Many small businesses in Kenya fail within their first two years of existence. There are many reasons and factors that contribute to their failure e.g. lack of capital, high overhead costs and many other reasons. One major reason however, is poor record keeping practices. A small business may have sales everyday and therefore the owner feels that he/she is making a profit because there is money everyday. When the small business can’t stay afloat and he/she has to close, they wonder what happened. It is therefore necessary to keep good records. This is because accounting records paint a picture of how the business is doing; where the sales are mainly coming from (if it’s a bakery like mine – I’ll be able to see if it’s from baking classes or cakes). Records let you know where the money is going; if it’s mostly paying for rent and payroll. You’re able to see how much you’re spending on production materials (e.g. flour, sugar, margarine, etc) and utilities (is your electricity bill extremely high compared to the sales?). If you’re able to, get an accounting software program that can assist you with record keeping and keep track of customer data as well. For my bakery, I use Quickbooks Accounting Software from Intuit. Quickbooks is great for small businesses and easy to use as well. However if you’re just starting and you cannot get the software at first; below are the necessary accounting records you’ll need to know how your business is doing.
1. Receipt Book/ Cash Sales book When you sell an item or a service to a customer/client, you should make sure you record the transaction. Make sure you always have a receipt book to keep track of all your daily sales and to give the customer a copy when the transaction is complete. Even if you have a business in which you don’t give receipts to your customer, e.g. a local shop; make sure you record the sales so as to keep track of your daily sales. You can start by purchasing plain receipt books from supermarkets or stationery shops. Then as your budget is able to manage, you can get personalized receipt books for your business with your business name and logo on them.
2. Petty Cash Voucher book It is imperative to keep track of all your small business’ expenses – and I mean all; i.e. Rent, Payroll, Utilities – water, electricity, garbage collection etc, Print material for marketing your business, Production materials, Phone and Internet costs, Travel and Transport costs, Advertising (online or outbound), Loan repayment and any other miscellaneous costs you may have. You should record any expense that is paid towards your small business, it is the only way you’ll be able to manage your business costs. A petty cash voucher is a great way to record all your expenses. Record all the expenses in the voucher book and attach supporting evidence, that is, receipts. For any purchase for your business, make sure to get a receipt. This is not only good for recording purposes, but for VAT auditing (if you have a small company and pay VAT monthly). Receipts are also evidence that you purchased an item, especially if it’s a fixed asset such as an electric mixer for a bakery, or a laptop for office use. Receipts come in handy for any warranty issues that may arise. You can find plain petty cash vouchers in supermarkets or stationery shops as well. You can also have a printing company make personalized petty voucher books for your business with your logo on them.
3. Business Journal A journal is another essential record to keep for your daily business activities. A journal shows your daily financial activities; i.e. how money came in and went out in your business. At the end of the day, you should know how much money you started with; what money came in from sales and how much went out to pay for various expenses. At business close, you balance and see how much money is left and then compare it with the amount of cash you have at hand to ensure that it’s an accurate record. The reason this journal is important is for accuracy and accountability purposes. It’s harder to track where money has really gone if you keep track of it weekly or monthly. However, if you do it daily, you will get any discrepancies sorted that day and the issue will be solved easily. A journal is especially necessary in a business that is busy every day e.g. shop, bakery, supermarket etc. You can start by purchasing a counter book in a supermarket or stationery shop to get started.
4. Stock Schedule It is necessary to keep track of any stock you have in your business. Stock can be tracked daily, weekly or monthly depending on the kind of stock it is. If you’re running a production or manufacturing business such as a bakery, wood workshop, metal workshop, maize or wheat milling etc; you should keep track of your production or manufacturing stock daily. For example, for a bakery, it is good to record the stock at the beginning of the day and at the end of the day. It helps you compare your sales for baked products sold to ensure they are equal to the stock used to bake the products. If there are any discrepancies e.g. too much stock was used and not enough products were sold, as a business owner you can trouble-shoot to find out what the problem is and where stock is going. For all the above businesses, you can also do a weekly general stock take to record the materials in your stock and if any are required to be purchased for replenishment. Retail businesses such as shops, supermarkets, clothes or shoe shops can also take weekly stock to see what they have sold for the week. You can also take weekly stock if your production or manufacturing business does not have a lot of daily sales. Monthly stock is taken for; production or manufacturing goods as well as fixed assets. This is necessary to keep track of your assets and to complete your monthly balance sheet (See below). You can purchase a counter book in a supermarket or stationery shop to keep track of your stock.
5. Balance Sheet A balance sheet summarizes a small business’ assets, equity and liabilities at a specific point in time. A balance sheet is best done every month for a small business so as to see the financial position of your business monthly. A great definition for a small business balance sheet from Wikipedia is that a small business balance sheet lists current assets such as cash, accounts receivable, and inventory, fixed assets such as land, buildings, and equipment, intangible assets such as patents, and liabilities such as accounts payable, accrued expenses, and long-term debt. Contingent liabilities such as warranties are noted in the footnotes to the balance sheet. The small business’s equity is the difference between total assets and total liabilities. A simple explanation of accounts receivable is – money owed to your small business by a customer/client. If your small business is a service based business such as an I.T. Company, transport or delivery service provider etc, you can write invoices to your customers (not cash sales or receipts). An invoice is a document that states the product or service supplied and cost to be paid. Different businesses can invoice their clients based on the agreed payment periods e.g. monthly or weekly payment.
Accounts payable describes money you owe suppliers or vendors. If you have an agreement with a supplier to supply goods to your business and you pay them monthly; the vendor writes you an invoice for the amount that is payable to them. Long term debt is usually a loan that your small business is paying slowly; taken either to start the business or boost it financially. For the first few months, if you are not familiar with a balance sheet and you do not have any accounting software; consult a book-keeper or accountant to assist you with compiling your balance sheet until you are comfortable doing it yourself. Below is a balance sheet format you can get started with, ensure that you create a balance sheet that is unique to your small business for complete accuracy.
Now that you know the essential accounting records required for your small business; if you already have one in operation – go buy them and record on them daily. If you would like to start a business, make sure you are prepared with all the record required to keep track of the financial progress for your small business.
All the best and work smart! ^_^