Most entrepreneurs are passionate about business functions like Strategy, Marketing, Branding & Sales. However, you would find very few who have a liking for Accounts. Most entrepreneurs quickly absolve themselves by declaring that they do not like Accounts and that they have left it to their Chartered Accountants (CAs) and to their internal Accounts function. The mistake they make is not thinking about how they can use well maintained books as tools to better manage where their business is headed tomorrow.
How things go wrong?
1) Your Chartered Accountant
I have come across many entrepreneurs who simply maintain some excel sheets of their sales & expenses (some do not even maintain these!). They simply handover these excel sheets along with their hard copy invoices files to their CAs for their book keeping. This is generally done in preparation of some statutory compliance (Income Tax/Service tax/VAT returns etc).
For a CA, an SME entrepreneur is generally a not-so-important client and one amongst a few hundred of them. Naturally, some junior level CA intern (in CA’s office) who neither has the skill nor the will to do a good job, is assigned with this task. Most important, these fresh interns have no idea of your business & domain and no idea as to what does an SME entrepreneur look for in his books (of course, many entrepreneurs do not even looking for anything!). These fresh interns follow a ‘garbage in, garbage out’ principle and simply produce something that merely addresses the statutory compliance requirement (& in most cases erroneously).
Most SME entrepreneurs do not have licensed Tally software. For some who own, they lack the skill to meaningfully navigate through their books and the will to even demand their Tally backup files from their CAs.
2) Your internal Accounts
Most SME entrepreneurs do not have any in-house accountant/s. In many cases, they simply expect some unskilled person to double up as an accountant. In an SME setup, given limited pay scales, very senior & skilled accountants cannot be hired. Since most entrepreneurs have a very step-motherly approach towards the Accounts function, they end up leaving the entire bookkeeping to these unskilled/semi-skilled accountants. In addition to the skills gap, these accountants majorly lack the perspective and business understanding required to design and maintain books which can serve as strong MIS for business. Most of them are not mature & disciplined enough to maintain books meaningfully ultimately leading to a ‘garbage in, garbage out’ approach.
What can be done?
1) Spare a budget for an accountant & maintain books internally: First & foremost, it is important to hire at least one accountant with a fairly decent level of accounting skills. This would also ensure that books (most likely in Tally in an SME setup) are completely maintained internally. Also, make sure that the accountant keeps your books updated at all times. Only when this happens, your books will serve as a good MIS for you. Well maintained & up-to-date books result into organizing data meaningfully for you to analyze. It offers you a gauge of your business’ current performance in almost every aspect. Your books provide you with hard facts and figures on what your business has been doing and how it’s faring to date. Through accounting, you get a good measure of where your business is at and how far or near you are to where you actually want to be.
2) Build basic level of accounting skills: If you’re like many entrepreneurs, you likely went into business to pursue a passion and not to become an accountant. Nevertheless, you cannot be totally hands-off and you need to closely work with your CA and your internals Accounts team. This would require that you have a basic level of understanding, if not more, of Finance & Accounting concepts.
3) Be involved at a day to day (/regular) level: Keep reviewing your books at a day to day (/regular) level not only to ensure that they are maintained well but also to keep getting a holistic view of your business. Keep overseeing your accountants work, and challenging when required, at periodic intervals to ensure that he/she is doing a good job with it.
4) Work closely with your CA and challenge him where required: Most entrepreneurs do not have a direct access to their CAs. It is important that an SME entrepreneur regularly interacts with their CAs and work closely with him to ensure that his books are meaningfully maintained. He should ensure that completely ready Tally backup files are provided to the CA as an input for his value addition and review. Various computations (Income Tax/Service tax/VAT/PT) etc be done internally and provided to your CA. Understand what changes/value additions the CA is carrying out and discuss those with him. A CA has limited time/bandwidth available for your work and therefore he may miss out on various things. Your detailed review would help you point out these gaps to your CA. At times it may be required to challenge your CA too.
5) Maintain your records carefully: Ensure that you have an intuitive folder structure on your server (/centrally) where you save your Accounts related files (challans, computations, Tally backups etc) with correct naming conventions. Ensure that, as a practice, your files are backed up and regular intervals.
We are all in business to make money (though this may not be the sole aim). However, by turning a blind eye to crucial business functions like Finance & Accounts, we are jeopardizing our most vital business goal. Can SME entrepreneurs (equally applies to any entrepreneur) really afford to do so and get away without knowing Accounts?