The answer to this may simply be because the law requires that some form of written records be kept by all businesses.
For the entrepreneur and other company stakeholders, adequate records can answer the following questions:
- How much profit is the business making?
- How much is the business worth?
- How much do credit customers owe the business?
- How much does the business owe its creditors?
- How much tax should the business pay?
How can a record keeping system be established?
Before putting up an adequate record keeping system, the assistance of an accountant should be obtained. If the owner cannot afford an accountant, he cannot afford to be in business.
An accountant can establish a suitable recording system tailored to the needs of a specific firm.
What will others want to know about the finances of a business?
Various people will want to know about the financial condition of a business.
Bankers may be interested because the business owner is applying for a loan. Tax collectors are interested in the condition of the business, so are partners, relatives and others who may have lent money for the business. Suppliers will also want to know things about the finances of the firm, because, when they ship merchandise that has not yet been paid, it is as though they are extending a form of credit.
Specific questions suppliers might ask
- How much do you own, how much do you owe, and how much are you worth?
- What was your income last year?
- How much of your sales are for cash and how much are for credit?
- What has been your collection record?
- What is your total overhead and what percentage of gross sales does it reprsent?
- What expenses do you have?
- What is the present value of buildings, equipment, vehicles, fixtures and other accessories?
- What items of inventory are the best and worst sellers?
- What are the most profitable and least profitable departments?
- Are you taking full advantage of cash discounts, trade discounts, and advertising and merchandising allowances?
(To be continued)
From: “Topic 10: Finance Aspects,” Windows to Entrepreneurship: A Teaching Guide, published by the SERDEF, 2013.
Photo: from flicker.com/photos/hey__paul