January 26, 2022


Accounting + Finance Blog

Smart Small Businesses Keep Financial Records for these Obvious Reasons


Small businesses that maintained concise accounting records avoid not only the brutality of internal revenue service but also to compound into the realms of large businesses. Today, many small organisations had failed due to failures of not understanding the number. Many business owners, when asked, cannot tell the amount of revenue they make in a day, how much more in a year.

However, keeping regular financial records of business transactions may mean extra expenses to the firm’s cash, which can be channeled to what the entrepreneur deemed to be more important.

But not all small businesses failed to keep a regular records of it business deals. Although, a little of these businesses may have wind up, book keeping must have help them to a greater extent in understand why their businesses went down at first instance.

Despite the cost incurred, many small firms keeps a daily records of financial information. Obviously, the reasons for doing so are not farfetched.

Reasons why small businesses keep accounting information

Keep Profitability in Check

The number one obvious reasons small firms keep a day-to-day business record is profitability. You no doubt agrees to the above. Every entrepreneur major aim is to make profit. The profit made may either be use for personal use or be use to grow the business.

To know the profit of a business, an income statement is prepared by the entrepreneur. If the entrepreneur has no knowledge on how to prepare an income statement, he or she may employ the service of an accountant. If the business owner uses an accounting software (Sage, Quick book or Accounteer), an income statement may be automatically generated every single day, depending on the package.

However, a simple income statement can be drawn using a spreadsheet software. It is important to segregate between

  • Revenue and gain
  • Cost of doing business and expenses, and
  • Gross profit and profit before tax returns.

Then, subtract Cost of doing business from Revenue to arrived at Gross Profit. Deduct Gains from expenses and add Gross Profit to it to arrived at the profit before tax. This is the major measurement of profitability in a business. Progress in profitability can known by comparing it with previous years, forecast and industry figures.

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Smart entrepreneurs, therefore, knows the profits made and plans how to channel it to the business. Also, it serves as a motivator to them.

Payment of tax

Tax remains a compulsory levy for every adult citizen. The payment of tax is important when a business has more employees and it is located in a major city, in a state. A small business’ owner is expected to pay personal income tax to the state board of internal revenue service (sbirs). If you decide to form a company, then, aside paying a Personal Income Tax as founder(s), a company income tax must be paid to the Federal government through the Federal Inland Revenue Service (FIRS).

It is true that, in Nigeria, tax payers are allowed to pay tax, base on personal assessment, also called self assessment. However, if the relevant tax authority finds you wanting for underpayment of tax, they will come for your books of accounts. If no accounting records are found, then the tax man will use best of judgment (BOJ) approach to assess the business taxable income. In such case, the small business owner may end up paying more tax. However, you can prove to the relevant tax board wrong only with a regular book keeping records.

Smart businessmen knows this. They keep adequate book keeping records. And prepare accurate tax returns to avoid been external issues, although, they are aware of ways to avoid taxes.

Understanding your business revenue

A system of book keeping has helped many small business founders know the amount of revenue they earn every year, every quarter and every month. This is very paramount for several obvious reasons. One of such reasons is revenue target.

Determined startup founders always have a target revenue for every month and year. The targeted revenue is compared with the actual revenue for the month. A variance stressed if the businessman is doing well or check areas where improvement are necessary. However, if there are no accurate accounting records, then, assessing progress will become difficult.

Regular book keeping records help the small business owner to know when there are seasonal variations in a year and how to cope with it. Also, adequate revenue records can help with forecasting future revenue growth with MS Excel and plan for it. Understanding business revenue and other business metrics can help the owner of a firm speaks more about his or her business with potential investors and creditors with a bit of confidence.

Imagine a business with no revenue records! It only tells of the likely poor business attitude of the owner(s). The founder is missing out of the potential data available from revenue records.

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Estimating business market share

One of the benefit of keeping a comprehensive record for business revenue is to compute the market share of a business. Smart entrepreneurs knows the contribution their organisation has to the market share of the economic sector they belongs.

For example, the market share of food sector in Nigeria worth 52 billion Naira. If a business is in this sector, the founder can know the business’ market share by calculating the total revenue earned for the year. If the revenue is up to a billion Naira, it means that the business has a reasonable market share of the food industry.

But, a lack of accurate revenue records by a business owner means it cannot have knowledge of it’s market share to a particular sector of the economy. An important data that should not be allowed to slip away.

Knowledge of the business Assets and Expenses

Regular book keeping can keep the small business owner alert to its assets and expenses. He or she will know what drives expenses. It has been known from time immemorial that salaries and wages always have the lion share of the total expenses of a business.

Source: NSE

A good example is the financial report of Ellah Laķes PLC for July 2017. The abstract above is a screenshot of the Note to the Account. You will noticed that in year end 2016, salaries and wages was 11.09 million. But the total administrative expenses show 12.36 million Naira. For 2017, the salaries and wages amounted to 4.36 million, probably due to reduction in staffs. But, administrative expenses were stated as less than 19,000 Naira.

From the abstract, you will noticed that despite all efforts of the Directors of Ellah Lakes Plc to cut down expenses, salaries and wages still remains the core expenses. The business owner can only figure out this, if he or she has a regular accounting information.

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This also applies to assets. There are various kinds of assets, but generally, assets are classified as Current and non current. Current assets exist within a year, but non current assets exist for more than a year. A businessman should know the classes of assets and learn how to deal with it. Adequate financial records is the primary source of these data.

Giving attention to Debtors and Creditors

Small business owners that fails to keep records of debtors and liabilities end up not knowing what is owed to these persons and organisations. This will result to overstating or understating these business items.

I have heard of small business owners requesting for payments from debtors more than once, because, they failed to record the debts when it was paid. Others may not remember the amount owed by the debtors anymore. And thereby understating the debts.

There are lots of benefits of keeping records for debtors and creditors. Smart business owners know these and had used them to increase revenue, pay up debts, just to mention a few.

Knowledge of when the business may fail

Record keeping has helped entrepreneurs know when a business is likely to fail. And as such, takes necessary steps to revive it. And if the firm cannot be re-engineered they will know and let go.

The benefit here is that they know what resulted to the failure of the business. And if asked will be able to explain and defend why it was impossible to revived the business based on the available financial records on their disposal.

Whats Next?

The above points are just a tip of the many benefits smart entrepreneurs had derived from keeping regular book keeping records. If you haven’t start keeping a regular accounting records, it is never too late to start. The benefits are more than the cost of it.