As a small business owner, you know that your time and resources are precious, and every penny counts. While you may be an expert in your industry, managing the finances of your business can be challenging, especially if you don't have a background in accounting or bookkeeping.
However, with the right tools, knowledge, and support, you can keep your business finances in check, and that's where bookkeeping comes in. Bookkeeping is a crucial component of small business management, as it allows you to track and analyze your financial transactions, make informed decisions, and keep your business on track.
This piece will walk you through the basics of bookkeeping, with a specific focus on small businesses in Kenya. It doesn't matter if you're just starting out or have been in business for a while, this article will provide you with the essential knowledge and skills you need to manage your finances effectively.
Basic Bookkeeping Concepts
Bookkeeping is the practice of systematically recording, organizing, and analyzing financial transactions to help you track the performance of your business. By accurately tracking your business’s financials, you can make informed decisions that will help your business grow. Keeping accurate records also provides a reference point when filing taxes and helps you to have an accurate picture of your business’s financial health.
It also allows you to make financial projections and forecast future plans. Ultimately, bookkeeping is an essential tool for successful business management and growth. With the help of bookkeeping services and software, you can easily and quickly keep track of your finances and gain insights into the performance of your business. Below are some of the benefits of bookkeeping;
Better cash flow management
Bookkeeping allows you to keep track of your cash flow, which is essential to the survival of any business. By monitoring your cash flow, you can make informed decisions on how to allocate your resources. This in turn can help you make sound economic decisions with regard to investments and other decisions. Bookkeeping provides you with the necessary data to make effective decisions, enabling you to assess risks accurately and adjust your goals accordingly.
Implementing good bookkeeping practices can help you understand where your money is going and how you can best manage it. With accurate financial records, you can better prepare for tax season and ensure that you are in compliance with all applicable laws. This can help save you time and money in the long run, as well as provide you with peace of mind that your finances are in order.
Accurate financial reporting
Bookkeeping helps you produce accurate financial reports, such as your balance sheet, income statement, and cash flow statement. These reports provide valuable insights into your business's financial health and can help you make informed decisions. Bookkeeping not only helps you stay organized and up-to-date on your finances, but it can also help you make the most of your business's potential.
By recording all transactions and categorizing them into different types of accounts, you can quickly and accurately access the financial information you need. Bookkeeping allows you to track trends over time so that you can identify changes in spending patterns, revenue, and overall profitability. This data can be invaluable when it comes to making long-term decisions about the future of your business.
Easier tax preparation
Bookkeeping simplifies the tax preparation process by ensuring that all financial transactions are accurately recorded and organized. This allows business owners to easily review and identify any differences, as well as deduct any expenses that can be claimed. Keeping accurate financial records can also save time and money by ensuring that there are no mistakes or discrepancies when it comes time to file taxes. With bookkeeping, you can review your finances quickly and easily, saving time when it comes to filing taxes. It also helps you to identify any potential deductions or credits that might be available to you.
Improved business planning
By keeping track of your financial transactions, you can identify trends, forecast future cash flow, and make informed business decisions. This can involve tracking your bank accounts, invoices, and other sources of income and expenses. You can also track the progress of projects, such as contracts with clients, and ensure that your business remains on track.
Whether it's an app or a spreadsheet, the key to successful financial management is having a system that works for you. The best tool will depend on your business's size and complexity, as well as your own preferences and habit. It's important to remain consistent and organized; whatever system you choose, make sure it's easy to use and understand.
Popular Bookkeeping Terms
To effectively manage your business finances, it's essential to understand the following basic bookkeeping terms and concepts:
Account payable
The money your business owes to suppliers or vendors for goods or services. Accounts Payable is money that has been incurred by your business and must be paid in a timely manner. Accounts Payable is an important concept in bookkeeping because it reflects the current financial obligations of the business. This concept must be tracked and managed properly in order to maintain the financial health of a business.
