Why record-keeping important for a business? Just like you, Arnold Zimba, who runs a printing and stationery shop in Lusaka also wonders why. I discuss the importance of record-keeping to a business in today’s podcast. Joining me to discuss this topic is Mwaba Ngenda. She is a personal finance educator and banker at Standard Chartered Bank. She is also a recipient of the 2019 Bank of Zambia Governors Award for individual contribution to financial education in Zambia.
What is record keeping in Business?
Recordkeeping or bookkeeping is the process of taking note of any financial transactions that occur within your business. It’s simply keeping track of all business transactions that occur as you run your business. Records of receipts and salaries that you’re paying, as well as records of your taxes, and all other regulatory requirements.
What records should you keep?
Starting with receipts, for everything that your payout, you should get a receipt. For every service that you pay for, get a receipt. Every person that you pay has an agreement, let them sign to say they’ve received X amount of money from you on such and such a day and for what? This shows what it is that you have paid them for.
Apart from receipts, you could also keep Invoices, records of salaries that you’ve paid out. It is important to write down what it is you payout as staff salaries. If you’ve decided to pay your employees a bonus, write it down as well.
Several business owners say I don’t keep records, but I’ve got a great mind! What good record-keeping practices would you encourage business owners to adopt for their business?
For people that think you will remember, there’s a saying that goes, “the shortest pencil is longer than your memory”. So even if your pencil is 2 centimeters long, just get a book, write it down. Nowadays life has become so easy such that they’re many different apps that are available for you as a small business owner to use.
You can also use a simple regular hardcover book to record your business transactions. You can maintain one book for your cash sales and another for your credit sales. You could also have a book for payments or expenses that you’re making off the business and one for salaries.
Your records say a lot about your business and so you should review your transactions from time to time. You’ll get information such as where your business is at, and then in the long run this will help you in terms of the growth of the business. So simple cashbooks and expense book, an invoice book, clear receipt book, and credit sales, order books are important to have.
How long do you think business records should be kept for?
It depends on the type of record. So for instance, for your cash sales, you want to have all your cash sales from January to December, cause then you’re going to wrap up the year. Know what your business has performed like in that past year, and then move on or plan for the next year.
For small businesses those that are under the turnover tax. It is an actual legal requirement that they keep records for a minimum of six years. It’s good to know that there are penalties for not keeping these records. The tax authorities might not be visiting you right now, but they might come in the future and they could request to see your records from as far back as when your business started, or at least see the past six years. So it’s very important to keep that in mind.
For a small business, it may seem difficult, especially if you are writing your transactions in hardcover books. But you could move to paperless, have systems. Nowadays they’re many software’s that are available for small businesses to use in record keeping.
Why Record Keeping is Important? Drawing benefit and value from your record-keeping
Record keeping is not merely about legal requirements or just the habit of keeping records for the sake of it. Recordkeeping is also about drawing benefit and value in terms of understanding your business now and also in the future. So let’s take a look at the importance of record-keeping in three major areas;
- Understanding your customers
- understanding your profitability
- Separating your personal finances from your business
Let’s start with understanding your customer. What is the value of keeping records in terms of understanding your customers?
If your business is in the startup phase, you are still trying to see what products or services are going to work and for which clientele and your client segmentation.
Keeping records will enable you to tell which of your services sell faster or which one people more eager to pay for. Which of your product sell quicker? For instance, if you have a store or shop, which one of your products has stayed for a long time after you’ve stocked up that product?
As a result of this insight, you will be able to make good business strategies such as, “buying 60% of this 40% of this because this gives me more”. You will also get to know what income on a day to day basis or more cash comes from a certain product or service. This helps you understand what your clients’ needs are. Because at the end of the day you are in business to bring a solution to your clients or your customers. So you provide a better solution once you understand what it is that your clients need.
How does good record keeping help a business to understand its profitability? And why is that very important?
For every business, there are costs to the product or service you are offering that you need to take into account before you calculate your profit. For example, if you own a store, maybe a clothing line, when you keep accurate records, you’re able to tell how much your order price was and what your selling price is. And don’t forget the cost for you to deliver that dress or that suit to your client. And then from then, you’re able to tell how much profit you have made.
Some would think it’s easy to calculate profit, if you bought a product at X amount and you sell the product at Y amount, then your profit is X minus Y. But you’ll find that there are other hidden costs that you may not have taken into account. Maybe you had to take the dress to the laundry, have it well done and presentable or you had to deliver the dress. All these are costs that affect the profitability of your product.
And once you keep accurate records of your costs and business expenses you are going to accurately price your product. This will allow you to understand what your profit is. So it’s essential to keep every record.
Finally, how does recordkeeping help you to separate your finances from your business finances and for you to be able to distinguish the two?
It is important from the onset to separate yourself from the business and to separate your costs from your business costs. So when you keep records for your business, even the day that you take away a hundred Kwacha from your business, you keep a record of that hundred Kwacha knowing that you owe your business money.
For small businesses, especially when you are starting, you will find that you put in a lot of your own money before the business can start to thrive. It’s important to record all the amounts you lend the business during this phase. It’s also important to pay yourself a salary every month or every quarter from my business.
Thank you so much as we conclude what is your final word to Arnold Zimba on the importance of keeping good business records.
- Not to be reactive, but to be proactive with your record management for your business. For the long term, and you want to scale up your business too.
- You must begin to practice this now early on in your business. Keep records of every financial transaction.
- Separate your business finances from your finances
- Clearly define what your business expenses or your income for the business are