Every small business is required to keep bookkeeping
records to produce at the end of the financial year a set
of accounts to show the sales income, business expenses and
the net profit for tax purposes. Medium and larger
businesses employ accounts clerks, bookkeepers and
accountants to maintain the financial records and produce
regular accounting information.
Small businesses and in particular self employed business
have a choice in how the financial accounts are prepared
and produced. A small business may employ the services of a
bookkeeper to produce the accounts while another similar
business may keep a manual record of financial transactions
while a third option is to use a bookkeeping software
system.
There are several advantages and disadvantages to whichever
course of action a small business may take to produce the
financial accounts and at the outset it is better to make a
definite decision on which route to take. Financial
accounts, financial control over the business activities
and the knowledge of how well or badly the business is
performing is crucial to success in the business
environment.
The underlying necessity is that if the small business does
not take a decision on its financial accounting then at the
very least it must accumulate documents of prime
significance such as sales invoices, purchase invoices and
possibly bank records during the financial year and
assemble these into some sort of order after the end of the
financial year for tax purposes. Failing to keep financial
records often results in a succession of administrative
burdens and often also leads to financial penalties if
taxation deadlines are not met.
If the small business owner chooses not to go down the
route of using bookkeeping software or outsourcing the
financial function to a bookkeeper or accountant then
manual financial records must be kept. Producing an income
and expenditure account for the business using the prime
financial documents of business is not rocket science and
most businessmen capable of running and managing a business
have the skills required to producing the bookkeeping
records.
The major disadvantage of a small business keeping manual
records is that documents get lost which may result in
profits and taxes being over declared, fines and penalties
through inaccuracies and often when accounting is produced
in this way it is done at the end of the financial year
purely for tax purposes rather than as an essential tool of
the business and that reduces financial control within the
business during the financial year to a minimum and often
zero.
If a manual bookkeeping system is adopted then disciplined
recording of the financial information on a regular basis
should be enforced and regarded as an essential function
and not an administrative burden. The main purpose of
regular accounts being to both see and understand the
financial position of the business and take positive action
as required at the earliest opportunity to achieve a
satisfactory financial result.
Other alternatives include utilising bookkeeping software
which is effectively often a manual system in itself but
within definite parameters to produce the essential
information. A bookkeeper might be employed whether a
manual system is used or bookkeeping software adopted.
Using bookkeeping software has many advantages. First of
all any small business that has purchased bookkeeping
software is more likely to keep regular up to date accounts
than one that has not. And secondly the bookkeeping
software is likely to provide a fixed set of disciplines
and produce the type of records a small business requires
for both the preparation of regular financial statements
and the end of year tax returns.
Another major advantage of bookkeeping software is that
records tend to be less likely to be lost or mislaid; the
packages can be backed up as required but essential
financial performance can be improved by greater financial
control. All businesses work towards producing a
satisfactory bottom line and only by producing regular
financial statements can the business obtain the earliest
information to achieve that satisfactory performance.
Bookkeeping software comes in many different formats from
simple spreadsheets to more complex data based accounting
software. For a small business the bookkeeping software of
choice is often a simple system requiring limited
accounting knowledge but must also be a package that
produces the desired end result.
The worst bookkeeping software is a complex program
requiring prior accounting knowledge that the small
business either does not fully understand, cannot be
bothered or does not have the time to learn and having
tried the system then abandons it. Such a process just
causes frustration and time to start again with a different
solution.
Bookkeeping software in effect automates the manual keeping
of financial records. To get the most benefit from a
bookkeeping software package each small business should
prepare regular financial records to enhance and improve
financial control, take financial decisions and achieve the
desired bottom line result.
Bookkeeping can be outsourced to an accountant or
bookkeeper and there advantages in doing so. The financial
records are generally maintained in good order and regular
financial reports produced. If the small business has a
volume of paperwork that becomes a burden to process and
keep on top of then a bookkeeper may be the best solution.
Employing a bookkeeper becomes essential when the paperwork
burden reaches a stage when it distracts the small business
owner from getting on with the main task of operating the
business. A bookkeeper has to be paid and that cost should
be viewed as the cost not of producing the financial
records but as the amount to be paid to release the time of
the small business owner and also to produce the financial
statements on which action can be taken to improve
profitability.
A major disadvantage in using a bookkeeper is that the
small business owner may remove themselves from the
detailed records. By producing the accounts themselves the
small business owner sees every financial transaction at
least twice, once when the transaction is carried out and
again when it is entered into the financial records.
This second view of the accounts can be important, errors
in management judgement can be noted, mistakes and bad
practises become more apparent. Missed documents are much
more likely to be noticed if the small business owner
produces his own bookkeeping records than if the task is
carried out by a third party such as an accountant or
bookkeeper. Nobody knows the business as well as the small
business owner knows his own business.
The conclusion and decision each small business should take
is doing something. A manual bookkeeping system may suffice
but the business may be better served using bookkeeping
software to increase financial control and performance. If
the administrative burden of maintaining the paperwork
detracts the small business from its main operations then
an accountant or outsourced bookkeeping services is a
logical solution.
----------------------------------------------------
Terry Cartwright a qualified accountant at DIY Accounting
in the UK designs accounting software for limited companies
at http://www.diyaccounting.co.uk/companyaccounts.htm on
excel spreadsheets and self employed bookkeeping software
http://www.diyaccounting.co.uk/bookkeeping.htm
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