How Your Accounts Will Help You

Bookkeeping can sometimes seem a chore – especially if you feel like getting on with other things such as production or sales; but it’s worth remembering that there are several reasons (and advantages) for keeping good business records, and many of them are a real advantage to you:

• to show you where you stand financially
• to help you make important financial decisions
• to help you agree (and perhaps reduce) your tax liabilities
• to control VAT – collecting it in and paying it out
• to help your audit in certain cases, and keep the auditing costs down
• to discuss your financial position with other people.

Let’s consider them in turn.

Knowing Where You Stand Financially

Without proper business records you will never know what your real financial position is. Not all businessmen and women, particularly when running small businesses, want to produce detailed financial statements every month, but it is very useful to be able to work out:

• how much money you have at the bank
• how much is owed to you by your customers
• how much you owe to your suppliers.

If you know that the money owed to you is enough to pay off your creditors and the bank, then you should certainly be able to sleep at night. (Do you know your current financial position?)

Suppose you suddenly find yourself short of £540 to pay a pressing supplier. You decide to telephone your bank manager to see if he will grant you some temporary help to tide you over.

Business manager. ‘Hello Alan, I wonder if you can help me? I urgently need to find £540 to pay off a supplier who’s threatened to stop an important delivery of new materials unless I pay. Can you help?’

Bank manager. ‘Yes, I should think so. What’s your overdraft at the moment?’

Business manager. ‘It’s only about £1300 . . .’

Bank manager (checking statement). ‘Yes, but hold on -1 see some cheques still haven’t cleared. I make it £1819.89 – and didn’t we agree a limit of £1500?’

Business manager. ‘Eighteen hundred quid? Good heavens, are you sure? I’d no idea.’

Bank manager. ‘Well, you should have! How much is owed to you by your customers? If it’s a lot, we may be able to sort something out.’

Business manager. ‘I don’t think we’ve got an exact figure – it must be a thousand or two. The papers are all over the place at the moment.’

Bank manager. ‘Look, why don’t you get your accountant in, and get the exact figures, then we can meet and see what can be done.’

Business manager (groaning). ‘That’s going to take ages and cost money – isn’t there anything else we can do?’

Bank manager. ‘Well, we’ve got to have the facts first. . .’

The business manager needs help, and the bank manager wants to give it – but not just on a wing and a prayer. What would you think of your bank manager if he was sloppy with key figures?

Could you answer the above questions about your own business?

Broadly speaking, if ‘what we’ve got’ is more than ‘what we owe’ the business is solvent. If not, it is insolvent and probably should not go on trading. However, it should be kept in mind that some of the assets (’what we’ve got’) are not in a form that can be used to pay the bills. The vehicles and equipment, etc. (collectively called fixed assets) are for the long-term benefit of the business and are not readily turned into cash. You should therefore also consider the situation without taking account of these items.

But these are basic questions, and are only the beginning of gaining a real understanding of your business as a financial entity. If you can’t find the answers to these questions fairly quickly and accurately, you will certainly need this book.