Why do entrepreneurs need to keep financial records

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

Business finance specialist Alexander Afanasyev - about why financial accounting is so important and how to maintain it correctly.

Many entrepreneurs do not keep financial records. They have at most a sign where they drive in income and expenses. Some even write everything down in a notebook. But there is little sense from this - there is not enough information, the business eventually becomes unprofitable.

Why is it not customary in small business to keep records

It so happened that in small business there is no culture of financial accounting. First of all, entrepreneurs learn marketing and sales. But without knowledge of the basics of financial accounting, it is unrealistic for a business to grow to medium or even large.

According to statistics, small businesses rarely live longer than three years. There is a feeling that it is just a lack of knowledge of the management and finance base. Finance is not just a collection of numbers in tablets, but information that helps you make decisions, plan actions and achieve goals. Business becomes understandable and manageable, and not just moving somewhere.

Why is it important to keep records

Imagine Semyon, who has a plumbing store. While it is warm, people are actively engaged in repairs, changing toilets, baths, mixers. Semyon has a lot of orders, the money falls into the cashier and accumulates in the company's account.

Semyon wanted a new iPhone and MacBook. Withdrew 200 thousand from the checking account of the store and bought it.

The entrepreneur gave the employees a salary and paid the rent. But then the supplier called and reminded that tomorrow is the day of payment for the delivered goods. Semyon turned on his computer, went to the online bank, and there was a shortage of 300 thousand. I had to borrow.

Semyon did not write that 30 days after shipment he must pay the supplier. Then he did not yet understand that if we take a deferral from the supplier, then we would keep his money with us, and in no case should they be spent.

And this is just one of the possible situations. Some entrepreneurs are profitable, but they do not see the money, because they are buried in stocks. Others give too long delays and live on bread and water until the client finally pays.

What is financial accounting

Financial accounting is a reporting system that allows you to keep the finances of a business under control. It consists of three reports - cash flow, profit and loss and balance sheet. Taken together, these reports provide answers to important questions: is the company growing, why there are cash gaps, is management effective, how to increase profits, why there is profit, but there is no money. Without this information, it is difficult for a leader to run a business.

Cash flow statement (DDS)

What takes into account

How much money comes in and out of accounts.

Why do you need

According to the report, the manager sees whether the business has enough money to fulfill its obligations: paying rent and wages, purchasing goods. Without a VAT, he will not control the funds in the accounts and over time will fall into the cash gap - a situation when a business does not have money to work and pay bills.

Together with the report on the movement of money, you need to keep a payment calendar. It is necessary to enter into it the receipts and write-offs of money planned in the future. That way, you can anticipate cash gaps and take action ahead of time.

Profit and Loss Statement (OP&L)

What takes into account

Revenues and expenses of the business on closed certificates or invoices.

Why do you need

According to the report, the head counts the net profit of the business.

Profit is not cash on hand. An unprofitable business may have a full cash register, while a profitable business may have an empty one. Let's look at two examples.

• Full cash, unprofitable business. Before the New Year, Cyril decided to earn extra money on Christmas tree decorations. There were many orders. Kirill bought raw materials for production, paid bonuses, launched targeted advertising. New Year has arrived, orders are over. Cyril paid taxes, rent, but there was not enough for all employees to pay. It turned out that the business was unprofitable. Kirill had to raise the prices of toys. And he did not even suspect - there was a lot of money at the box office.
• Empty cash register, profitable business. Nastya produces cosmetics. Everyone admires her, writes reviews, she has a lot of orders. But there is no money - she borrows from relatives for production. And the business was profitable. The profit was simply in the form of stocks in the warehouse, as well as receivables - deferrals to wholesale buyers.

Balance

What takes into account

Business assets and liabilities. Assets are everything that a company owns: real estate, equipment, stocks. Liabilities are money with which a business has bought assets.

Why do you need

The manager knows if the business is growing and on whose money it is developing. He also sees on the balance sheet what the profitability of the business is.

Imagine: an entrepreneur keeps three reports. According to the DDS, he sees that there is no money. Looks at the OPiU - there is profit. And then he checks the balance and realizes that profit is a full warehouse of goods and new equipment.

Situations that cause companies to have financial problems

Money is mishandled

The owner thinks that all the company's money is his property. This is not true, because a business is a separate organism, into which you cannot just climb in and pick up 100 thousand for a new smartphone.

Moreover, the money spent by the owner may not even belong to the company. For example, if you were given an advance payment for a project, and you have not yet handed over your work, this money is not the property of the company, but of the client, which is simply kept in your account.

Also, an entrepreneur may not understand how much he can take without harming the business. To know this, you need to correctly calculate the profit, plan future expenses and development, and only then receive dividends.

Think they are earning

Often a company calculates profit in cash on hand or on accounts: it deducts expenses from income and receives a certain amount. But it's not right. Profit is a virtual indicator that cannot be touched or expressed in figures on the current account.

The problem with incorrect calculation of profit is that the manager makes a conclusion on the basis of it whether the company is working effectively or not. But the amount of money has nothing to do with efficiency and profit margins.

Do not plan and set goals incorrectly

If the leader sets goals incorrectly or does not do it at all, the company does not develop. Most often people think like this: "The more we earn, the better." For such purposes, there is no specifics, no plan, no digitization. Because of this, the business is marking time in one place, rests on the ceiling, and the entrepreneur jumps to a new project.

Planning and executing a plan is a basic part of running a company. For the plan to come true by 80-90%, you need to set goals for profit and development, draw up a financial model with different scenarios, calculate budgets, appoint deadlines and responsible persons, and regularly monitor the implementation of the plan. Without this, small businesses will continue to close in the first three years.

They think that if you increase sales, your profits will increase

The logic seems to be simple: the more sales, the more earnings. But it should be borne in mind that along with sales, the costs of hiring new employees, the purchase of raw materials and goods, the organization of additional sales, and delivery also grow. Costs are often relegated to the background, and only the amount of money from future sales is taken into account.

If you do not plan to increase sales, you can earn a loss instead of profit. It is necessary to clearly understand how the revenue will increase, what expenses this will entail, how this will affect the working capital, whether the company has enough money for this. If you don't initially digitize the increase in sales, you're either lucky or not. And if the accounting is carried out incorrectly and the company is actually unprofitable, then the loss will only increase.

How to start keeping financial records

Financial accounting is needed to conduct business based on numbers, not intuition. Start with the DDS report. This is the easiest way. Enter every day receipts and expenses for all wallets, compare them with the actual amount of money in the accounts.

DDS template →

Along with the DDS report, keep a payment calendar: determine the amount of money at the beginning of the month, add planned receipts and expenditures. So you will see if you have enough money to pay off everyone.

Payment calendar template →

When you are just versed in accounting, you do not need complex programs. A table in Excel will suffice. It is important to learn how to group income and expenses into categories yourself and keep records on a regular basis.