I’m not talking hypothetically when I say poor accounting is expensive. Nor am I talking as an accountant with a vested interest in selling you my expertise. I’m talking as a business owner who, with the best of intentions, ended up with poor accounting for many years, and suffered the consequences.
Poor accounting will cause you many a sleepless night, before it finally kills your business if you don’t get it under control.
This is my story – how I got there, the struggle, how I overcame it, and the lessons I learned along the way. I’ll even share some tips on what to do if you can’t afford an accountant.
How did I get there?
In 2009, when we set up SCG Audit, we created a small bookkeeping service. I then handed over responsibility for our accounting to the bookkeeping team.
Looking back now, I realize that:
- The handover was too casual – I asked the accounting officer to take care of our accounting. I didn’t discuss the details, I assumed they could simply take care of it.
- I assumed that our business at the time was simple. We mostly paid expenses in cash and issued a few invoices a month. On the assumption that the transactions were simple, I did not discuss processes and accounting treatments.
- I didn’t realize that the external clients that they served would be their priority. That meant office accounting did not get the necessary attention and was done only when they could find the time.
- I didn’t consider staff turnover. Things changed hands a couple of times, which in turn meant the accounts got murkier.
I subsequently discovered a year in that the accounts were a mess. Whilst I knew what to do, my focus at the startup stage was to get clients, execute work and address the many things that you must to establish a business. All I could do was review with the accounting officer and make suggestions on what to do.
In the end, nothing much happened. The accounting officer and the assistant we employed later still had ongoing client work and deadlines, office backlog and ongoing transactions, so office accounting naturally only received attention after client work had been addressed.
The consequences of poor accounting
The immediate consequences were as follows:
- We couldn’t determine our revenues and expenses, which meant we couldn’t tell if we were making profits or not.
- When we drew up plans, we couldn’t reliably tell how we were performing against the plan.
- We couldn’t file taxes. Now this is a real problem because you incur penalties and run the risk of having to deal with the distractions of a tax audit.
- We couldn’t be sure that our debtors and liabilities were accurate.
All the above meant we couldn’t tell whether we were making a profit or generating adequate cash.
We also couldn’t plan properly and reliably monitor how we were doing. The lack of information was hampering our ability to grow. The problem only got worse and more frustrating as each year passed without resolution.
Getting to grips with the problem
Three years into the journey, with the situation not improving and frustration growing, we had to act. To get to grips with the problem, we took the following actions:
- We created an accounting unit to take care of the office accounts.
- We recruited an accountant to take care of the office accounts. We also hired an intern to work with her.
- We always had good underlying documentation – vouchers, invoices and other documents. We organized the documentation.
I would like to report that with the steps taken above we easily overcame the problem. Unfortunately, we did not. Even for a dedicated accounting team, backlogged accounting poses a challenge. We had to answer the following:
- How do you deal with both the backlog and ongoing transactions, so that you are not perpetually backlogged?
- How do you handle missing information or lack of information relating to a transaction?
Since assets and liabilities reflect the cumulative effect of previous transactions, you can only get a clear picture when the backlog is cleared. Until then your asset and liability positions will not be entirely accurate.
It took us about four (4) years, the recruitment of a senior manager to supervise finance, and the changing of our software to Xero to get accounting information we could trust.
And as we put the accounts together we found that:
- We had surprises – we had not done as well as we assumed.
- We had not billed for some of the jobs we had carried out.
- We had billed but not collected on some of the invoices we had issued.
Lessons we learnt from tackling our backlog
- You must dedicate a separate team of accounting personnel to the backlog and a separate team to ongoing transactions.
- You must establish basic processes for capturing and processing accounting transactions. The entrepreneur needs to be disciplined, and he must ensure that he provides information to the accounting team on any deal and transaction he enters.
- You must have good documentation. The work is a little easier with good documentation; without, it’s much harder.
- Most of the bookkeepers and accountants that an SME can afford do not have the expertise to deal with a backlog situation. We hired a senior manager for finance and administration to supervise the project and I dedicated time to support the effort.
- Clearing a backlog to receive reliable accounting information is an expensive venture. It is much cheaper to develop the accounting system and maintain the accounts on an ongoing basis.
What to do if you can’t afford an accountant or bookkeeper?
For many startup Ghanaian entrepreneurs and businesses, accounting is the last thing on the mind.
The priority is to find resource, get clients and generate cash flow. That is natural and that was my priority as well. Hopefully, my story will show that without the necessary attention, accounting can become problematic.
Many entrepreneurs do not know or understand accounting, and many genuinely believe they cannot afford an accountant. The cost of having an adequate accounting system is a necessary cost of running a business.
If at startup you really can’t afford an accountant or a bookkeeper, here are some steps you can take:
- You must talk to an accountant to understand the records you must keep, the taxes that will affect you, how to handle them and your options, considering your circumstances, for getting reasonable accounting.
- Be disciplined. Keep good underlying records. See our blog on documentation to keep.
- Discuss options for keeping your accounts. Some low-cost options you have are:
- Outsourced bookkeeping. Enter a contract with a bookkeeping or accounting firm so that periodically – monthly or quarterly – you submit your records to the firm to maintain your account. The advantage of this arrangement is you have access to accounting expertise.
- Hire an accounting person inhouse. I would recommend that you use an accountant to help you recruit. The accountant will help you determine whether the person can do the job.
- Work collaboratively with an accountant using cloud accounting software like Xero. A cloud accounting software such as Xero is designed to be used by the layman with the support of an accountant. You can enter a variety of arrangements with different costs.
Some of the arrangements you could enter are:
- Get a Xero expert to set up your accounts and train you and your staff to use the platform, not just for accounting, but for business functions such as raising invoices, sending statements, keeping your fixed asset records and a host of other functionalities. After the training, do your own accounting. Your cost is a one-off fee to cover setup and training.
- Enter an arrangement with the accountant to review your files, generate reports and help you understand them. This is an add-on service and will cost a bit more than if you did everything yourself. In addition to the setup fee, you will pay a recurring fee which could be monthly, quarterly or yearly depending on the agreement. This option gives you access to an accountant on an ongoing basis.
Inadequate accounting is terribly expensive because without accurate financial information you cannot grow your business.
If you’re just getting started, you have options for dealing with accounting. Please explore those options and take steps to avoid repeating my situation.
Written by George Katako
George is the Managing Partner of SCG. His area of interest is technology, strategy and financial management. He is keen to bring the transformative power of IT to the Ghanaian SME.