Proper bookkeeping essential to ensure business survival

About 50 per cent of all new businesses that open shop each year collapse before their first birthday, according to 2014 statistics.

Venant Bahizi

About 50 per cent of all new businesses that open shop each year collapse before their first birthday, according to 2014 statistics.

Data from the Rwanda Development Board (RDB) on small-and-medium enterprises (SMEs) show that over 1,200 companies were set up in the past few years, but the majority have already folded.

Statistics from the registrar’s office indicate that in 2012, at least 251 businesses were formally closed and the number almost doubled in 2013 to at least 437 enterprises that folded formally. In the first nine months of last year, 377 businesses were deregistered.

Between 30 and 50 businesses are registered daily by RDB, with more than 10,000 enterprises being registered every year, according to RBD statistics.

The figure of companies that closed shop could be deceptive as it represents only businesses that folded officially, as hundreds more do not take time to go through the process. 

Why this high rate of business failure? Development analysts blame the high mortality rate of new ventures on various issues, including lack of business management skills. In fact, many businesses and organisations do not keep relevant books of accounts, making it hard for them to keep track of the day-to-day operations like accounts payables and receivables, from which financial statements are derived.

There is also poor business planning, inadequate market research, lack of internal controls, inefficient production processes, and limited access to information.

According to the Institute of Certified Public Accountants of Rwanda (ICPAR), one critical variable for business success is the availability of adequate, timely relevant data and information as the basis of sound decision making.

That’s why bookkeeping plays a critical role as it helps businesses capture and organise relevant financial data for easy analysis by accountants and, subsequently, managers.

It is important to understand that bookkeeping plays a major preparatory role in facilitating decision-making that may promote or hinder optimal business performance. As much as there are many new companies registering and opening shop, the mortality rate of start-ups in Rwanda is alarming, calling for interventions to improve the situation. According to ICPAR, many enterprises do not practice bookkeeping, especially as many new entrepreneurs set up businesses without prior planning.

The institute notes that companies still struggle with payroll problems, which lead to financial liability and personnel challenges. ICPAR adds that few firms combine tax activities and other financial accounting in “one neat annual undertaking”. According to ICPAR, most businesses just sell or provide services without keeping any record of the transaction.

But accounting and bookkeeping professionals recommend the practice, saying it is a tool that helps businesses plan ahead (budget) and forecast business, as well as planning for purchases and other related activities. It is the best way through which businesses can meet deadlines; make timely loans, rents, bills or tax payment.

It is only through bookkeeping that cash flow management can be possible; no business can stand the test of time without it. It is a strong tool through which performance of a business can be evaluated to see whether it is stagnant, depreciating or growing. It helps business managers to strategise or make certain adjustments accordingly. Bookkeeping aids the setting of projections and goals for the business; and guides managers on when to bring an extra hand as it shows whether the business can foot the extra expenses. It guides a business on whether to use own team or seek professional advice without incurring an extra cost. Proper bookkeeping helps one to compare their present financial status to previous year records at any point in time to analyse an organisation’s growth.

As business become more complex there is need for more critical and innovative management approaches and timely decision making.

Businesses today need timely, relevant and adequate information to make sound decisions and to solve challenges facing them more than ever before. Of critical importance to management is availability of data and information related to daily transactions.

Data on invoices accounts receivables and payables, assets and liabilities become the bedrock for analysis and decision making.

It is, therefore, critical that businesses and companies maintain an elaborate adequate and complete system of capturing, processing and communicating such data and information (bookkeeping).

The writer is a commentetor on business-related issues