Big firms have inbuilt systems for tracking information relating to how they are operating. This is usually not the case among small business firms. That’s the necessity for this discussion. Deliberate attempt was made to keep the conversation simple.
Running a business firm involves entering into contracts and making transactions with different individuals, and group of individuals on a daily basis. These take place with the exchange of cash or a promise to pay cash.
As business transactions and contracts with different clients increase, there will also be a rise in incidents which can only be properly understood through proper analysis of how they have been occurring over time. These incidences is what is called trends. To facilitate trend analysis and reap the many rewards it promises, will require proper documentation of all relevant information related to business operation. There are several reasons why trends occur in business. We’re only concerned with those resulting from products and clients.
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Trend in business is a revealer of so many useful insights which aid in making business decisions. This is why large firms and intermediate companies have and pay kin attention to ensuring the efficient functioning of system of record keeping, for tracking down all relevant information, relating to the day to day activities of their institutions. But farther down the line, at the level of micro/ small business firms, proper record keeping is largely a rarity for the usual reason of lack of adequate resources to engage the services of record-keeping staff, on the one hand. On the other hand, keeping proper records, to some entrepreneurs, is too time consuming, uninteresting and a thing to be avoided.
For instance, one of the things an individual may feel strong reluctance to do, is to be making daily comprehensive records, showing details of all contracts with other persons and money made or expended, together with the source of the income and the reason for the expenses. This instance, explains the case of some entrepreneurs / small business owners.
Not having sound business record is very costly for the reason that a business owner needs to understand exactly what he or she is doing as well as how the business is being affected accordingly. Given that the human brain has serious limitations with respect to accurate remembrance of past events, failing to maintain sound records of daily business operations, amount to disservice to oneself and one’s firm in the long run.
How Record Keeping Grow the Performance of Firms
A business person knows exactly why he or she is in business. (This is without prejudice to classical thoughts on goal of a firm). However, for a firm to continue to exist and do business, it must commit to acquiring and serving increasing number of customers. It must also ensure it is making profit by doing so. These transactions, over time provide large volume of unorganized information which can only be adequately captured through documentation. A micro business firm needs good information to address myriads of business related problems, just as bigger organization does. Sound business record serves as a feedback, of which, when properly processed( or analyzed), provide details of how the various transactions entered into by a firm, has affected its performance. If the firm offers multiple products and operates in more than one location, the processed information obtained from records will equally reveal how each product or service line, operation base is contributing to business performance. Let’s take a closer look at these noted factors below:
Product profitability: Profitability is used to explain the extent of gain resulting from a product, service or event. Gain here means the positive difference one gets when cost of an item is deducted from the sales value of the item. When the documented information is analyzed, it will show how each of the products or services offered by a firm, is contributing to profit. When this happens, it will be seen whether or not some products or services are bringing more gains than others. If some products are simply yielding losses, that will equally be figured out. Based on cost consideration, a business person would find this sort of information very useful. This will lead to investing more on the products that bring in more gains.
Client profitability: Careful assessment of transactions with clients over time, will reveal those who have record of persistent payment default as well as customers that it cost so much to serve. Among the latter category are customers that make small orders but maintaining them cause big ‘headache’. Another set of clients that will be revealed are those who are loyal in keeping to terms and in patronage. Information of this nature will guide an entrepreneur to formulate better strategy that will help him or her get more results for the effort made. For instance, It may be decided that the firm, will do better by channelling greater energy to serving an increasing number of clients that bring in more gains at lesser headache.
Sectional profitability: When cost of doing business in a place, and the associated performance, is compared with corresponding information from another area(s) of operation, this will reveal deeper insight about the extent to which each place of operation is gainful. That will guide a business person in deciding which areas should get more investment and which should get less.
The Two Alternatives
It should however be noted that whether a business person keeps records or fails to keep proper records, sacrifice is made. Keeping adequate records will require the discipline and time of a business person, or his/ her money paid to obtain the service. This’s the first aspect of the sacrifice. The alternative aspect of the sacrifice is to forgo having sound records of your business operation and make decisions without accurate knowledge of how your previous decisions fared. In this case, you’re willing to operate blindly and risk serious consequences.
Keeping good business records is a habit that all entrepreneurs should have. It helps a business person to take better financial control of company’s growth and success and will give an entrepreneur peace of mind farther down the line.