Why review your business accounts?

The bookkeeping records are the mirror that you look into to know how your business is performing Click To Tweet

The ultimate goal of a business is to make money for the entrepreneur. On the way to attaining this goal, there are many things that you must do in your business which includes, producing the service or product, selling, managing your customers and keeping financial records.

Record keeping sometimes referred to as bookkeeping is an integral part of a business and these records are the mirror that you look into to know how your business is performing.
Once you have your records in place, the next important step is to use them to improve your business. This entails pouring through the numbers to understand the patterns and trends that the records reveal.

For you as an entrepreneur, there are two reasons why you want to go over your business accounts;

  1. To check that they are accurate; reviewing your accounts allows you to make sure they give a fair reflection of the state of your business, which will help to highlight any weaknesses and areas for improvement, for example, you will be able to note the missing records, vouch estimates used and even assess how stock is being managed.
  2. To compare performance; when accounts are compared with previous years or with your competitors, they can show unique trends and help you learn from other businesses in a similar position to yours.

Business accounts should be reviewed at least every quarter.

Reviewing your accounts allows you to make sure they give a fair reflection of the state of your business Click To Tweet

What to look out for

There are some important things to look out for when reviewing accounts.

On the income statement check whether the business has made a profit in the year and whether revenue or costs has gone up or down compared with the previous year?

The balance sheet will tell stories about how much money is in the bank. Remember, from the Cash is King article, we discussed why money should be available. The balance sheet will also gauge whether cash levels are moving in line with profit?

On the balance sheet, you will be able to note if the stock level is reasonable and also whether there are any big payments due soon in terms of loan repayment or large invoices. When analysing business accounts, ensure there is nothing that is obviously missing and use ratios to help you to compare and contrast the performances of businesses.

Comparisons can be made internally with past performance or budgeted results or externally with competitors or industry averages. It is good practice for the accounts to be independently reviewed and you can one or more of the following people to do this on your behalf:

  • Any person other than yourself
  • An accountant or
  • An auditor

In our ‘Reviewing Financial Accounts’ guide, you’ll find a section on key ratios for analysing business performance. It will provide you more information on how to go about reviewing your accounts. Download our guide on reviewing financial accounts here.

Bookkeeping for dummies

Bookkeeping is an important skill to have when you're starting your business Click To Tweet

One thing that you quickly learn when you start your business is that you’ll have to handle every aspect of it; from marketing your products, hiring your employees and most importantly getting a handle of your accounts.

It is therefore important that you get a good understanding of the basic set of accounts for any business, how they relate to each other and how the different actions you take are represented in your books. The more your business grows the more complex it becomes and at that point, you might want to consider getting yourself some professional help.

In this Forbes article, the writer talks about what you need to know about the 10% of start-ups that succeed.

One of the things he talks about is making sure you understand the ‘’boring’’ stuff about your business. It is so easy to get carried away by the more interesting aspects of your business and forget to handle the less interesting but many times the most important aspects of your business. One of these is the accounting.

What we are going to do here is to give you a basic introduction to the business accounting concepts that you need to understand as you run your business. Don’t be worried about whether or not you have an accounting degree, these are things you can do with your eyes closed.

Every business transaction is an exchange of one thing for another Click To Tweet

Double entry: All business transactions have a double effect on the accounts

Every business transaction is an exchange of one thing for another. This is the basis of accounting, the idea here is to get an all rounded picture of where your money is going and keep yourself from small mistakes.

As a boutique owner, you sell an outfit (inventory) in exchange for cash. This simple transaction has a double effect of increasing the amount of cash in your business while reducing the count of inventory. Very simply put that is double entry affecting your cash account and your inventory account.

The accounts are interrelated

At this point, we are basically building up on the double entry concept by creating an account for every element of your business. If for example, you did not sell the outfit for cash but for credit, then you’ll want to keep an account of the person to whom you sold the outfit to until you get the money in cash and then close off that account while increasing the amount of actual cash that you have.

Every time you use your cash for something new then create an account for whatever aspect of your business is affected by that transaction. If it is an account that you already opened then you just keep building on that account.

