ONE of the most commonly misunderstood concepts of running a business especially among the Small and Medium Enterprises (SMEs) is knowing whether the business is making a profit or not.
In a business undertaking, it is unlikely for a business to continue operating if it is not registering profits especially in the long-run.
This is so because business continuity is on the understanding that it shall reward profits for business owners unless it is founded on charity.
One of the obvious reasons as to why a business is set up by a person or group of persons, is with a view that the business will start awarding them with profits to enable them improve their livelihoods.
For this reason, it is important that a business set up maintains proper financial records to enable it know whether it is making profits or not.
It is advisable for a business to maintain preliminary records even if it maybe operating without a full time bookkeeper or accountant.
Accounting records in this case may range from cash receipts; invoices, credit notes, orders and any other document pertaining to the day to day business transactions to enable the consultant prepare financial records when called upon to do so.
I have witnessed other entrepreneurs who become satisfied with their businesses because they have enough stocks and that the business account is healthy and yet have accumulated enough business obligations.
These obligations are, unfortunately, such that if called upon to settle them, the business will remain with no money and stocks to talk about.
Actually, others have gone ahead to withdraw the money for personal use without analysing whether the money belongs to the business or not.
My young brother who is based in Livingstone was complaining to me that whenever the time for paying rentals for his small business approaches, he is forced to dig deep into his pockets to settle rentals.
The safest way any business can keep on sustaining itself is through the money it generates by itself through its business operations.
It should pay for its obligations and leave some for its masters (business owners) in form of profits.
I told him that if a business is unable to pay for its rentals, it simply means that it cannot sustain itself and therefore, it is better off to be closed because that is the sign that it is making a loss.
Even in a situation where a business is only able to pay for its expenses, obligations and without making any rewards to the business owners in form of profits, especially in the long-run, it is not healthy.
This situation in business circles is called breaking even.
The reason is that a business is supposed to reward those who took the trouble to set it up, with profits.
One of my clients told me that he cannot tell whether the business makes profits or not because he does not see it.
When he pays for rentals, salaries and other business obligations that’s it!
One other deceiving procedure in business circles, most especially among the SMEs which I have witnessed, is when one goes to the bank and discovers that the business account is very healthy.
They withdraw it and apply it for personal undertakings such as building or buying personal cars not knowing that the money, although sitting in the account, does not belong to the business but belongs to business obligations such as creditors.
At one time, when I was analysing a cash book for one of my clients I gave him the balance according to the way I analysed the cash book, which was less than the balance he obtained from the bank.
I told him that the balance at the bank is a cheating balance and that, if he withdraws that money beyond what the analysed cash book is showing, he will end up bouncing cheques which are in the pipeline waiting to be cleared.
This is the commonest problem among the SMEs that do not have qualified bookkeepers or accountants for financial record keeping. Instead, they depend on obtaining bank balances from their banks where they maintain their business accounts.
My advice is that no matter how small a business may turn out to be, financial records must be maintained to give a clear picture for the business roadmap.
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