By Emeka Anaeto
Last week we noted that irrespective of the peculiar nature of small & medium enterprise, SMEs, in terms of standard operating procedures, SOPs, most banks expect the small business owner to operate a semblance of formalization in their business approach, as the bases for advancing them business loans.
In the last edition we discussed budgets and forecast as one of such SOPs. In this edition we focus on accounting, often known as book keeping.
Book keeping is a process of recording the financial transactions of a business. It comprises sales record, cash payments received by the business, payments made by the business for goods and or services it received as well as other expenses made in the cause of business transactions.
Keeping good records for your business is a major requirement for bank loan. But essentially your business needs to keep standard financial record for the purpose of effective review of your business activities, manage the business effectively and comply with tax requirements.
There are two types of accounting methods; cash and accrual. A cash-based system records transaction at the time the cash was paid or received, regardless of when the sale transaction occurred. This system suits businesses that mainly rely on cash transactions. An accrual-based system records transactions when they occur, regardless of whether payment is received at the time or at a later stage. An accrual system is the one most commonly used.
You can record your transactions using either a manual or electronic system. A manual system involves entering your records into a ledger or notebook, available from a stationery shop or office supplier.
Electronic systems use software or web-based applications and generally have other functions allowing you to issue invoices, receipts, track stock, etc. You can also use spreadsheets to record your transactions.
In the weeks ahead we shall give more information on the various ways you can keep a standard financial record fit for bank loan purpose.