Balance the accounts

You’ve probably heard this phrase before, what it simply means is that after some time you’ll want to know how your accounts look. Say every month or every week when you want to know where your business stands you’ll make sure that for every account you opened both sides have an equal amount.

For example, your inventory account had a balance of $1000 when you started off, every time you sold something that balance reduced. Let us assume that at the end of the month your inventory reduced to $250, you’ll continue selling it off at the beginning of the next month so to balance your account the $250 will simply be considered as inventory carried forward.

Bookkeeping grows more technical as your business grows & there are many apps you can use to do this Click To Tweet

These are the basic accounting ideas that you need to understand. Bookkeeping, of course, grows more technical as your business grows and there are many applications that people employ these days to do this, however, the idea remains the same.

In the next article in this series, we’ll help you understand the important accounts when doing bookkeeping for your business. We’ll talk about differentiating between cash and profit, understanding the incoming statement as well as the balance sheet.

How to monitor a budget to inform business decisions

Budgets play a key role in the day to day decisions, here are 4 scenarios Click To Tweet

The budget is not only important for future decision making but for day to day decisions as well. To be able to use it this way, you must monitor it frequently by comparing your actual income and expenses versus what you had budgeted.

When you notice differences in actual performance compared to your budget that is major, consider what caused the variance and what action you can take if the variance is negative or positive.

To give you a look at how you can go about this process we will take you through four types of variances that can occur in your business and the kind of decisions you can make to remedy.

1. Sales aren’t coming through

Sometimes the projected sales fall short of what was expected due to unforeseen circumstances; maybe a new competition came in or business was just slow. What this means is that you will have a stock in excess of what you had expected.

This needs to be followed up by decisions that will enable your business to perform better; your options may include changing the sales strategy or buying less stock than was budgeted for the next month.

2. An employee disses you

Maybe you had a bit of a tiff with one of your employees and they ended up walking out on your business. What does this mean for your business? Can the work be done without him/her? Can those left do additional hours? Do you need to budget for overtime?

These are all possibilities that can arise based on losing an employee. This will determine whether the positive change in your budget will be a temporary one or a permanent one depending on how it affects the running of your business.

3. Your landlord is acting up…

Unfortunately, this happens quite often than we would like to think about; worse still, you might not even get enough notice to organise yourself if the landlord increases the rent at the last minute. Based on the overall outlook of your budget, you can decide if your business can sustain the costs of an increased rental expense.

The options you might have would be to negotiate the exact amount of increase or when the new rent amount can be effective to give yourself time to plan. You might also opt to look for more affordable space elsewhere, which may lead to double charges in the month of booking and moving.

4. Repair expenses went up

Your loyal van is coughing, your mechanic is charging more for his services based on your desperation. Repairs will be higher than usual. You may not have very many options here except maybe try and find out if the rates are competitive and if it warrants you looking for another mechanic.

If this specific expense is on a continuous rise then you might consider getting another van to reduce the monthly expenses. A new van brings in a whole other dynamic to your budget and your financial accounts.

In addition to giving you a picture of how your business will look in the future, budgets play a key role in the day to day decisions. It is important to constantly monitor the difference between the budgeted expense and the actual expense and make decisions accordingly. Remember that the decisions should be based on the overall outlook of the budget and how one decision will affect another aspect of the budget. Consider the budget holistically and not as standalone budgeting decisions.

The 3 C’s of the budget cycle

Before you create a budget for your business, you need to know what the budget cycle is Click To Tweet

You are probably asking yourself what this thing called the ‘’budget cycle’’ is. You have heard about the budget and how it works but you are less likely to have heard about the budget cycle.

The budget cycle simply refers to the phases or stages that you should go through while working on the budget for your business. Following this step-by-step process will help you make sure that your budget is actually beneficial to you and not just a dreaded process.

1. Coordinate

This is the very first step of the budget process and is highly dependent on what you want to see happen in your business within the period that is relevant to your budget. Three questions you need to ask yourself

  • What do I plan to do and achieve?
  • How much money do I have to spend?
  • What method will I use to budget?

Obviously, you can only budget to spend money that your business already has or is expecting to get. You can project your sales based on past performance and consider that as expected revenue in your budget.

