ACCOUNTING PRINCIPLES FOR YOUR BUSINESS

Principally it is of great importance when starting your business to understand some elementary book keeping or what we called basic accounting principle. Understanding these accounting principles doesn’t mean you have to be an accountant or even have to employ an experience accountant. But as the owner of a business, even if you have an experienced accountant, you yourself must know some of this accounting principle, so that you understand properly how cash flows into your business. Because as an owner of the business you are equipped with working knowledge of how accountants keep record of business transaction.

If your business makes a lot of money, it’s not just wise to just keep track of how your cash flows. You will need to also spend the money. And if proper records are not available, then there might be difficulties in settling your bills. For example, when the volume of cash flowing in is able to meet your bills, let say monthly bill, you don’t have much to think about other than if the bill is due for payment and you discover you don’t have enough cash to pay it. This implies that, by the time cash flows in, there are things already lined up to be done with it. If what you want to spend the money on remains undone, you won’t hesitate to find out from your accountant why the case remains so.

And when you have more money flowing in than going out, which is the normal case when your business is experiencing solid cash flow (and not necessarily making profit); that money flowing into your business does not mean your business is profitable. You must understand that firmly! Then if you do not have proper accounting records, you head on for some sort of opportunistic trouble. It is either invoices are not sent out on time or you don’t ask your client/customers to pay for their service. This could invariably lead to serious cash flow problem over a period of time if not checked.

Your account department must be solely under your control and supervision. But what if you are ignorant of basic accounting principles, the greater the problem you experience depends on your account department. I highlight some of these problems:

1. Diversion of Money

When you are not under pressure to spend money legitimately incoming cash can easily be diverted by your account staff or by your self - if you are not self disciplined. The solution to this particular problem is rigorous monitoring of account receivable. This will be effectively done when you have a sound reporting system in place - that let you know the amount you are expecting from what source and when due. Daily account monitoring is the best, so as to trace any discrepancy in record. As a business owner it is expected that you are directly involved or you delegate such function to someone you can trust.

Failure to do this can lead to a smart but dubious account staff diverting money due to your company/business into a private account.

2.  Multiple Payment

As a business owner, you must be very watchful of records - a clever account staff could steal money from company by raising voucher for one item twice. And in a rush of business activities, it is possible for you to approve payment for one item twice. These are possibilities and you must keep an eye on what you approved as the sole director of your company.

The solution to this problem is vigilance and patience. Be focused and concentrate your mind on all day-to-day activities, both financial activities and others. Keep your eyes wide open and be around your business.

3. IOU Manipulation

IOU simply stands for “I Owe You”. It is the paper form that you fill when taking money from the account departments to make purchases on behalf of the company. After the items are bought, the receipt of the purchase is returned to the account department and the IOU is retired. A clever accounts person could, however deliberately not return the IOU form to the company (owner) to destroy after it has being retired. He or she could use the IOU form in the future to get money from the company.

After sometime, the person who signed the IOU would be asked to come and clear it again. Unless the person has evidence that he had retired the IOU before, he will have to pay up the money. But if he has evidence that he had cleared it, the account person would be shown up as a crook. But in most cases, if the amount involved is heavy, the account person would have bolted away before you have the opportunity of discovering his sharp practice.

The solution to this problem is to educate all your staff who takes IOU to always insist that their IOU forms be returned to them when they are retiring it. They should never be satisfied with statement like “I can’t lay my hands on the IOU file now, go, I will destroy it for you” or “come back latter I am too busy” etc. Always insist that you are given the IOU form to destroy yourself. Failure to do that, such staff will have to be blamed.

4. Incompetent Accounts Staff

Having a brilliant account staff who fiddles with your money or having an incompetent staff that turn accounts upside down - which one is worse? Both of them have devastating impact on your accounting record and your business at large.

While the incompetent account staff may not have stolen your money, the fact that movement of money cannot be accurately traced places no value on his honesty and character. For this case, the solution is to ensure that staff working in your accounts departments all knows what they are doing. From experience, the fact that good hands are surrounded by those who don’t have enough experience with the hope that the experienced hand will supervise the inexperienced hand, doesn’t always work well. If the experienced hand, for one reason or the other takes off his eyes from what the inexperienced ones are entering into the account record books, they may have done enough damage within a short time, which is counterproductive. Continually train your staff in the account department and employ credible and experienced hand at all times.

5. Over-Invoicing

As a business owner, you make purchases when it comes to buying the things you need for your business, you are hedge in by many forces or pressure. Top on the list are the members of your staff. Since it’s practically impossible for you to go out and buy everything you need, you have to rely on some staff to buy some of these things for you. And for those who are dishonest, you could be paying higher than the cost of some of the things they buy for you.

Next on the list, are your suppliers. They are supposed to be happy that you are helping their own business go on by buying from them, but rather turn against you indirectly, by conniving with your own staff to inflate their invoices. The solution to this is to find a periodical check on prices of the things you use frequently. You can also use more than one staff to do the same job of finding out the price without each of them knowing.

For this issue you don’t have to lose your sleep worrying about invoices being inflated in your business. Just make sure that you do what you must do to keep it down to the barest minimum.

6. Poor Financial Security Check

You definitely use money since the money come in. Make sure all transactions are not done in your business office, but rather money should be paid in the bank. Though this is strictly suitable for some kind of business, but it is widely accepted that your client/customer paying for service can pay directly to the bank, and thereafter bring the teller back to you. Make sure your accounts staff are heavily warned of the consequences of their dubious activities if they choose to do so. At the time you employ them through to the period of interview open your eye to see and use unseeingly simple questions to locate their credibility and honestly level.

Using cheques book can be very good, but beware of security. Company cheques must not just be open cheques and must be signed not just by one director but may be two, depending on the sole purpose and ownership status of the business.

Finally, if you are well prepared, your chance of winning the war against those who want to reap where they do not sow in your business is as bright as your resolve to succeed as an efficient entrepreneur.

Continue to employ strategies that will drive them underground, hoping they stay there. It is a matter of continual watching and vigilance. Take heart, your business won’t go down because of their activities when from time to time, you catch them in the very act as you are sure to do if you do your homework well, make a scapegoat of the offender and hand them over to the law. At least you will keep them back for some time.

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