To keep track of how it is growing, how much it is worth, and how profitable it is, a business must do records-keeping. Basically, there are seven records to put up and maintain:
Payroll: The owner must know the amount paid to his own self and his employees. The information requires a mini-accounting system to keep things accurate and in order.
Cash balance: The owner must know how much cash is available at any given time to determine if this can be paid. Money comes into and goes out of the firm everyday, but without records,entrepreneurs would not know what they can afford.
Accounts receivable: Under certain conditions, the owner extends credit to some customers. The money owed is called accounts receivable. These are important records. Without them, how would the owner know when to bill and for how much? When to discontinue credit? When to make aggressive efforts to collect overdue bills? When to charge interest, if any?
Accounts payable: The amount of money owed by a business to others (such as suppliers) is called accounts payable. These bills need to be paid on time for two reasons: (a) sometimes by paying a bill on time, one will receive a cash discount, and (b) one must maintain a good reputation in relation to those with whom he does business. Without accurate records, one may make mistakes.
Inventory records. Even in a small retail business, an owner must have control of inventory. What products are selling? What products aren’t moving? Is there a good supply on hand? Entrepreneurs can keep some of this information in their head, but not enough to do the kind of job necessary to make a profit.
Government requirements. The owner must file financial statements for tax purposes. Taxes are calculated based on the profit a business earns. Even a very small business must file certain reports.
Financial statement: At least once a year, the owner should have a comprehensive financial statement of the business prepared — this is similar to an individual having an annual medical checkup. How well did the business do in terms of total sales? What were its expenses? What are its profits before and after taxes? What can the owner do to improve its financial picture next year? When borrowing money, entrepreneurs must present such a statement to a banker; if they want to sell their business, they must show financial statements to prospective buyers to show the firm is worth buying.
(To be continued)
Photo: “The financial statements were improved this year” by Stephen Day, c/o Flickr. Some Rights Reserved