The methods for preparing and presenting business budgets vary and are as many as there are businesses. If you haven’t been budgeting for your business though, this is a simple template that can get you started.

2. Construct

This is where you get your hands dirty and prepare the actual budget. The past performance of your business and what you want to do in the year should drive this stage of the process. Also, consider engaging other pertinent people for your business. For example,  your suppliers’ credit policies will determine how much you intend to pay out to them at what time.

Carry out this process on a monthly basis before coming up with a full year budget. Just as with the financial accounts, have your budget reviewed by external parties and make any necessary changes and then communicate the final budget to all stakeholders.

3. Control

This is also referred to as the monitoring phase. We mentioned earlier that the budget is not meant to be 100% accurate. The monitoring needs to take place at periodic intervals e.g monthly; it involves comparing the budgeted numbers with the actual numbers. This step is important for three reasons:

  • Helps you compare what you estimated with what is actually happening
  • Helps you pinpoint why things are not going according to plan
  • It’s an opportunity to react to the costs and respond to them

In a case where the first two months monitoring process shows that the sales budgeted are less than the actual sales because business was slow, then you can consider whether you need to order as much stock as you had intended to or you could decide at that point to try a new technique to increase the sales.

Similarly, if the rent expenses go up because the landlord increased your rent at the last minute you can adjust the budget accordingly for the subsequent months.

‘Why should start-ups care about the budget?’ – Top 3 budget myths debunked

Time to bust some myths around budgets for business with @StanChart Click To Tweet

Here at SLA, budgeting is not a new concept. I am sure by now we know why we need to set up a personal budget and how to go about it. However, how many of you #MotherlandMoguls spend time budgeting for your businesses? Did you know that there is a difference between the budget and other financial accounts?

During Standard Chartered Bank’s Financial Education workshops we have had small business owners give several ideas about budgeting, most of them are misconceptions that we need to debunk. Have you found yourself making one of these statements about your business budget?

“As long as I have prepared the financial accounts I don’t need a budget.”

“Only big businesses need to do them.”

“They always turn out differently.”

Read through as we debunk each of these common misconceptions

1. “As long as I have prepared the financial accounts I don’t need a budget.”

Here we need to understand that the financial accounts for your business are very different from the budget. Whereas the financial accounts look backward, the budget looks forward. The two do not play the same role for your business.

The budget is a financial plan for the forthcoming period while the accounts are a report for a period that has passed. In our view, the budget is more important as it is a predictor or a guiding light for your business.

2.  “Only big businesses need to do them.”

It might look like only big businesses need to draw up a budget because they handle such huge amounts of money or because they have much more to lose BUT the reason why you need to draw up a personal budget is the same reason why your business needs a budget.

It is actually much more important for a start-up to begin the habit of budgeting so that as the business grows the process becomes easier. Start-ups and small businesses are more likely to go bankrupt in the early years and a budget is one of the important tools that can save your business.

3. “They always turn out differently.”

Surprise! Surprise! Budgeting for your start-up is a tricky business; things do not always turn out the way you write them down. Your sales estimates are not always right; your expenses hit the roof sometimes. We have some good news for you though, this is absolutely normal!

Your business’ budget does not have to be 100% accurate. You should review your budget ever so often to adjust and check on the variances as you get more information. Yes, budgets always turn out differently because they look to the future and we are never 100% sure what will happen in that future; and it acts as a blueprint to ensure your businesses is not groping around in the darkness.

As important as it is,  a budget works hand in hand with the accounts to help you measure the performance of your business, period after period. It is great to have both documents, and if you need the help of an accountant, by all means, go for it.

Why should you budget for your business?

Ever wondered how multinational organisations control their financial calendars? It's simple Click To Tweet

“I was always running out of money, constantly struggling and missing my orders was the order of the day. Having my lights turned off, sometimes in the middle of a client presentation was not surprising anymore; all this because I had either forgotten to pay the bills or I had no money to pay, the devil is a liar”. Rosanne told us.

In small businesses, these kinds of confessions abound, and most of the time, they are blamed on external forces or things beyond our control. Have you ever stopped to wonder how a big organisation, with thousands of branches across the world, hundreds of suppliers and millions of customers can control their financial calendars, knowing exactly whom, why and when to pay?

The answer is; they meticulously prepare and monitor budgets, which helps them figure out these details. Since budgets have served big organisations well, we have misconstrued them to be a tool for big organisations. Yet, by the very nature of small businesses, the scarcity of funds, the reliance on the founder, and the advantages of a budget means that these small organisations need them most. Yet we find that most micro businesses don’t maintain budgets and struggle through financial management like dream walkers.

If you have experienced any of the symptoms below, either in your personal or business life, then you are suffering from a disease called lack of a budget and you should immediately take the steps provided below to return you’re to good health.

Symptoms of lack of a budget

  1. Run out of money unexpectedly
  2. Unable to pay for emergencies such as medical
  3. Unsure whether you can afford good business opportunities
  4. Have too much money lying around
  5. Losing suppliers due to your inability to pay them
  6. Unsure whether things are going well in your business, you have no idea where you stand
  7. Receiving reminders and chasers for payment from tax authorities, suppliers etc.
  8. Unable to identify business decisions such as when to increase your prices or hire more staff.
  9. Not knowing when to talk to your bankers about loans, investments or deposits.

To remedy these symptoms, you need to start preparing budgets, it is as simple as ABC. In upcoming articles, we will be teaching you in length.

  • The phases or stages that you should go through while working on the budget for your business.
  • How a budget influences important business decisions.
  • Debunk the myths around budgeting in the article and guide you towards changing the mindset on why we must budget.

Simply put, a budget is a plan on how to earn and spend money. Maintaining a budget, updating and monitoring it often will help you avoid all of the above financial pitfalls that can harm your business.

Stick around and reading all articles in the series -as well as any other on budgets- to enable you to master the budgeting process. Remember, failing to plan, is planning to fail.

A stitch in time: The importance of timing in managing business cash flow

#MotherlandMoguls be aware that poor cash flow management could ruin your business Click To Tweet

A stitch in time saves nine…whoever said that was right. The saying is a warning against procrastination. Putting off doing important stuff until it is more convenient is never a great strategy in personal life and especially in business.

When it comes to your business, it needs to have a minimum amount of cash to remain afloat. Maintaining liquidity requires intentional effort and coordination to ensure that you meet this requirement.

Poor cash flow management has been known to floor businesses. At the root of the famous Enron scandal was the management of cash flow. That is why #MotherlandMoguls who are their own #Bosses need to pay attention to it.

Managing your business cash flow

There are three major warning signs you need to pay attention to when managing your cash;

  • Slow Collection: When your sales are not moving as fast as you expected them to or you are not making sales at all.
  • Excessive short-term debt: “Short term” usually refers to debt that is due in 90 days or less. The larger this figure is, the higher the chances that your business is cash strapped.
  • Overtrading: Making sales is a good thing; the problem is having more credit sales which means that the cash your business should have is stuck with your customers.

Sometimes what happens is that businesses ignore some warning signs and fail to respond to them on time which leads to bigger problems. One of the most important things to do here is to monitor and coordinate when money comes in and when it goes out. The moment you recognise a situation that is likely to put your business at cash flow risk, deal with it at the earliest opportunity. This is one of the lessons that Julia learned.

Timing is everything when it comes to managing cash in a business Click To Tweet

A business at standstill

We met Julia in one of our Financial Education workshops. Julia runs a small milk delivery business and she was having a few challenges with her cash flow. A majority of her customers bought her milk on credit which she let them have for a period that was not specified.

When we met her, her main problem was that she was not able to pay her milk suppliers because she didn’t have enough cash on her. Some of her customers owed her for more than two months and the fact that she could not pay for the milk meant that her business was at a standstill. Julia also rents a storage unit where she stocks up her milk; she was in arrears for one month and was about to throw in the towel when we met her.

Lessons from Julia

Timing is everything when it comes to managing cash in a business, you must be sure about the dates when major payments (out and into the business) are expected and when. Some of the tips we gave Julia for her business were:

  • First to consider taking a loan as she tries to stabilise her cash position
  • Not to rely on her sales to make basic payments such as rent and wages since Julia might not always meet her sales targets. Rather she should have savings that she can dip in when the going gets tough. This savings can be built slowly over time when business is good.
  • Not to order excess milk if she doesn’t think she can sell it.
  • To compare the credit terms of different suppliers and pick the one that works best to her advantage.
One way to ensure money moves through your business is by saving up to make basic payments Click To Tweet

A couple of months later, Julia who had decided to continue her business reported that her business was doing much better as she had found another supplier who had better credit terms. She also instituted stricter credit terms with her customers.

If your business is cash-strapped consider taking on some of the tips we have given and you just might end up with a smile on your face like Julia did.

Cash is King, don’t ever ignore it

standard chartered bank she leads africa
A #MotherlandMogul who underestimates the power of money sets herself up for failure Click To Tweet

Phones are ringing, orders are streaming in and your sales department is a beehive of activities. Your business is doing well, the mood is ecstatic. The store person walks to you and breaks unpleasant news, stocks are exhausted. You quickly ring your suppliers and each supplier, as if choreographed responds, “We can’t supply till you pay the outstanding amounts”.

You call your accountant and ask her how much money the business has. She says there is very little cash, but quickly assures you that there are receivables which if you collect; the business will have more than enough money to buy stocks. You ask your assistant to call all the debtors and collect outstanding money. Meanwhile, you call the bank, for quick working capital. In your mind, either of these two must come through for you.

By end of day, you call your bff to explain you have no money to buy stocks and you have lots of orders pending. She does not have any cash either; all orders for that day are delayed.

The next day is no better, and customers start asking for alternatives, to which you direct them to your competitors. It is a sad state of affairs and each passing day, the mood in your business dampens, and activities slowly grind to a halt. Where did I go wrong? you ask yourself; with no answers.

Many times we hear an investor say, I will make loads of cash from this idea, so let me put in all the money that I have. Yet she doesn’t consider the day to day cash needed to sustain the business and her life. Such a #MotherlandMogul who underestimates the power of money sets herself up for failure. Money dictates the pace of growth for our businesses, and also the pace of progress of our lives. The absence of money brings business to a standstill and slows our lives down.

Planning cash flows is tantamount to respecting the King. Cash must circulate in your business, from your financiers and customers, to be used for purchasing inventory or stocks, investing, paying for labour and some lying around in a bank account to handle emergencies.

All these activities are so important for your business survival, neglecting any of them, or leaving it to chance is a quick way of muzzling your business to death. In this series of articles and guides, we are going to breakdown cash flow management’s concepts to help you manage your King in a way in which he will flow, without any turbulence, and provide your business with the much-needed growth.

Learn the basics of cash flow analysis with @SheLeadsAfrica & @StanChartKE #MoneyMakingMogul Click To Tweet

Tight Money (Guide)

The cash flow cycle explains the physical flow of money in your business, from the moment you receive it, through utilising it to pay for your expenses, all the way to banking and using it to produce goods and services.

cash flow management strategies
Click on the image to access the guide

Show Me The Money (Guide)

We then delve into the best time-tested strategies for managing cash. Here, we discuss how much money you need to have idle around your business waiting to be spent, what you need to do to manage suppliers and the people who owe you, when to turn to debt and when to dispose your inventories, even if it is at a loss.

cash flow cycle guide
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A stitch in time… (Article)

Timing your cash flows to coincide with your outflows is quite a serious strategy in the process of managing cash. It is important that your big expenses are undertaken when you are expecting your big payments from your customers or an inflow from your financier, be it a loan or a grant, or an injection of capital.

Read up on how to time your cash flow here.

Cash in itself can be an investment. That means by having liquid cash, you can keep it in a form in which it earns interest instead of keeping it under your mattress. Money can be invested to earn a return while waiting to be used in the business. Concepts around managing liquidity, investing excess cash, earning or paying interest and banking will be discussed in our last article on cash flow management.

Cash is King. No queen ignores the king. If a #MotherlandMogul ignores the King, it can only be to her own detriment.