Pre-read_on_Basic_Book-keeping_for_Trainees_@DBA_102 (Pre-session_briefing)

BASIC BOOK-KEEPING, ACCOUNTING SYSTEM AND

MONEY MANAGEMENT FOR START-UPS.

A Pre-session briefing for Trainees @DBA 102 (pre-read)

COURSE INTRODUCTION: No organization can truly be successful and even survive without capturing, communicating, analyzing,

interpreting, planning and controlling its financial & monetary activities. The lack of proper

accounting and financial recording has caused a lot of start-up businesses to collapse especially during the

first few years of their existence. Every business owner is expected to have basic skills in book-keeping and a

fair knowledge of Accounting Processes if he/she must succeed in business.

OBJECTIVES: The objectives of this course are to enable:

- Participants have generic knowledge about relevant accounting terms and application.

- Know how to set up an accounting system: Trainees will be educated on the need to set-

up keep an accounting system

OUTLINE: - Definition of key accounting terms

- Basic book record keeping rules for a healthy start-up business

- How to set up a simple accounting system

- Preparing a simple & complete financial statement for your business

- Budgeting & cash-flow Forecasting:

- Types of budget, benefits & setting up an accounting system

- The 10 Commandments to managing cash flow.

- Q & A

- Syndicate sessions

Course Summary: Accounting is simply the numerical representation of a business transaction. It is the process of recording;

classifying, selecting, measuring, interpreting and communicating financial data to enable any user of

accounting information make decision.

Book-keeping is simply the systematic recording of transactions on a daily basis in the appropriate books.

The end-result of book-keeping is accounting. That is, Accounting is about making use of the transactions

recorded in the books.

The importance of Book-keeping and Accounting is that it shows the income, expenditure, assets and

liabilities of the business at a given period. Also, it helps to prevent fraudulent practices.

A very important principle in Accounting is the Business entity concept. The meaning of this concept is that

the owner and the business are treated as separate individuals. That is, only transactions that relate to or

affect the business must be recorded. The ability for entrepreneurs to draw this fundamental demarcation

is the survival of any business entity.

Another essential principle is the going concern concept, which expects that the business will operate

perpetually. That is, business transaction would be carried on without the intention of cessation or

disposal of the business.

Dual aspect concept or Double-entry principle implies that all transactions must have two aspects: one

debit and one credit. In the application of the double entry principle when faced with any transactions,

always ask yourself two important questions: which two accounts are affected? (Give them names) and

which account is to debited and which is to credited? The account giving value is credited and the account

receiving value is debited. In other words, “CREDIT THE GIVER, DEBIT THE RECEIVER”. A strong grasp of the

double entry principle is the foundation of understanding Accounting.

A debit entry represents an increase in the value of assets, a decrease in the amount of a liability or an

item of expenditure or expenses. A credit entry represents a decrease in the value of assets, an increase in

the value of a liability or an item of income or gain.

Assets are anything the business owns, which are expected to be of future benefit. e.g. Land and Building,

Furniture and Fittings, Motor Vehicles, debtors, cash, etc.

Liabilities are anything the business owes to outsiders. e.g. creditors, bank overdraft, long term loans, etc.

Any earning as result of sales is income, while expenses are recurrent costs incurred within a financial year.

E.g. salaries, rent, stationeries, transport costs, charges, etc.

Companies and Allied Matters Act (CAMA) requires every company to keep proper accounting records and

to prepare periodic financial statements that show the financial performance and financial position of a

business entity.

The elements of a financial statement include the following:

1. Income Statement showing the profit or loss as a result of the income earned and the expenses

incurred during a financial year. It is the statement of financial performance;

2. Statement of Financial Position (Formerly known as Balance Sheet) showing the assets and

liabilities of the business as at the end of the financial year;

3. Statement of Cash flow showing inflow and outflow of cash and cash equivalents during the

financial year.

Preparation and presentation of financial statements may differ due to industry or other regulatory

requirements; hence, Accounts can be adopted and not adapted as the financial transactions of a

company is unique and peculiar, even for businesses in the same industry.

Basic knowledge of accounting is very fundamental for the entrepreneur who desires not just business

prosperity, but also business posterity.

Methodology: - Facilitation.

- Practical Session.

ACTION LEARNING - ASSIGNMENT:

Practical Session: Computation of business plan Financials (using DBA Ms-Excel

Template)

OUTLINE DETAILS 1) Accounting and Business Success

No organization can truly be successful and even survive into many years of existence without

capturing, communicating, analyzing, interpreting, planning and controlling its activities on a

day-to-day, especially, its financial or monetary activities.

Starting a business as an entrepreneur is a lot easier than sustaining the business. What it

takes to start is a strong will and desire, determination and personal convictions; all backed up

by the Grace of God. However, to sustain the business, an entrepreneur requires not only

God’s grace, but also knowledge, wisdom, skills, experience and good character.

