It's so easy to avoid being a dead loss

Keeping proper financial records is crucial for a small business - and as simple as writing a cheque, argues Peter Robinson
Of the hundreds of businesses which start up in any given year a large proportion are destined to fold - leaving their proprietors scratching their heads as to what went wrong.

Time and again the failure of a business can be shown to be due to poor financial control - or no control at all - and a lack of awareness by management of the true financial position.

Many self-employed people and proprietors of small businesses find themselves in trouble simply because they do not keep proper financial records.

Accountancy is for accountants, book-keeping is for book-keepers, but the recording of business transactions is for everyone in business. These should be entered in a standard analysed cash book, petty cash book and perhaps a day book.

The next stage is to transfer the totals of these columns to a report form. I call this a "Robinson Report", which I give to my clients at the end of each month.

It has most of the financial information on it needed to see how the business is performing. Most people in business - from the self-employed to small and medium-size businesses - will be able to work out from this report what their current cash position is. They will be able to see how much they owe and how much is owed to them and for how long. They will also see what profit or loss the business has produced, the percentage of gross profit (GP) and net profit (NP) on turnover as well as other important information.

All this information can be gathered by people in business who have not had any previous book-keeping or accountancy experience whatsoever. If a person can write out a cheque they can enter this amount in the appropriate column in their cash book.

If we examine this report at the end of each month, we will be able to see how the business is performing. First we look at the turnover and GP. Is there sufficient GP generated to pay all the expenses? Is the percentage on turnover high enough, and how does it compare with similar businesses? Next we can examine the expenses and see if they can be reduced. Then we can look at the net profit or loss. If it is a profit, is it enough for the proprietor to make a decent living? If it is a loss - what are the reasons?

Owners or managers should be encouraged to make out this report (at the end of every month) and not wait for their accountant to draw up a profit- and-loss account and balance sheet at the end of the trading year. They need to know what is going on now, not what took place 12 months ago.

The owner of a small business who spends a little time doing his/her own accounts (probably not more than a couple of hours a week) will know much more about the business than if it is left to an accountant.

And don't forget, it is now compulsory to keep proper financial records under the new self-assessment tax scheme. These reports will provide most, if not all, of the information required to file the new tax return. And a report like this would be very useful to bank managers and others who have a vested interest in their client. It could be a condition of a loan or an overdraft facility that the bank receives such a document at the end of each month. Also, if an owner wishes to sell a business, these reports will be invaluable as they will show the true trading results far better than profit-and-loss accounts and balance sheets, which are wide open to creative accountancy.

The main theme of this article is to show what an overwhelming advantage it is for owners of small businesses to be fully aware of their financial state at all times. After all, they are in business for only one reason - to make money.

Peter Robinson advises small firms on setting-up and book-keeping. His booklet 'Who Needs An Accountant?' is published by Peter Robinson (137 Summervale House, Oldham, Lancs, OL9 6JB) at pounds 4.95.