Start With Simple Business Planning And Bookkeeping For Success
Estimated reading time: 8 Min
Why take business planning and bookkeeping seriously? Most countries require a statement of the business results, and both add essential value to your business.
Take Them Both Seriously From the Beginning
You’ll be making many decisions over time.
Your business plan and financial records are essential for making well-informed decisions.
Business Planning provides you with a blueprint for running and measuring progress with your new business.
Bookkeeping provides the information needed to measure the financial progress of your business.
Both require good record-keeping and discipline.
Business Planning And Budgeting
You know the ageless question: “Which comes first, the chicken or the egg?”
It’s a bit like this with aspects of business planning, especially for a startup.
From the beginning, most entrepreneurs are dependent on research, at least as much as on prior experience.
So some business planning results in educated guesses, the emphasis being on “educated.”
It’s essential to start somewhere!
Market Research
There are many possible parts to market research.
Key parts include:
- Understand the potential customer’s requirements.
- Understand the competition.
- Understand risks (internal and external risk factors);
- Development of operational strategies and tactics;
- Financials: market size, pricing, potential sales, costs, budgeting, etc.
Stating the obvious, perhaps (but often missed, especially by solo entrepreneurs with start-up businesses), is a projection of potential outgoings and income.
Financial Resources
Current resources available need to be understood and included in the mix.
A formalised budget is ideally used to show an expected profit (or loss) and potential cash flow over time.
Many businesses fail simply because cash flow isn’t considered when starting up and they simply run out of cash.
Usually, this is because income doesn’t increase fast enough to cover outgoing cash.
This may not be the end of the business if a plan highlights the challenge and credit is approved beforehand.
However much market research is carried out, many of the projections are based on educated guesses.
Here I emphasise the word educated.
Until the planner has prior experience with the specific marketplace, there will be some guesswork and assumptions.
It’s important to be fully aware of the difference between areas where facts are stated and assumptions made!
Value Of Experience
The best (most useful) operational and financial plans are developed after a little experience.
After a year or two of financial data.
After a year or two of operational experience.
Then they can be based on a semblance of reality largely fuelled by the bookkeeping records.
However, anybody with an idea, for it to fly, needs to get started and build experience as they go. This is of course where consulting with an expert can pay dividends.
Plans should never be thought of as a fixed recipe for success.
Progress against plans needs to be regularly reviewed, adaptations made, and actions taken as appropriate.
The financial business plan (often projected over three years) reflects targets for the business that reflect operational plans.
Operational plans identify the strategies and tactics (activities) that the business will implement over time in order to deliver the financial outcomes of the business.
One without the other makes no sense.
An operational (or working) budget is typically set up with tighter targets than shown in the potential figures, but must that still show a profit at some time in the future.
Software For Bookkeeping
“What gets measured gets managed,”
Peter Drucker
That’s a very reasonable assertion and what is even more certain is that what doesn’t get measured is far less likely to get managed well.
Many planners, especially first-time entrepreneurs, use spreadsheets both for planning and tracking progress but nowadays there are many reasonable cost-effective bookkeeping software products that include financial planning, budgeting and reporting modules.
The thing is that budgeting is a great place to start with financial planning.
The amount of thought that needs to go into a reasonable budget can be used to set up an adequate bookkeeping system.
Choosing the right software for your jurisdiction should also make it relatively easy to meet statutory requirements when they rear their head.
Financial Records
Good financial record-keeping is essential for two primary reasons.
As already stated, whether you are self-employed, or running an incorporated business you need to be able to keep the taxman happy.
The books also give you the information you need to manage effectively.
Good Bookkeeping
Not keeping financial records or maintaining financial books is a bit like filling up the fuel tank of your car from a supply that has no gauge, and no odometer or fuel gauge in the car.
You can’t be sure how much fuel you pumped nor (assuming that you paid for the fuel) that you paid a reasonable amount. In addition, such a situation would mean you can’t confidently manage a journey in the car for any more than a short distance.
Good bookkeeping provides a financial gauge via which you can confidently manage your business.
Bookkeeping skills help you keep tabs on what your business is paying for and how much.
