What is a sound accounting system?
Businesses are said to adopt sound accounting systems if their bookkeeping and accounting systems are reliable, able to produce accurate and updated financial information. Such systems also include efficient and effective filling and documentation systems. In addition, the personnel involved in the preparation of the financial information are qualified to do the job. Last but not least, the financial statements and reports are drawn based on the outlined accounting concepts and standards.
Why sound accounting systems important for business?
Financial information is important to accounts related personnel as well as non-accounts related personnel. For example, heads of non-accounting departments too need to know information about budgeting so that they can wisely plan their activities. In the other article, we analogize accounting system as a heart to human. It is so important that its failure will eventually let other systems to malfunctions. Basic Accounting:
a) Easy references
Data about prices, suppliers, customers and inventory are important in trading businesses. Price of each purchased product must be known in order to determine the sales price. Mistake in setting up the sales price can give a negative effect to the business such as losing customers to competitors and incur a business loss. Proper records and filling system will help entrepreneurs in term of getting the required information promptly and the information is available when needed. Some business owners wasted hours of their valuable times looking for information from their improper and unsystematic filling system. Records of stock movements must be maintained and updated in order to ensure that there are no stock outs. In addition, proper stock record also helps entrepreneurs to know promptly which items should be purchased and when to order.
b) Effective planning
Financial data and analysis are important for management to make effective decision-making. However, the data must be reliable, accurate and updated. Without a proper records system, entrepreneurs may ask for debts, which have been settled by debtors. Entrepreneurs may also continue to give credit to suppose to be black listed customers or non trustworthy customers, or ‘rich but stingy’ debtors.
c) Right decision at the right time
Ability to make right decision at the right time is an important ingredient for a business to be successful. This requires the availability of accurate and complete information. Management may issue bounce cheque because the cash book is not updated. Normal “wrong but tolerable” practice by SMEs is to call their bank every time they want to issue a cheque. Entrepreneurs also may have to follow suppliers’ recommendation blindly because of no proper stock records. Furthermore, they may continue to spend on unnecessary expenses because their data is not reliable or the data is simply not available.
d) To obtain suppliers’ trust and confidence
Credit facility is only given to trustworthy customers. It is important to get the supplier’s confidence in term of the business financial position and ability to pay debt on time. A proper record keeping and filling system will give confidence to suppliers to do business with. It shows that the business owner knows what is going on with his or her business and it is under control. Some business owners do not know the updated debtors balances. There are also cases where entrepreneurs contacted their debtors to know about the debts instead of them reminding their debtors.
e) To ease loan approval process
Many entrepreneurs apply loan from banks, government agencies and funds provided by the government. However, there are complaints that it is not an easy process and also a time consuming process. One of the main reason for this is entrepreneurs fail to show their financial reports as required. Many entrepreneurs do not give their accounts managements a priority even though they agreed that it is important for their businesses. There are entrepreneurs who managed to get their business loan but later fail because of no proper accounts management system. Before approving any loan, loaners normally want to see, among other things:
• The financial statements for the past 3 years
• Present and forecasted future cash flows
• Active business bank accounts
With a sound accounting system, entrepreneurs could supply all those required information immediately.
f) Early detection of problems and enhance business competitiveness
Accurate and updated records of profit and loss, cash flows, sales, purchases and expenses enable entrepreneurs to know the actual position of their businesses. Many business owners think that they are doing fine but the fact is that they are not. They merely measure their businesses based on the daily sales. Some business owners think sales are profits. They are happy because they have money in their pockets, and as a result, spending lavishly. Business is not only about having sales but also expenditures and other obligations. Those aspects have to be considered and that is why proper recording of transactions are important. Proper records will alert entrepreneurs and help them to wisely plan for their business developments. Efforts are made to maintain and strengthen their business strength while weaknesses are identified at early stage and rectify. This will make business to stay competitive even during its turbulence and hard time.
g) Effective internal control
Sound accounting system also serves as an effective internal control. Here are few examples of how proper record keeping and accounting system help to prevent and detect irregularities in business.
Psychologically, good record keeping and filing system warns staffs that fraudulence activities will be easily detected. Businesses dealing with cash are exposed to risks related to insincere staffs.
Monthly bank reconciliation statement helps business to detect if there is any unauthorized issuance of cheque. One of our clients was able to detect the omission of RM2000 from their bank account through the preparation of a monthly bank reconciliation statement.
Proper maintenance of creditor ledgers could prevent double payments made to suppliers and avoid unnecessary dispute between both parties
h) Smoothing the auditing process (for company)
Auditing process normally is a nightmare to accounting staffs. During auditors visit, sometimes accounting staffs have to work long hours and under pressure, answering all sort of auditors’ questions. Staffs taking emergency leave and sick leave are normal during this period of time. Difficulty during auditing process occurred because supporting documentations for the prepared financial statements are not available and auditors’ required information not readily prepared. Having a proper record keeping and filling system can help to smoothing the auditing process. Improper records and documentations can lead to additional costs being incurred by the management. The company may need to incur “accounting-fix” cost on top of the audit fee. Other costs that can be very “costly” to the management are the delay in the issuance of auditor’s report and the qualified audit report instead of unqualified audit report.