Talking Business with SMEs By Frank Tagarira Did you know that bookkeeping has Italian origins? The double-entry system was developed by Lucas Pacioli of Italy in 1494. By Frank Tagarira Though many business owners prefer to avoid it, bookkeeping is one thing you can’t afford to ignore. Despite the importance of bookkeeping, SMEs often neglect it because of the time and effort it takes to set up and tend to a bookkeeping system. Most business owners would rather be out generating sales than sitting in the office making journal entries or entering debits and credits in their general ledgers. But bookkeeping is one thing you can’t afford to ignore. To understand why, it helps to comprehend what bookkeeping is and how it affects your business. Bookkeeping is the recording of a business’s financial transactions. It’s the first step of the accounting process, which also includes classifying, reporting and analyzing financial data. Bookkeepers are responsible for organizing and tracking receipts, cancelled cheques and other records generated by financial transactions. Bookkeepers record all transactions cash disbursements, cash receipts, sales and purchases, and others in a journal and post the journal entries to a general ledger of accounts, which accountants use to prepare monthly financial statements. Although bookkeeping doesn’t contribute directly to your profits, there are several good reasons to maintain balanced books: – I am sure you are in business to make a profit. How then can you know with certainty if you are making a profit or loss without a proper bookkeeping system in place? Without a bookkeeping system in place it becomes very difficult to prepare financial statements or management reports that can aid decision-making. – Lenders and investors want to see accurate and complete books for a business before granting loans or raising capital for it. If you rely on outside financing, this is the most important reason to invest time and money in bookkeeping. – Bookkeeping generates the information you need to manage your company. For example, up-to-date general ledger information shows which customers are past due on their accounts or have outstanding balances on lines of credit. Financial reports help you assess whether or not gross profits and expenses are in line with your budget and projected net profits. In other words, these reports help you anticipate and avoid cash-flow problems. – In order to know how much you owe the Receiver of Revenue, you need an accurate picture of your company’s income. In addition, keeping receipts and cancelled cheques will back up whatever deductions and tax credits your company takes. Without good record keeping, you leave yourself exposed to fines and penalties if you get audited. Bookkeeping Options Many businesses hire an accountant or a bookkeeper to maintain their books. But if you cannot afford to or do not want to hire an accountant, you can learn the basics by taking a bookkeeping class at a college or small business centre in your area. In any case whether you hire a full-time/part-time accountant, it is a good thing to have a basic background of bookkeeping. This will enable you to keep in touch with the figures in your business. One of the first decisions to make is whether to use a manual or computerized bookkeeping system. Generally, only the smallest companies use manual systems and make entries to ledger pads. Most companies use desktop accounting software, such as Pastel, QuickBooks and Turbo cash. Some of these software packages are payable once off and others require annual subscription fees. There are also free accounting softwares like Turbo Cash which can be downloaded free from the internet. However, in choosing computerized accounting software it is imperative you choose a system that you can easily work and cope with. Some accounting packages are designed for large corporate companies and may have little scope for a small business operation. Bookkeeping is an integral part of any business operation and SME operators should not take this part of their business for granted. It also pays for an entrepreneur to be in touch with the numbers of their business. Be Bold, Be Brave, Be Excited. Frank Tagarira is a Business Development Consultant and Business Coach.