Everyone in business regardless whether it is a micro, small or medium business must keep records. Accurate record keeping is essential to the success of a business. It allows you to manage stock and raw materials, calculate and monitor profit and loss, plan for the future and also helps you in filing tax returns.
Every single transaction must be recorded daily – both purchases (cash out) and sales (cash in). The process of recording purchases and sales is called cash flow.
Cash flow is important for predicting how much money will be needed and when it will be needed. Cash flow also helps to predict cash surplus (profit) and plan investment. Cash flow is recorded in a book which is called a cash book.
How to keep a Cash Book:
The cash book shows the situation of the business at any given time. It includes all sales and all costs over time. It is important to record every single sale and expenditure. This allows the owner to track sales and expenditures month by month. In addition, knowing the average monthly sales means that one can plan for the future.
To work out the cash flow for the month, add up all the Cash In (Revenue) records for that month. Then add up all the Cash Out (Expenses) records for that month. Subtract the Cash Out total from the Cash In total to find out the balance (profit or loss).
To work out Cash balance, Cash Out is subtracted from Cash In (revenue) into the business.
Though it may reduce the speed of working and serving the customer, the use of a receipt book minimizes errors and keeps a hard copy of all past transactions carried out. The risk of not recording could be very high especially when the business has employees handling cash transactions. Cash is very sensitive and easy to steal.
An ideal receipt book should have at least two copies for each transaction, one for the customer and one for the business. Usually one copy remains in the book (book copy) while the other is given to the customer. The book copies are left in the receipt book until it is time for computing sales.
Record keeping to businesses with annual turnover of more than Sh14 million and above can easily keep their records and provide receipt using Electronic Fiscal Devices (EFDs).
TRA introduced the first phase of EFDs to VAT registered traders in 2010, later in June 2013 EFDs were also introduced to non VAT registered traders targeting 200,000 small and midsized traders who earns at least Sh14 million per annum.
Though majority businessmen refrain from using the EFDs but they are very important in helping you keep records for your business transactions particularly sales.
Sales on Credit
Selling on credit has the advantages of retaining royal customers or improving sales during low period. Caution has to be taken when selling on credit. Many businesses have collapsed due to non collection of debts.
It is important to assess the credit worthiness of the customer and put in place some control measures for the credit levels. It is advisable for the owner to limit credit to those long term customers that can be trusted.
the table below shows how to keep a record of sales on credit. It is a good practice to inform the customer when the payment must be done. It is also good to send reminders on or before the due date. This same information should be recorded and tracked in the records as shown in the table below. If the customer does not pay the balance by the agreed date, the owner/manager should pursue the client for payment.
Preparing Financial Reports
In the course of doing business, many transactions take place and the owner may not trace each and every activity in mind. With record keeping in place a summary could be prepared on what has been happening. From time to time, the owner of a business would want to know exactly what is happening in the business.
In accounting, there are set procedures and guidelines on how this is done. There are three main reports that could be prepared that provide a full picture of financial performance by a business. These reports are
- profit and loss statement
- balance sheet and
- cash flow statement as discussed below.
Preparing a Profit and Loss Statement.
Profit and loss statement is prepared to provide information on whether a profit or loss was made for that particular period. More often the owner calculates the profit or loss of her business.
When preparing the profit and loss statement the owner gets on the driver’s seat of the business. The Benefits are:
- Helps the owner to assess business performance and can therefore make good decisions
- Reference and comparison purpose
- Help in assessing one’s tax liability
- Sourcing funds
- Detection of fraud
- Budgeting for future needs
- Cost control
- Credit control
A profit and loss statement is prepared as follows:
Step 1: Computing sales
Sales are cash receipts (or promise to be paid later) for goods sold or services rendered to customers. Computation of sales should include all what was sold and is treated as gross income into the business. Where few items are involved and the selling price is fixed, sales could be determined by multiplying units sold to selling price. This could also be determined by adding all cash sales and credit sales.
Step 2: Calculation of Gross Profit
After computing sales the next item to estimate are the costs of those sales. For example if the business is that of selling solar panels, they must have been bought or made them by owner. The cost of getting these panels ready for sell is what is called cost of sales. These costs are deducted from sales to get Gross Profit.
Gross Profit = Sales – Cost of sales
Step 3: Calculation of expenses
In the course of doing business, the owner pays for services like transport, rent, electricity and wages. She may also withdraw money for own use at home. All these expenses drain cash or resources from the business and that the money never comes back. They are deducted from gross profit. The table below shows some workings.
Computation of Expenses Salaries/Wages
|Other Indirect costs| Tax, etc|||TZS|
Let us end here, next week we will discuss on how to prepare the balance sheet and cash flow statement.
For more detailed information on business management please visit the below web address http://enterpreneurs.or.tz/business-management/
Prepared by Veneranda Sumila
Tanzania Private Sector Foundation (TPSF)