The books also tell you what your business is earning, and where from and help you to figure out any profit or loss.
You may have noticed I refer to books (plural).
This is because traditionally, business financial records were recorded in several separate books called “ledgers” or “accounts”.
There were a minimum of three, one for each of income and expenditure, and a third used to summarise (to show profit or loss).
In addition to working out profit and loss figures, a skilled financier or accountant may use various other algorithms to evaluate the health of a business.
Single or Double Entry Bookkeeping
You may well be familiar with personal budgeting methods that reflect what is known as a Single Entry.
However, for business purposes, a Double Entry system is used.
The double entry system is the best way to produce auditable books from which accounting and tax reports can be produced.
It is also used to produce periodic management reports designed to check for errors and keep track of progress.
Of course, different countries have slightly different accounting rules and different tax and VAT regimes; so accounting systems and software cannot always be used across borders.
Care should be taken when choosing software to make sure it is suitable for the jurisdiction of the business.
Simple Record Keeping
An essential part of the bookkeeping process is to keep and organise all written materials such as incoming invoices and receipts and outgoing invoices, receipts, payment records etc.
When updating the books, information entered is inevitably taken from a written record of some kind (invoices, receipts, payment records etc).
An essential discipline is to keep all manual records organised well (invoices, receipts, payments made etc).
A simple method for cross-referencing written materials to records in the books can save an enormous amount of time later.
Obviously, where you produce your own invoices for sales and receipts for payment received, you have complete control over the numbering systems used.
If you use an electronic bookkeeping system, the numbering is normally automatic.
However, paperwork received from others such as purchase invoices, and receipts for payments made will have a completely different (third party) referencing system and may not be so easily cross-referenced to your bookkeeping system by entering the references manually.
Most electronic bookkeeping systems allow you to set up a field for recording your own cross-reference.
This isn’t essential but I’ve found it’s helped with tracing errors, or proofs on many occasions.
Personally, I keep this as simple as possible using:
- A prefix of “I” or “O” defines if the transaction is Incoming or Outgoing.
- The date (numerical year and month) that I estimate the transaction will affect the accounts, written backwards for ease of sorting such as 202201;
- A three-digit number starting at 001 for a specific month ranging up to 999 (which allows for up to 999 “I” transactions and 99 “O” transactions each day.
For example, the first income recorded for January 2022 has a cross-reference of “I-202201-001”.
I manually add the cross-reference to each manual record in addition to any electronic record of that transaction.
I recommend setting up two separate ring binders, one for sales and the other for purchases with the paperwork stored as close to date order as possible.
If you want the system to work well, keep it as simple as possible, but no simpler (Albert Einstein).
Take Auditing Seriously From The Beginning
Why take auditing seriously?
Just like the value of bookkeeping, auditing records are useful for the same two areas; both to meet tax requirements and for the management of the business.
Auditing is about checking that the record-keeping is accurate.
This simply means double-checking that entries to the bookkeeping system are complete and accurate.
Whenever possible it’s best to check accuracy using the services of a second person.
One way is to employ a separate bookkeeper or accountant for perhaps a few hours each month to handle this.
Obviously, over time, as a business grows more time might be needed for this role.
How often should I Update The Books?
Keeping on top of bookkeeping, and especially VAT begs the question, how often should a small business work on its bookkeeping and accounting records?
In my experience, it is best to handle it little and often.
Perhaps once per week or even a little each day.
I find that leaving this organising to once a month is both inefficient and leads to making more errors.
Five or ten minutes each day can be a lot easier to find than half a day of headache at the end of each month.
Recommendation
A basic understanding of bookkeeping principles and accounts is essential to keep tabs on the financial position of a business.
They’re part of the first of the four cornerstones of a business online.
Accounting is a specialist function and the business manager needs to know enough to be able to understand an accountant’s communications… especially when planning and tracking progress.
Although many countries nowadays set similar standards for recording financials, there are local variations that the business owner must be aware of in order to meet statutory requirements.
Setting up a solid foundation for business planning and bookkeeping right from the start of a new business will pay dividends as your business progresses.
If you have any questions, please, just ask them …
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😉
Richard
