How to Keep Records for a Small Business


Some recent research into the causes of bankruptcy among small firms shows that, while poor sales, bad initial choice of site, misguided spending and sheer bad luck were all factors that occurred very often in the history of failure, one element dominated all of these – a general absence of reliable records.

One creditor that generally pursues its debtors all the way to bankruptcy is the Inland Revenue, and the major reason why small firms get into trouble with their tax bill is absence of records. Without records, the small businessman has only, at best, a vague idea of his profit. The Inland Revenue presents him with an assessment and he finds himself without the paper evidence necessary to argue against his tax bill. He is saddled with a demand, the basis of which he does not really under­stand and which he is unable or unwilling to pay. Lack of records also means that he has been unable to plan his cash flow to ensure he has enough saved to meet the tax demand and any other sudden expenditure. As a result, a promising business may be aborted and its owner driven into bankruptcy, all for the lack of a few simple records.

Readers may doubt that records are simple. An illusion often encountered these days is that enterprise is stifled by a bureau­cratic government’s unappeasable appetite for complicated forms that nobody needs and nobody reads. This has some validity in the case of government statistical forms and VAT returns, but this article is concerned with the firm too small to be involved in either of these. The Inland Revenue forms are not difficult and generally involve no more than the appendage of a set of annual accounts. Annual accounts, however, cannot be prepared without books of account.

It would be understandable for the new businessman to pro­test that he went into business for himself, not for the taxman, and that he is damned if he is going to spend a couple of hours a week writing up books just to please the Revenue. However, it is failure to keep books that will almost always guarantee a higher tax bill than is really fair to the taxpayer. The Revenue fights with paper, and the taxpayer must do likewise. It is quite futile to hope that you are too small to come to the attention of your tax office and quite hopeless to believe that a nice line in patter and excuses is any substitute for proper records.

It is not only the tax bill that can be controlled by good record keeping. The businessman who wishes to survive, let alone grow, must know how he is doing on a weekly, even a daily, basis. This means he must know two very important things about his business at all times: first, the amount of cash he has to spend, and, second, the true profit or loss he makes from his sales.

It is important to realise that making a profit does not neces­sarily mean having any spare cash and that having a lot of money in the bank does not mean a big profit has been made. The Inland Revenue is interested in the profit or loss, and the bank in both the profit and the cash, while the businessman is interested in success (a matter of profit) and survival (a matter of cash).

Now to the records themselves. First and foremost is the cash book. Every week the receipts are added up and the total weekly pay­ments deducted from them to give a cash at bank balance. This should agree with the bank’s records and, if it does not, the reason for the difference has to be found so a correct view can emerge. If the cash book is written in every time a cheque is received or paid out, the effort soon becomes a habit rather than a burden.

Many small businesses deal in notes and coins rather than cheques and for such transactions a petty cash book is neces­sary. If possible, retain vouchers for every entry in the book to prove the accuracy of each entry if it becomes necessary. At least once a week add up the receipts and payments to obtain a balance of cash in hand and check that it agrees with the actual amount counted from the till or the cash box. This routine will quickly reveal any carelessness with petty cash and provide an early warning system of alien fingers in the till!

If sales and purchases are made on credit, a sales and pur­chases ledger will both be necessary. In the purchase ledger, suppliers are recorded in alphabetical order of name. Address and phone numbers are written under the name, and on the right-hand side are listed the date, nature and amount of each item bought on credit. On the left-hand side are recorded all the payments made to the supplier for the items on the right.

Every month, the left-hand total is deducted from the right to show how much the supplier is owed. If the supplier sends statements, these should agree with the purchase ledger account. In the sales ledger, customers are listed in a similar way to the suppliers in the purchase ledger but sales on credit to them appear on the left while their payments appear on the right.

The above records represent the absolute minimum for any business. In addition, limited companies must keep a record in a capital ledger of any land, buildings, machinery, furniture and vehicles owned (all entered on the left) showing the cost of such items at the time of purchase.

All expenses are posted from the cash books and purchase ledgers to the left-hand side of the nominal ledger. Income from sales, rent, dividends, etc, is posted to the right. There is a separate page in the ledger for each type of expense or income: one for rent, one for wages, one for sales, etc. It is important to keep expenses on the left and income on the right if the books are to balance.

Every month each page in the nominal and capital ledgers is totalled, taking care to keep right-hand totals separate from left-hand ones. The balances in the sales ledger and purchase ledg­ers are also totalled, as are the totals in the cash books. These are then listed on a sheet of paper called a trial balance whose left-hand totals should add up to the final total of the right-hand totals. If so, the books balance and the businessman can be confident of his records.

A comparison of expenses with sales will show the profit for the month. The cash book totals will show the cash in hand. The sales and purchase ledgers will show how much the busi­ness owes and how much it is owed in turn.

A small sacrifice of time and effort in keeping simple books is well worth the return in terms of knowing where the business stands. Additional benefits are: saving the cost of employing a bookkeeper, confidence in facing the Inland Revenue and con­trol of one’s own business destiny based on accurate data instead of on some mythical ‘flair’ or ‘gut-feel’ that cuts no ice with the official receiver. Indeed, it can be said that no busi­nessman is in control of his business fate unless he is in control of his business records.

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About the Author: Marie Mayle is a contributor to the MegaHowTo team, writer, and entrepreneur based in California USA. She holds a degree in Business Administration. She loves to write about business and finance issues and how to tackle them.

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