Late payments can have serious implications and can result in legal or financial repercussions if not managed appropriately. It is important to understand the terms of the agreement and to ensure that timely payments are being made. One way to do this is to create an accounts payable system that tracks when payments are due.
Account receivable
The money owed to your business by customers for goods or services. Account receivable is an asset, which means that it is a valuable resource your business can use. This money is typically collected a few days, weeks, or months after it has been billed. Account receivable is part of the bookkeeping process and helps you to keep track of the money you need to collect from customers.
It also helps you to identify any potential bad debt, which is money that customers are not likely to pay. Customers may forget to pay their bills, or they may no longer be in business. In either case, this money won't be collected and should be deducted from your accounts receivable. It is important to regularly review your accounts receivable to ensure that all customers are paying their bills on time. If any customer is behind in payments, you can follow up with them to collect the money that is owed.
Assets
Resources owned by your business that have monetary value, such as cash, inventory, or equipment. Assets are tracked in bookkeeping to ensure proper accounting for all the items in your possession. Keeping accurate records of the assets your business owns is essential for assessing the financial health of your company. Furthermore, it allows you to accurately assess the quality of your current investments and make informed decisions about potential investments. Assets are typically classified as either current or fixed, which helps to provide an overview of the liquidity and value of your business.
Liabilities
These are debts owed by your business to others, such as loans or accounts payable. These liabilities generally affect the balance sheet and must be managed carefully. There is no one-size-fits-all approach to managing liabilities, as different businesses have different needs for taking on and managing liabilities.
Bookkeepers must have a good understanding of the debts that the business has and must keep accurate records of any payments or changes in the liabilities of the business. It is also important to stay current on any changes in the law that may affect the liabilities of the business, as well as to make sure that all payments are made on time to avoid any penalties or fees.
Equity
The difference between your business's assets and liabilities. Equity is an important concept in bookkeeping because it represents the value of the business and how much money it has in reserve. Equity is calculated by subtracting liabilities from assets.
This is important to know when looking at financial statements, as it shows how much money the company has to invest, pay debts, and reinvest in the business.
It is also important to keep track of equity when making business decisions, as it can help determine if a particular project is feasible or if it would put the company into financial distress.
Double-entry bookkeeping
Double-entry bookkeeping is a bookkeeping method that records each transaction in two accounts, ensuring that debits and credits always balance. It is the most effective way to properly record financial information since it eliminates the risk of human error and helps the business maintain accurate financial records.
Double-entry bookkeeping requires two entries for every transaction – one associated with a credit and one with a debit. This ensures that each transaction is accurately recorded, with one entry increasing an asset and another entry reducing liability or equity.
Double-entry bookkeeping also adds an extra layer of protection to the accuracy of financial records, since all transactions must be balanced before they can be recorded, and any discrepancies must be reconciled.
The Importance of Record-keeping in Bookkeeping
Record keeping is a critical part of bookkeeping, and it involves keeping track of your financial transactions and organizing them in a way that makes it easy to analyze your business's financial performance. In some cases, you may need to keep track of every individual transaction, while in other cases, a summary of the transactions may be sufficient.
In either case, record keeping involves tracking all of your transactions, including income, expenses, assets, and liabilities. An important part of record-keeping involves understanding the specific rules and regulations that apply to your business.
Depending on the nature of your business, different laws and regulations may apply, so it is important to understand which ones are applicable and how to properly follow them.
There are several record-keeping tools that small businesses in Kenya can use to keep their financial records organized. These tools include:
Spreadsheet
Spreadsheets are a versatile and accessible record-keeping tool that many small businesses in Kenya use. They allow you to create a simple bookkeeping system by setting up columns for each account and entering transactions as they occur. Spreadsheets can be used to record sales, expenses, accounts payable, accounts receivable, and other financial transactions. Excel and Google Sheets are popular spreadsheet tools that small business owners can use.
