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It’s a well-known fact that the mortality rate of start-ups is exceptionally high. One of the major contributors to this high rate of failure is mismanagement.
What many an inexperienced entrepreneur doesn’t realise is that poor bookkeeping constitutes mismanagement.
While a box full of invoices may work for the short term, as your business grows this kind of mismanagement can hurt your current projects, hinder growth and can come back to haunt you when audited.
It’s therefore much more important to have a proper bookkeeping system in place and manage it properly than one would initially think.
My shoe box is working fine, thanks.
So you’re one of the shoe box people and your system appears to be working fine.
What’s the problem? It’s this: accountants aren’t magicians. They can’t make information appear out of no-where, meaning they can only do so much when they’re given a box full of slips.
The consequences of such a system though are much more serious than the look on your accountant’s face:
- An unidentified negative cash flow,
- Outstanding debtors not being paid timeously,
- Private and business finances becoming mixed,
- Tax planning and VAT not being incorporated into daily processes to ensure compliance and optimum tax benefits,
- And overall ignorance of the business’s finances.
Why good bookkeeping is important
We understand that entrepreneurs of new business are spread very thin.
They also tend to go in one of two directions: focusing too much on operations to spend time on bring in new business, or spending so much time in the field bringing in business that the operations are neglected.
When the books are neglected, the knock-on effects for your new business have far greater impact than you may realise. Here are the top business wrecking balls that swing out from neglected books:
- Improper financial management. If you can’t see what bills need to be paid and when, you can fall out of favour with overdue suppliers. If you’re not monitoring monies due to you either, this can hurt your cash flow.
- Dodgy tax returns. If you’re relying on your memory, come tax time you’re going to hit problems because of incorrect financial statements.
- Funding rejection. When asking for a loan or funding from a bank, you’ll need to provide financial statements. Presenting messy or erroneous statements is a guaranteed ‘No!’
- Faulty business planning. If you don’t know what your money is doing, your business planning might not align with what you’re capable of.
- Mixing business with personal. A tangled web of transactions can mean you miss out on tax deductions or worse, be penalised into bankruptcy.
- Fraud. If there are loopholes in your system, you could be vulnerable to fraudulent activity in your financial department.
The way forward
While the best course of action would be to have a proper system in place from the get go, it’s still possible to implement a new one and save yourself untold drama in the future. Start righting your ways by:
- Getting in the habit. Like you check your email every morning, make your business accounting a habit, be it daily, every other day, or weekly. Keep tabs on what money is going out and what money is coming in. Keep track of invoices, outstanding monies, and customers who are slacking
- Learning the lingo. While it’s not expected for an entrepreneur to know all the ins and outs of bookkeeping, having basic understanding of the terms goes a long way in understanding how your business is running. Make the effort to learn accountancy terms.
- Having the right software. Your options are vast, so don’t just follow the herd. Find a package that suits your needs, abilities and budget. Failing that, consider outsourcing your bookkeeping.
- Getting help. We know that entrepreneurs are lone wolves who tend to go it alone. But avoid the self-reliant trap – you may think you’re badass for doing it all yourself, but there’s always someone out there who knows more. An accountant specialising in SMEs can save you time and effort, which can be directed into running and growing your business, but they can also spot the gaping holes you didn’t and potentially save the business.
If you’re interested in developing your accounting and bookkeeping knowledge, Wits Plus offers a year-long, part time course in Business Accounting.
For more course information, contact Wits Plus at www.witsplus.wits.ac.za, email [email protected], or call +27 (0)11 717 9510/9500.