A majority of small businesses in Kenya fail within their first year. As we have repeated many times before, this is due to poor management. It’s that simple folks.
Accounting mistakes are just one of the ways that small businesses in Kenya display this. Any business that does not maintain its financial records properly will fail. These records influence you decision-making in business.
It is important that you, the entrepreneur, have some basic accounting knowledge before you can afford an accountant. You must know how to prepare your journals and ledgers. You must also know how to prepare the 3 financial statement. We have the templates right here! ⇒ cash flow statement,income statement and the statement of financial position.
Even so, these 8 accounting mistakes may sneak under your radar and undo the good work your business is doing:
1. Confusing between accrual and cash basis
There are two ways to enter records for your bookkeeping in order to track business activities. You can either record once you receive and pay money or the moment you earn revenue and incur expenses (before getting the money). Of the 3 financial statement, it is typical that only the cash flow is prepared though a cash basis.
Anyway, what’s the difference? Cash basis is simple because you only record a transaction once but this way is prone to human errors. Also as your business grows it will become hectic to have to make records this way. The accrual mode is superior because you record stuff twice (double-entry) making you less likely to miss entries.
2. Not disclosing all the information
In Kenya, business secrecy is a big deal. How many small businesses in Kenya do you know that will only have a family member run the finances? We even prefer loans to investment for our business. But when preparing financial statements you must reveal everything.
Don’t try to hide your accounts payable (debts) for instance. These statements are for outsiders, like the loan manager, to assess and they will find discrepancies when you don’t adhere to the principle of disclosure. You will also jeopardize your future decisions when you have to come back and refer to the statements you cooked.
3. Not accounting for revenues properly
Small business in Kenya like to diversify their operations, instead of specializing on the one. You may find a salon also runs an M-Pesa shop or a Cyber Cafe also sells movies and TV Series. I guess this is good for making more money but it can become a problem in accounting for revenue.
What happens is that all this complicates the separation of core business activities from extra streams of revenue. Are you going to treat selling CDs as a core business activity when it consistently outperforms the Cyber you started with? I don’t have an answer. What are you going to do?
4. Skipping accounting work because you have bank statements
This is the point where you cross the line and become too smart for your own good. Look, having only the one bank account where all your business is transacted is not an excuse to substitute the financial statements with a bank statement.
The bank statement is to be used for comparison, with financial statements, to ensure transaction details on both ends are correct. A bank reconciliation statement is prepared for this. Now, when you go to apply for a loan you can have the two statements supporting your plea.