Why is it that one of the most uninteresting aspects, except to someone with an eye for figures, of any business is keeping financial and other records? Most entrepreneurs will be much more interested in chasing sales or doing a deal with a supplier but it is a fact of life that records of all kinds are an invaluable tool to anyone in business. History tells us a lot about the future and helps answer a lot of questions. This chapter explains what record keeping is and does. It includes:

• keeping your books
• watching your money
• having an audit
• making losses
• judging your business.

KEEPING YOUR BOOKS

Running a business in the 21st century entails keeping control of the daily deluge of paper that hits your office desk. Letters, enquiries, bills, tax demands, junk mail, invoices and mail shots are among the many bits of paper that have to be dealt with.

You must develop, as quickly as possible, a routine which suits you.

It could be as soon as you get to the office check the answer-phone for important messages. Then open the post and sort it into piles covering sales, buying and accounts. Make all the urgent telephone calls. Start the day’s work.

These priorities may change as the business grows but the important thing is to have a routine which ensures you cover all aspects of the business and nothing is forgotten. Don’t let your office work drift into chaos. It can be fatal.

Book-keeping

Accounting records, or book-keeping as it is more often known, are an essential part of this routine and you must set aside time to deal with your accounts data on a regular basis. Good records are needed for a number of reasons including proof of what is in your accounts and what is going on in your business. You will be required by the Inspector of Taxes and the Registrar of Companies to produce accurate accounts and the records you keep will justify the figures contained in them.

The records you keep will depend on the business but all businesses have to keep records of their cash and bank transactions. The main requirement of these records is to let you know how much cash or spending power you have at any one time.

Recording debtors and creditors

If your customers do not pay you when you sell them goods you will have to keep records of what people owe you and for how long. Similarly you may buy your stock or goods on credit so you will need to know how much you owe and by combining the records of monies in and monies out you should begin to forecast what money you will need and when. These records will also tell you what you have spent in total, what has come in and whether you are making a profit or a loss. The more sophisticated your records the more accurate will be your results but you should keep the records as simple as possible so that the information you get is what you want. It is no good hoping your business is successful. You must know.

If you have employees you must keep accurate records so that your duty as a tax collector for the government is properly fulfilled. This applies to VAT as well.

There may be many other records to keep. These include details of customers, suppliers and services you use. But all this takes time, a commodity which may be scarce when you start a new enterprise.

There is not sufficient space here to cover the many ways of book-keeping and you would be well advised to seek the help of an accountant to set you up with the simplest accounting procedure for your business. For some businesses there are ready made systems and, of course, you may well be computer literate and wish to use ready made bookkeeping packages.

Summary

• Keep your records simple.
• Remember the records must be accurate for the taxman and the VAT man.
• Be methodical.
• Control of your business will be difficult if your records are not adequate.

WATCHING YOUR MONEY

All companies can be considered purely in financial terms and it is in this way that effective control of what is happening is exercised. Once upon a time a businessman might have run his business with very few records and some even ‘on the back of a fag packet’.

Today everything is much more sophisticated and it is therefore easier to watch what is happening to your money. For example, the banks produce statements showing all your transactions with them. Not only is their system foolproof as far as the bankings and cheques paid out are concerned but also they may be entering transactions initiated or agreed by you but not generated by you directly. They may be:

• standing orders, which are instructions to the bank to pay bills on a certain date in the month or year
• direct debits, which means your supplier supplies his goods and takes his money out of your account with your permission
• bank charges or interest payments which are in accordance with your agreement with your bank.

You will appreciate from this that your records may be out of date until you have verified these amounts by checking against your own books. Equally you may have made payments to suppliers who, for some reason or another, have not paid your cheques in and so the bank has not yet reduced your balance with them.

It is therefore essential that you keep your own record of the exact amount you have in hand so that you do not breach your agreement with your bank and run into unauthorised overdraft problems.

You will also need to know how much money your customers owe for goods and services supplied to them but not yet paid for. This record is normally a sales ledger which will show, in respect of each customer, how many invoices you have sent them, how many they have paid for and therefore how many are still outstanding.

The same system can be used for the suppliers of goods and services to you.

With these records you now know how much you have, how much you owe and how much is owed to you. If you plot this you can forecast fairly accurately what your cash position is at any time and be able to manage your money so that you do not overspend. Bank managers will be impressed with you if you have that knowledge.

All these recording systems are designed to ensure that you do not run out of money. Remember that the VAT man, if you are registered, will need to be paid at some date in the future, as will the taxman if you have employees. You will also be required to pay the tax on your own income at a later date. These occurrences can all also be built into your cash planning. Finally with good records you will be better able to plan for the future. You will be able to assess:

• how much money is available for your advertising campaign
• how you will be able to afford some new equipment
• when you can have your new car.

Major projections and realistic estimates like these can only be done when the basic information is available. All good companies know their current financial situation.

Case study: Usha uses technology

Usha’s husband Kalim is a computer expert and he persuades Hannah and Usha to invest in a ready made accounts programme for the personal computer Usha has at home. This programme will record all the financial transactions which take place as well as keep a sales and purchase ledger. It will also generate statistics about the business which will be a useful tool to monitor how they are getting on. Usha agrees to put the computer in the office, at an agreed value, so that it is available for use at any time. She remembers to add it to their insurance.

HAVING AN AUDIT

It is not necessary for a small company to have an audit or appoint an auditor. The stringent rules applying to small companies have been relaxed in the last few years and now if your company:

• has a balance sheet total of not more than £1.4 million it may be able to take advantage of these new audit requirements. Small companies tend to have auditors who not only audit the accounts of the company but very often help the company to prepare them and assist with their book-keeping and tax matters. However, the auditor must not take part in the management of the company.