These programs provide users with a range of features for creating complex financial models and tracking business performance. Excel, for example, allows users to create formulas, create charts, and graphs and set up macros for automating processes. It also has features for data validation and cell protection, allowing users to ensure the accuracy of their records. Google Sheets has similar features, including the ability to collaborate with other users in real time and customize the interface to suit individual needs.
Bookkeeping software
Bookkeeping software, also known as accounting software, is an excellent record-keeping tool for small businesses in Kenya. It automates the process of recording financial transactions, producing financial statements, and managing other bookkeeping tasks. Bookkeeping software like QuickBooks, Xero, and Wave Accounting can help small businesses in Kenya save time, reduce errors, and improve their overall bookkeeping practices.
This software can be used to track and manage expenses, create invoices, and generate financial reports. It also helps businesses develop budgets and maintain their financial records with convenience. Furthermore, these software solutions can be easily integrated with other business systems such as payroll and payment processing. This makes it easier for small businesses to manage multiple aspects of their operations.
Manual ledgers
Manual ledgers are traditional record-keeping tools that small businesses can use. They involve manually recording financial transactions in a physical ledger or journal. Although manual ledgers can be time-consuming and prone to errors, they can be an affordable option for small businesses that cannot afford bookkeeping software or prefer to keep things simple. Manual ledgers are easy to understand and can help business owners keep track of their finances with minimal effort.
Furthermore, manual ledgers remain popular with those who wish to keep their financial records secure, as physical documents can usually be stored safely in the business premises. Manual ledgers are also ideal for entrepreneurs who are just starting out and don’t have a lot of capital to invest in accounting software. As manual ledgers require very little upfront cost and can be easily maintained, they serve as a great option for small businesses that are just starting out.
Cloud-based storage
Cloud-based storage systems like Dropbox, Google Drive, and OneDrive can be an excellent tools for storing and organizing your financial records. They allow you to access your records from anywhere, collaborate with others, and ensure that your records are backed up in case of any disasters. Plus, they can help you keep track of your financial documents, so you always know where to find them when needed. Cloud-based storage systems can also be used to share files with other people, such as accountants or tax professionals. This way, you can ensure that all parties have the latest version of the documents and that all changes are tracked and documented.
Essential Financial Statements
Financial statements are an essential component of bookkeeping as they provide a snapshot of your business's financial health. They help you to analyze your business's performance, identify areas for improvement, and make informed financial decisions. There are three primary financial statements that small businesses in Kenya should produce:
Income statement
An income statement, also known as a profit and loss statement, provides an overview of your business's revenue, expenses, and net income or loss for a specific period. It helps you to analyze your business's profitability by subtracting your expenses from your revenue. You can use an income statement to identify areas where you can cut costs, increase revenue, or improve efficiency.
Balance sheet
A balance sheet provides a snapshot of your business's financial position at a specific point in time. It lists your assets, liabilities, and equity and helps you to determine your business's net worth. A balance sheet is useful for analyzing your business's liquidity, solvency, and financial health.
Cash flow statement
A cash flow statement provides an overview of your business's cash inflows and outflows for a specific period. It helps you to track your business's cash flow and identify areas where you may need to manage your cash more effectively. A cash flow statement is useful for analyzing your business's ability to generate cash, meet its financial obligations, and fund its operations.
Wrapping Up
Good bookkeeping practices help you to understand your business's financial health, make informed financial decisions, and comply with legal and tax requirements. By following the basic bookkeeping concepts and using the record-keeping tools and financial statements outlined in this article, you can improve your business's financial management and increase its chances of success.
Remember to keep accurate and up-to-date records, regularly review your financial statements, and seek professional help when necessary. Don’t also forget to choose a reliable payment provider to handle your payment needs and give your business the best payment processing service. If you don’t already have an account with IntaSend, you can create one here.
We hope this article has provided you with a helpful overview of bookkeeping basics for small businesses in Kenya. Good luck with your bookkeeping endeavors!
Cover Photo by RetroSupply on Unsplash
