounting system.
3) Failing to capture sales tax or value-added tax. Some entrepreneurs don’t want to pay taxes, so they intentionally don’t want to disclose all the business transactions. They end up maintaining two books of account, the ones that they display to the tax authority and the ones that they keep for themselves. As a result, they cannot make informed decisions because they do not have a true picture of what their business performance looks like.
4) Not having a backup. Should the hard copy documentation be stolen or files get misplaced, you do not have any backup for your resources. Identify proper systems of how you can back up your financial transactions like cloud-based accounting systems.
5) Improper classification of employees. What do I mean by this? We have employees who are direct employees that you must engage for you to make a sale. They become direct employees who are supposed to be on payroll. We have employees who are employed on a casual basis as professional consultants who you engage. How do you classify and record them in your books? Do you capture the withholding tax?
6) Bad cash management; you’re not able to account for discretionary cash. How was it disbursed? Have it been reconciled before disbursing the next petty cash? The moment you do not trail from when you funded petty cash to how it was expensed before you disburse cash for the next cycle, that becomes a loophole and portrays poor record keeping and communication.
7) Not having the professional help that you need; the last bit is many business owners try to do bookkeeping themselves, and yet they’re not conversant with bookkeeping. You should concentrate on your core if your business has grown. And if your business is able to accommodate an external person to come and do your bookkeeping, outsource your bookkeeping, so that you have a true picture of your business.
It’s a system that records, processes information and produces an output which is in the form of a financial statement to help you make a decision. You put in all that information, from the invoices, the suppliers bills, information from your bank, inventory stock, payroll, and then at the end of it all it generates financial reports and financial statements that help you make a decision. As a business owner, it’s for you to decide what accounting system you need to deploy so that it can generate reports to help you make decisions. We have several accounting systems; free and paid accounting systems.
I would even advocate if your business were not large enough, just go for the free accounting software. Find some of the free accounting software options below:
They have good features and are able to generate statements for that can help you make a decision.
For the paid accounting software options we have: