A business needs to have some idea of where it is going
Without accounts you cannot analyze your business to detect problems.
Why it is important to do accounts
Accounts are needed for:
1) Accurate Invoicing:
A business relies on making sales, invoicing its customers and getting paid. Too
many small businesses produce their invoices late, or they are inaccurate. In
many instances they use packages like Excel or WORD to generate a nice looking
invoice, full of errors. We have even seen companies who are unable to reprint
the invoice because the Excel spreadsheet was overwritten or they did not save
it. What a waste of effort in making a sale and not getting paid for it.
2) Timely payment by debtors (customers).
Once invoiced a business expects to be paid. If the business gives terms, or
even if it officially does not have debtors, it may allow a customer to pay
tomorrow or next week. At that point the business has to ensure that it collects
the outstanding money due. This can get quite complicated when the business has
many customers, or writes out many invoices. A proper check of what is
outstanding is essential. At the same time the business should issue a statement
of what is outstanding, and how old that particular invoice is.
Moreover when the payment is finally received it must be marked off against
the customer’s account. Here lies a crucial point: When the customer gives
payment in the form of a cheque or even an Internet transfer, the company must
confirm that the money is actually in their bank account. In particular a cheque
means nothing until it has been cleared in the bank account. The business should
mark the account as having been paid, but also have a way of knowing if the
cheque has not been cleared for payment. This applies to debit orders where the
customer may reverse his payment.
Accurate payment of accounts
As important as it is to be paid, payment of suppliers is crucial to the
business’ success. Supplies who do not receive payment will stop supplying:
telephones will be cut off, electricity disconnected, raw material deliveries
stopped.
3) Proper Budgeting
A business needs to have some idea of where it is going, financially, to be able
to do elementary budgeting and planning.
4) Banking
The bank account is the single most important financial document. It records all
money in the bank account. “Cashflow is king”. It is therefore essential for a
business to check their bank account on a regular basis:
To ensure that it does not exceed this overdraft limit.
To ensure that it can pay it expenses as per its budget.
To check that the customer who had paid them has actually put the money into the
bank account, or not reversed the payment. This goes back to the point, timely
payment by debtors
Without accounts – income statement/balance sheet businesses cannot get
overdrafts/loans, even open accounts.
They cannot analyze their business to detect problems.
VAT is difficult to calculate, or inaccurate. Many businesses fail to include
bank charges, and other fees appearing in the bank statement if they don’t
receive an invoice.