As an owner of a business, your company's books and financial statements represent a score sheet which tells how you are progressing, as well as an early warning system which lets you know when and why the business may be going amiss. Financial statements and the underlying records will provide the basis for many decisions made by outsiders such as banks, landlords, potential investors, and trade creditors, as well as taxing authorities and other governing bodies. The necessity for good, well organized financial records cannot be over emphasized. One of the greatest mistakes made by owners of small businesses is not keeping good financial records and making improper or poor business decisions based on inadequate information.
Quality financial information does not necessarily translate into complicated bookkeeping or accounting systems. Far too often owners of businesses become overwhelmed by their accounting system to the point where it is of no use to them. An accounting or bookkeeping system is like any tool used in your business; it needs to be sophisticated enough to provide the information you need to run your business and simple enough for you to run it (or supervise the bookkeeper). Questions you should ask in developing an accounting and financial reporting system are:
- Who will be the users of the financial information?
- What questions do I need answered to manage the business?
- What questions should be answered for government or regulatory taxing authorities?
As your business grows, you should work closely with your accountant to ensure that your accounting system is providing you with appropriate information.
ACCOUNTING RECORDS AND RECORD KEEPING
Another question, which the owner of a business must answer, is "Who will keep the books of the business?" Will you do it yourself, will the receptionist or a secretary double as a part-time bookkeeper, will you have a bookkeeper that comes in periodically or will the volume of activity be such that a full-time bookkeeper will be required?
Very often the owners of a business decide to keep the books themselves and underestimate the commitment they have made to other phases of the operation and the time required to maintain good financial records and books of account. As a consequence, the record keeping is often low priority and must be caught up later. This approach, though rarely planned, can require a substantial expenditure of time and money. While it is important for the owners of a business to maintain control and stay involved in the financial operations of the enterprise, this can be achieved by maintaining close control over the cheque signing function and scrutinizing certain records. Remember, many businesses that would have otherwise been successful have failed due to their inability to maintain adequate financial records. Whether you do it yourself or choose to hire someone else to do it for you, bookkeeping is essential. Properly maintained books will let you gauge your performance and plan for the future. Your company's accountant can help develop a good program of record keeping duties for you, your employees and any outside bookkeepers you may engage.
There are a number of very good, easy to use, and relatively inexpensive accounting software systems that are commercially available, many of which offer a range of features based on current technologies. Each program is different and there are many good options to choose from. Your accountant knows your business and can take much of the confusion out of the selection process by assisting you in the purchase and setup of your accounting software.
What is internal control? It is the system of checks and balances within a business enterprise that helps to ensure that the company's assets are properly safeguarded and that the financial information produced by the company is accurate and reliable. When you're operating as a "one man shop" or at least handling all of the company's financial transactions, maintaining good internal accounting control is relatively straightforward.
When your company grows to the size where you must delegate some of the functions, it becomes more difficult to ensure that all the transactions are being accounted for properly.
No matter the size of your business, you should always be able to answer "yes" to the following questions:
- When my company provides goods or services to our customers, am I sure that the sale is recorded and the revenue is recorded in accounts receivable or the cash is collected?
- When my company expends cash, am I sure we received the goods or services being paid for?
The methods used to ensure that these two questions can be answered affirmatively will be widely varied. There are essential stepping stones to maintaining good control in your business. The solution in your particular instance may be as simple as numbering the sales tickets and being sure all tickets are accounted for or, reviewing all invoices and time cards before signing company cheques. These are fundamentals in a well-run business. As the company grows you will need to consider more internal controls as your processes and systems become more complex.
Regardless of your size, you should consider controlling your business and safeguarding hard-earned assets as a priority from the outset.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.