By Babajide Komolafe
In the last edition, we pointed out that many people invest in businesses that do not generate enough profit or income to justify the money, effort, and time invested. Sadly, they persist in such ventures until the business eventually collapses. Why is this so?
This often happens because most business owners—especially small business owners—do not keep records of their business activities. The few who do often fail to review those records or seek help from professionals who can analyse their books, identify areas of weakness, and recommend solutions.
Unfortunately, I have seen educated and even well-exposed people, including university graduates, who are guilty of not keeping records of their business activities. While a few do not even know how to keep records, the majority simply neglect the task because they see it as a time-consuming effort with little or no apparent benefit. Unfortunately, they are wrong—and by the time they realise it, it is often too late.
The right approach to starting and running a successful business requires that you keep records from the very beginning, even before you spend a dime of your money on that business.
You must understand that operating a business without records is like driving a car with your eyes closed—imagine the consequences. From the outset, you must create a system for documenting every business activity.
Records provide the information you need to make sound decisions about your business.
For someone just starting out, you must keep records of the following: all money invested in the business; all money spent to create your product or service; all money earned (revenue) from selling the product or rendering the service; all properties acquired for the business and their respective costs; all expenses that consume money (expenditure items); all activities that generate income (revenue items); and all money borrowed for the business, as well as all money owed by customers.
From these basic records, you—or a professional—can prepare income and profit statements for your business. From these statements, you can determine your profit, calculate your profit margin, and even compute your Return on Investment (ROI), as explained in the last edition.
Your records will also show whether the price of your product or service is below or far above the cost of production. Information from proper records helps you assess the health of your business and empowers you to decide whether to close it, maintain its current scale, or expand by investing more money.