One thing that I find people with little experience in business struggle with the most when they venture into business is record keeping. I do not blame them or anyone who struggles with this. It’s hard to do something if you do not understand the importance or the urgency of it. So let’s have a little discussion about the meaning, purpose and importance of bookkeeping for your business. I’ll also include a few practical tips on how to get some important things right.
Bookkeeping is the activity or occupation of keeping records of the financial affairs of a business. The task of bookkeeping is that of collecting and organising the financial transaction data of a business. This information is then further used to prepare accounts and analyse the business.
Why bookkeeping matters
The information that comes from the processing of bookkeeping output is used for performance evaluation, profit calculation, tax purposes and financial control. Much like high school mathematics, the importance of bookkeeping information is in it being the foundation of good financial data. If you make a mistake with the bookkeeping then your accounting and analysis will be affected too. Getting your bookkeeping right is a very important matter for your business so what can you do to help yourself out here?
Separating business and personal expenses
The first thing you have to do is firmly separate your personal expenses AND INCOME from your business expenses and income. Using a tracking tool is very useful for this but you need to go a step further. For business transactions, make sure you get a receipt. If you can set up a separate account for your business transactions the better though I do understand that this is not always possible.
Double-entry accounting is a system that recognises a single transaction in at least two places with the equal and opposite effect. For example, if you purchased $200 for cash worth of stock the double entry for this would be a decline in cash (or bank) of $200 and an increase in your inventory of $200. This system helps to track the movement of value through the entire chain of the business. Understanding double-entry accounting is critical. You may use an app that does the double entry for you automatically but understanding this system will help you greatly.
Cash vs accrual accounting
Cash accounting is pretty easy to understand, when an event that affects cash happens we recognise the event and record it. So if you are working on a cash basis, buying and selling for straight-up cash, cash accounting is the one for you. Life is of course a little more complicated and we have things like credit sales. Accrual accounting recognises things like sales, assets and liabilities when it becomes probable or certain that money will be exchanged and not when it actually is. So when I give someone goods on credit the sale is recognised and they become a debtor to the value of the goods. The right one for you will depend on how you operate.
Choosing a bookkeeping system
You have a lot of options when it comes to accounting packages and bookkeeping systems and choosing the right one for you is not an easy task and cannot always be done quickly. You will have to consider the user-friendliness of course but also issues like the ability to handle multiple currencies and consideration for special rules in your territory. This decision is best made with your accountant if you are going to use one.
Organizing and storing documents
If you take nothing else from this article please take this paragraph to heart. One of the most important places where your bookkeeping information will end is with the tax authorities, ZIMRA in our case. You know that saying about court “it’s not what you know but what you can prove”? Well, when you are dealing with matters of bookkeeping and tax the same principle applies but the word is substantiate instead of prove. You need to keep solid records of your transactions. Your bank transactions are not enough. Earlier I mentioned making sure you get receipts for all business transactions well that’s only half the battle. It’s wise to scan receipts and documents of transactions. These source documents may prove very important down the line. If a mistake is made or records are lost they can always be corrected or reconstructed from source documents.
Making bookkeeping a habit
The final tip you should really apply to everything you do, not just your bookkeeping. If I had a dollar for every time that I have been asked to do books for a business and handed a bunch of receipts and a bank statement I’d have a lot of dollars. It doesn’t have to be this way. You should make bookkeeping a regular habit. It depends on the frequency of your transactions but as a rule of thumb daily is best, weekly is the bare minimum, fortnightly is tricky and monthly is bordering on suicidal.