A company’s first auditor is appointed by the directors. He holds office until the general meeting at which the first accounts are laid before the members. From then on it is up to the members to re-appoint the existing auditor or elect a new one at each subsequent meeting.

However, a private company can pass a resolution not to lay its accounts before the members in general meeting. If this is the case the auditor has to be appointed or re-appointed at another meeting within 28 days of the accounts being sent to the members.

In addition a private company can pass a resolution dispensing with the need to appoint an auditor every year. In that case the auditor remains in office until removed by passing another resolution.

What does the auditor do?

The auditor has a number of functions. He or she should ensure that

• the company has kept proper accounting records
• the company’s accounts are in agreement with them
• the accounts comply with the requirements of the Companies Act 1985 (amended by the Companies Act 1989)
• the accounts give a true and fair view of the company’s affairs
• the information given in the directors’ report is consistent with the accounts.

When he or she is satisfied with this he gives a report to the members stating his or her opinion of all the above mentioned items.

Who can be an auditor?

Only certain people can be auditors. They must be members of a recognised supervisory body and must hold a current audit practising certificate. The five recognised bodies are:

• The Institute of Chartered Accountants in England and Wales
• The Institute of Chartered Accountants of Scotland
• The Institute of Chartered Accountants in Ireland
• The Chartered Association of Certified Accountants
• The Association of Authorised Public Accountants.

You must make sure the auditor of your company is registered. If you are in doubt contact his professional body.

It is for the directors of the company, providing it meets the criteria for opting out of an audit, to decide whether to do so. If they do not decide to opt out then the company must have an audit.

Can an auditor resign?

An auditor may resign in which case he or she must explain the reasons to the company and he or she may be removed by not re-appointing or passing the appropriate resolution. Note that he or she may have an entitlement to damages if the appointment is terminated by the company.

Case study: Harry takes the simple way out

The management company only has a few bills, mainly for repairs and maintenance, and Harry is now wondering whether it is necessary to have an audit done at all. He speaks to his advisers who agree that he does not. However, he must prepare a set of simple accounts to present to the members showing them the financial position and send a copy of the balance sheet to the Registrar of Companies. The company itself will become ‘dormant’ which basically means it has no significant accounting transactions during the period. The necessary resolution is passed.

MAKING LOSSES

Nobody forms a company with a view to making a loss. But it happens.

A company can make profits or losses in three ways:

• 1.Through ordinary trading.
• 2.By capital gains.
• 3.On investment income.

It is possible for a company to make a profit on accounts but make a loss for the purpose of calculating any tax payable. This may also apply the other way round. The method of calculating profits for corporation tax purposes is dealt with in Chapter 10.

Losses are basically the difference between income and expenditure where the expenditure exceeds the income for the period of the accounts. The accounts of a company must show the income and the expenditure which relate precisely to the period of the accounts.

Example

Accounts for the year 31 December 200X:

Income	£45,000
Expenditure	£55,000
Therefore loss is	£10,000

The losses amount to £10,000 but included in the figures for expenditure is £15,000 paid as a salary to a director. It is therefore arguable that the company made a profit of £5,000 before paying the director’s salary. This would be true if it was a sole trader business, but in a company directors’ salaries are a deduction from profits as directors are employees of the company. They cannot give their salary back.

It is possible for a company to make a loss on its trading activities but to make a profit on the sale of an asset, like a piece of land or equipment. Land and equipment are held for the long term and expenditure on them is not made for the current year only. However, when the asset is sold the precise profit or loss is crystallised in the current year. For both accounts and tax purposes all these losses and profits can be set off against one another.

Despite the above examples the object of being in business is to make a profit. Losses, however made, have to be paid for out of the capital in the business and will diminish the amount of money left to invest in future trading. Too many losses will starve the business of all its capital and the closure of the business will result.

Monitor your activities well and the problems caused by losses will be minimised.

JUDGING YOUR BUSINESS

The ability to know what is going on in your business cannot be emphasised enough. It enables you to plan your next moves using the experience of hindsight and gives you a clearer view of where the business is going.

This can be highlighted by producing regular, say monthly, figures. You should know your monthly sales figures and they should be broken down into products or types of sale. You can get from your books an analysis of what your expenditure is being spent on: wages, goods for resale, telephone, electricity and so on. All this information gradually builds a picture of what is happening. It shows up seasonal fluctuations. It shows what happens in the holiday month of August, when sales may be up if you sell ice cream or down if you sell overcoats. It shows what happens if the unexpected happens, like snow in August when overcoats are at a premium!

Eventually you may deem it necessary to produce a regular flow of information including a set of accounts each month which will keep you fully informed and enable you to forecast what will happen with more accuracy. You will be able to change direction with confidence if you think fit. You will be judging your business for yourself.

Armed with this information how much easier it will be to convince others that you know what you are talking about. You can visit your bank manager with your head held high knowing you can satisfy him or her with your answers. You are now in control of most events.

Case study: Dean wonders about his cash position

Although Dean has made good progress with his advertising campaign as many enquiries have come in, he is still a little worried about his cash position. The expense of the campaign is draining his resources as the orders generated are not for immediate delivery. He therefore feels he must limit the amount he is taking out of the company as salary. This will bolster the bank balance and he can always make up the amount later when business picks up.

ACTION POINTS AND REMINDERS

• 1.Remember to keep your office organised and tidy.
• 2.Establish the records you will keep.
• 3.Records of sales and purchases should be kept if both are on credit.
• 4.Initially keep only essential records and do not waste time on unnecessary information.
• 5.Regularly check on your cash position.
• 6.Will your company need an auditor?
• 7.If not who will prepare your accounts?
• 8.Have you got sufficient information to judge your business success?
• 9.Check to see if your company making a loss on any of its activities.