Many businesses fail because they do not prepare management accounts based on generally accepted accounting principles. Instead they run their business from bank statements.
Relying on your bank statements has many drawbacks.
- The manager has no record of his trade creditors which can be fatal. A list of creditors should be maintained and booked in the accounts.
- A record of loans, credit card balances , lease liabilities should be recorded to keep track on liabilities owing to external parties.
- A business which buys and sells goods, or manufactures goods, should book purchases and sales in order to calculate whether a profit is being earned on each. This requires the calculation of cost of sales in accordance with accounting principles. A business selling goods and services at a loss will soon run into trouble. Cost of sales during a period requires booking opening stock, plus purchases, plus direct costs such as production costs, if there is a manufacturing process, and deducting closing stock. This vital information is not available from the bank statements.
- Sales sold on credit need to be booked to ensure debtors are recorded and followed up if not paid within the credit terms.
Preparing proper accounting records is vital for successfully running your business.
There are numerous accounting packages available on the market, suitable for small businesses.
They are not expensive. Failure to operate a proper accounting system is likely to prove expensive as the business grows.