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  • The Importance of Accounting in your Day-to-Day Business

The Importance of Accounting in your Day-to-Day Business

05 December 2016

By Phillip Joubert, Professional Accountant (S.A.), Manager – Business Services and Advisory

The South African economic and business environment has seen major developments and constant change over the last few years. A snap decision by our government can improve or destroy a business in the blink of an eye. As such, the future of South African economic growth, the creation of jobs for a skilled and empowered workforce is placed firmly in the hands of the Small to Medium Enterprise (SME) market. “According to The Global Entrepreneurship Monitor’s Annual Survey on Global Entrepreneurship (2011), South Africa had an estimated 5,579,767 small business owners, of which nearly 80% were retailers while more than 20% were service providers. These businesses accounted for almost 12 million jobs in the country.” (JTB Consulting, 2016).

With so much at stake, it is quite disheartening to hear that in May 2013, according to Rob Davies, South African Minister for Trade and Industry, that five out of seven start-up and SME companies fail within their first year operations. With so many reasons given as to why a company would fail, with everything from no business plans to the inability of a company to obtain funding thrown in, one reason that is hardly touched on is the financial information available for a company to use in their decision making. That does not mean that having a good accounting and reporting system will save you from failure, but it may just show you a dangerous trend before it is too late. You can make the relevant decisions to obtain more funding, rethink your marketing and advertising campaigns, even get in someone to help you with a formal business plan or in a worst case scenario, follow the right debt management process through a business rescue practitioner.

To give an example, John has been operating his new laundry service for the last nine months. In this time, he has entered into agreements with two hospitals and three hotels to wash and press all the sheeting used by them. Things have been going well, and due to the new method developed by John, he can offer this service at 60% less than his cheapest competitor. All is well with John and his laundry service, until he needs to pay his suppliers and staff. What happened? Why is there no money in the bank? John is facing a similar dilemma faced by numerous SME’s, lack of cash. But, John may argue that the company is profitable. What could have gone wrong?

John, like most entrepreneurs, do not have formal finance qualifications, they have a great idea or product that they use to start their business. They market the product, spend more time and money on the development of the product, sell the product at a reasonable price. In short, an entrepreneur is focused on growing their business to the best of their abilities.

In the past, or rather, traditionally, these companies would engage with an auditor, not just for statutory audit services, but for general business advice. Maybe the auditor would have a small accounting department that would annually prepare the accounting records that need to be audited, and the company would make its next decision based on the results of the previous reported information resulting in old, historical, and almost useless information for the day to day operations and decision making of a company, and making use of such old information, could harm the business in many ways.

That being said, there are very few things as important as the results of a good audit that has been performed. It can give assurance to an outside investor that this company they want to invest in, applies good reporting and financial governance principles and the information can be used to study historical trends and to some extent, maybe predict the future.

With all the constant changes in the business environment, a company can no longer rely on old, outdated and historical information to make active business decisions. The company must, in order to survive, have access to real time, accurate information. John might then have noticed that his biggest hotel customer, has not settled their accounts for the last four months, and that is why he cannot pay his staff and suppliers, and with all the technological changes taking place, the ability to have real-time information has become a reality and long gone are the days that you have to wait weeks for your bank statements to be sent to you via the postal service, and then wait for the bookkeeper or accountant to capture the data, only to have information available 3 months after the fact that is outdated by this time. Various accounting packages can now communicate directly with your online banking profile, extract the data required and import it, without the chance of human error, directly into the accounting system.

Accounting software has the ability to invoice a client and send him the invoice directly from the package and at the same time, ask the client, by means of a button on the invoice, if s/he would like to settle the invoice now. And, one of my favourite features, can automatically remind your customers that their account is overdue, which may save costs of debt collectors. Other features that are included in these packages are geared more for the businessman to take snap decisions, calculate ratios relevant to the business and even do budgets and projections (all of which is assuming that the company is run on good corporate governance principles).

A decent accounting system and various reporting packages are all good and well, but at the same time, you need someone that can input the correct data to obtain the information you need from it. Garbage in would result in garbage out. A good accountant or strong bookkeeper that keeps abreast of the changes is one of the most valuable tools in any organisation. And at the same time, you can have amazing information provided to you, but as a business owner, you need to be able to understand what you are reading. Only then will you be able to take the information given and make a decision based on real time valuable data.

Your accountant or bookkeeper will also be able to train you on how to analyse and correctly interpret the data that you are looking at. A ledger full of invoice numbers won’t help John to cut down on the spending that he is doing, or it may point him in the wrong direction completely, and that could have disastrous results for the business. Your accountant or bookkeeper will be able to guide you through the vast volume of information that is suddenly available at your fingertips, and should be able to assist you in establishing policies, procedures and decent governance principles that are there to help you and your business to not just be sustainable in the short run, but have a decent impact on the long term future.

Unfortunately for many SME’s, a good accountant or very strong bookkeeper comes at a price, however, the benefits they will bring to your business is invaluable. And if you are still concerned about cost, and you can only afford the minimum, various Accounting and Advisory firms have the ability to assist you at a reasonable cost that will truly be an investment in your company, your staff and the economy’s future.

Accounting and bookkeeping has long since evolved away from a cost, a data capture and statutory reporting arm of any business, and should be an important part of your day to day decision making, so that you can focus on your business, to grow your business, expand into new markets, to employ more staff, and empower them to take part, an active economic part, of South Africa’s future. Money truly does make the world go round.

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