Good records play a very important role for any individual or entity that creates them: providing users with historical insight and serving as a basis for future forecasts. As a business owner, good financial records will serve this same key purpose for you: telling the story of your business and helping you to recollect important details, easily.
The history of record-keeping is as old as the creation of the world. Starting from the earliest “oral tradition” records kept by Grecian societies, to electronic databases maintained in this social media age, records have always formed an important part of human life.
Although effective record-keeping could be a herculean task at the onset, in the long run, the benefits, outweigh the effort required to create and maintain such records. The motto you need to keep in mind when it comes to financial record keeping is “it is better to have them and not need them than need them and not have them.”
Benefits of records keeping in a business include but are not limited to the following:
- Showing the financial health of a business. That is, whether the business is growing, static or nosediving.
- Providing information that will be useful for internal decision making.
- Helping you to keep business expenses under check and control.
- Enhancing your chances of securing loans and grants from financial institutions and donors.
- Providing information to investors, creditors, suppliers, government agencies and other stakeholders both within and outside a business organization.
There are many financial records that are important to the running and success of a business, but for the purpose of this write-up, we shall limit the discussion to four.
1. Statement of Profit or Loss and Other Comprehensive Income
This was previously referred to as Profit or Loss Account. This is a statement that shows the profit earned or loss incurred by the business entity during a specified period. Basically, the statement of profit or loss measures the financial performance of a business during the period. The main function of the income statement under which the profit or loss is determined is to ascertain the net profit or loss resulting from the business operation.
One major business goal in every organization is profit-making. Hence, it is imperative for every organization to ascertain whether the business is making a profit or making a loss. This is the record that shows the business owner how profitable the business is and this can aid the management or business owner in making informed decisions.
This record appears to be one of the most important records that every business owner must keep because it forms the basis of any decision or line of thought and the importance cannot be overemphasized.
2. Statement of Financial Position (Balance Sheet)
A Statement of Financial Position is the financial statement showing the assets, liabilities and owners’ equity (i.e. capital plus reserves) of an enterprise on a specific date.
This statement shows the financial wealth of a business entity at a date. Basically, it shows the assets owned by the entity, liabilities owed by the entity as well as the owners’ residual interest (i.e. equity) in the business. It also shows the presentation of the summary of assets and liabilities in a well-arranged form, so that the financial position may be clearly ascertained. In summary, this statement shows the assets and liabilities of the company.
- Assets are resources that are controlled by an entity as a result of past events from which future economic benefits are expected to flow to the entity. They are resources that the business can use in generating revenue for the company. This could either be liquid asset (e.g. cash), non-current asset (e.g. plant and machinery, building, motor vehicles), or other forms of assets. The advantage of assets acquisition for a business is that it helps to reduce capital and operating expenditure, and this will have a positive effect on the profit of the business. However, if your business is a startup and you are just trying to build your capital base, you may not want to invest all your capital on assets since it is not all assets that will generate immediate cash for your business. So, it is important for you to understand your business and understand the type of asset that you need before acquiring them in other to avoid asset redundancy.
- Liabilities are obligations settled by the entity as a result of a past event, which are expected to result in an outflow of economic resources from the entity. those obligations meant to be settled are liabilities. These are obligations whose benefits the entity has enjoyed before. The benefit may have been enjoyed for more than one year (Non- Current) and it could have been enjoyed within a year (Current). It is not absurd for businesses to incur liabilities, but it should be kept to a small. It is advisable for a business to grow within its pace and constantly watch its liabilities so that it does not outgrow the business. Although there are circumstances that the business will have to incur debt to finance the business, such as taking a loan, this should be settled as soon as possible to protect the creditworthiness and integrity of the business as this is one of the intangible assets (goodwill) of the business.
It is important to keep these records to know if you are incurring too much liability which is not healthy for the business or whether the business needs to increase its asset base for better operational activities.
3. Debtors Receivables Ledger
This is a finance record that shows how much the company is expecting from its customers, as a result of previous transactions. It is important to keep this record because it helps you to plan your operations. For instance, it might be better to go after customers owing you instead of borrowing, and incurring interest expense. Even if you have to borrow some funds, this record will help you to know for how long you will have to borrow because it will show when the customer is expected to pay back the debt.
If you have to meet an urgent cash requirement in month four, and you are expecting one of your customers to pay back his obligation in month five, you may have to borrow money for just one month and return the money the following month. This will prevent you from holding idle funds ( i.e. the customer paying you back the debt obligation and the borrowed funds) and you will be able to save some interest expense that would have been paid when you decide to borrow for longer terms.
Keeping this type of records helps you to know how long you should borrow. It also helps you to ascertain how much of your working capital is tied down with your customers. The ledger will also help you in the future in case you decide to give out to bonus or provide a trade discount to your loyal customers.
4. Cash Flow Statement
A cash flow statement is a financial statement that provides valuable information about a company’s cash flow and how changes in balance sheet accounts and income statement affect cash and cash equivalents. It has three sub-division namely Operating Activities, Financing Activities, and Investing Activities. The statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills and returns on probable investment. It also allows insights into the company’s future income needs.
In conclusion, in this article, we have identified and discussed four financial records that any business owner must maintain namely: Statement of Profit or Loss and Other Comprehensive Income, Statement of Financial Position (Balance Sheet), Debtors Receivables Ledger and Cash Flow Statement.
As a business owner navigating the current competitive business environment and focused on breaking even in the long run, it is important for you to ensure that you begin or continue to keep the records stated above as this will ensure that you enjoy the benefits we have discussed.