Why Proper Accounting Systems Important for your Business?

Financial data and analysis are important for management to make effective decision-making. However, the data must be reliable, accurate and updated. Without a proper records system, entrepreneurs may ask for debts, which have been settled by debtors. Entrepreneurs may also continue to give credit to those black listed customers or non-trustworthy customers, or ‘rich but stingy’ debtors.

Ability to make right decision at the right time is an important ingredient for a business to be successful. This requires the availability of accurate and complete information. Management may issue bounce cheque because the cash book is not updated. Normal “wrong but tolerable” practice by SMEs is to call their bank every time they want to issue a cheque. Owner may also have to follow suppliers’ recommendation blindly because of no proper stock records. Furthermore, they may continue to spend on unnecessary expenses because their data is not reliable or the data is simply not available.

Credit facility is only given to trustworthy customers. It is important to get the supplier’s confidence in term of the business financial position and ability to pay debt on time. A proper record keeping and filling system will give confidence to suppliers to do business with. It shows that the business owner knows what is going on with his or her business and it is under control. Some business owners do not know the updated debtors balances. There are also cases where management contacted their debtors to know about the debts instead of them reminding their debtors.

Many business owners apply loan from banks, government agencies and funds provided by the government. However, there are complaints that it is not an easy process and also a time consuming process. One of the main reasons for this is the business owner fail to show their financial reports as required. Many business owners do not give their accounts managements a priority even though they agreed that it is important for their businesses. There are entrepreneurs who managed to get their business loan but later fail because of no proper accounts management system. Before approving any loan, loaners normally want to see, among other things:

• The financial statements for the past 3 years.
• Present and forecasted future cash flows.
• Active business bank accounts.

 

With a sound accounting system, business owners could easily supply all those required information immediately.

Accurate and updated records of profit and loss, cash flows, sales, purchases and expenses enable business owners to know the actual position of their businesses. Many business owners think that they are doing fine but the fact is that they are not. They merely measure their businesses based on the daily sales. Some business owners think sales are profits. They are happy because they have money in their pockets, and as a result, spending lavishly. Business is not only about having sales but also expenditures and other obligations. Those aspects have to be considered and that is why proper recording of transactions are important. Proper records will alert business owners and help them to wisely plan for their business developments. Efforts are made to maintain and strengthen their business strength while weaknesses are identified at early stage and rectify. This will make business to stay competitive even during its turbulence and hard time.

Sound accounting system also serves as an effective internal control. Here are few examples of how proper record keeping and accounting system help to prevent and detect irregularities in business.

Psychologically, good record keeping and filing system warns staffs that fraudulence activities will be easily detected. Businesses dealing with cash are exposed to risks related to insincere staffs.

Monthly bank reconciliation statement helps business to detect if there is any unauthorized issuance of cheque.

Proper maintenance of creditor ledgers could prevent double payments made

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to suppliers and avoid unnecessary dispute between both parties

Auditing process normally is a nightmare to accounting staffs. During auditors visit, sometimes accounting staffs have to work long hours and under pressure, answering all sorts of auditors’ questions. Staffs taking emergency leave and sick leave are normal during this period of time. Difficulty during auditing process occurred because supporting documentations for the prepared financial statements are not available and auditors’ required information not readily prepared. Having a proper record keeping and filling system can help to smoothing the auditing process. Improper records and documentations can lead to additional costs being incurred by the management. The company may need to incur “accounting-fix” cost on top of the audit fee. Other costs that can be very “costly” to the management are the delay in the issuance of auditor’s report and the modified audit report instead of clean audit report.