The lack of proper accounting and financial recording has caused a lot of start up businesses

to collapse especially during the first few years of their existence. If you do not know where

you are, where you are going and how to get there, then there is a great possibility that you

will end up moving round in circles and eventually get tired out and collapse.

Most entrepreneurs at start out, are usually the production & technical manager, marketing &

sales manager, client services & operations manager, finance & account manager,

administration and human resources manager, the CEO/COO all wrapped up into one. This

puts a lot of burden on them and makes them to gravitate only to the functions that they

have prior skills in to the detriment of the other equally important areas; especially the

finance and accounting function, which is a strong determinant as to whether the business

will survive into many years of existence or otherwise.

Every entrepreneur is expected to have basic skills in book keeping and a fair knowledge of accounting processes if he/she must succeed in business. To a large extent, most collapsed start-up businesses went under because of this single reason.

As you put together your thoughts on which products to invent or services to provide in

exchange for cash, please consider the urgent need to acquire knowledge in financial record-

keeping and basic accounting processes. Honestly speaking, it will make a lot of difference in

the way your business turns out. Hiring a skilled staff to handle that for you at start up is not

an excuse to totally act and play ignorance.

2) What is Accounting and Financial Record Keeping?

Accounting is a function of management and involves the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information. Record or Book Keeping is that part of accounting that involves the recording of data in a prescribed form.

3) The Importance of Financial Record Keeping

The need for a good financial record keeping process cannot be over emphasized considering

the consequence of doing otherwise. The importance of maintaining a sound financial record

keeping system includes:

To ascertain the success of the business

To provide data for meaningful decision making

To obtain a bank loan

To facilitate the provision of capital from interested investors

To facilitate the preparation of a good budget

To provide data for the determination of tax payable to govt.

To comply with the provision of CAMA

To ascertain the amount distributable as profit (dividend)

4) Accounting Terminologies

The objective of a sound accounting system of a business is to capture the totality of all the

incomes, expenses, assets and liabilities of the business during the relevant period to which

the accounting records relates. The starting point in doing this is to familiarize ourselves with

some basic accounting terminologies:

Accounting Concepts.

These are the basic assumptions upon which business transactions are recorded in the

books. The following are various concepts of accounting:

Business Entity Concept – this concept assumes that for accounting purposes

the business enterprise and its owner(s) are two separate entities.

Money Measurement Concept – this relates to the fact that all business

transactions must be recorded in the accounts in money terms.

Going Concern Concept – here, it is generally assumed that the business

enterprise will continue to carry on its business for an indefinite period of time.

Accounting Period Concept – this states that all business transactions are

recorded in the books of accounts based on the assumption that profits of the

business is to be determined for a specified period of time.

Accounting Cost Concept – this states that all assets are recorded in the books

of account based on the original cost price.

Duality Concept – this states that every transaction have a double (dual) effect

in the financial records.

Realization Concept – here, it is assumed that revenue from a business

transaction is recorded in the accounting records only when it is earned

(realized).

Matching Concept – this concept relates to the assumption that all revenue

earned in an accounting period must be related to the totality of the cost

incurred in the same period.

Accounting Method.

Set of rules to determine when and how income and expenses are recorded. The two

most common methods are accrual method and cash method.

Cash Method – this is a method of recording transactions in the accounts only

when cash is received for income and when cash is paid for expenses;

irrespective of the accounting period to which the transaction relates.

Accrual Method – this type of accounting method involves the recording of

financial transactions in an accounting period whenever income is earned or

expenses incurred within the period irrespective of whether cash is received or

paid respectively.

Accounting Principle.

These are the rules and guidelines that must be followed during the preparation of

financial records. They include:

Substance over form

Consistency

Objectivity

Fairness

Materiality

Prudence

Account.

This is a place (or financial record) where all information relating to a particular asset,

a liability, an item of income an expense or capital is entered.

Ledger.

This is a document containing a set and/or series of accounts.

http://www.businessdictionary.com/definition/rule.html

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http://www.businessdictionary.com/definition/income.html

http://www.businessdictionary.com/definition/expense.html

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http://www.businessdictionary.com/definition/method.html

http://www.businessdictionary.com/definition/cash.html

Accounting Equation. This is a simple; easy to understand principle upon which financial accounting is based on. It is illustrated as:-

Resources in the Business = Resources Supplied by the Owner

Assets = Capital Or

Assets = Capital + Liabilities

Balance Sheet.

The accounting equation is expressed in a financial position statement called the balance sheet. A Balance Sheet is an accounting statement of assets and liabilities an organization has as at a particular point in time.

Profit & Loss Account.

This can also be referred to as an operating statement. It is a statement that shows the summary of income earned by the business over a period of time through sales of goods and services; and matched against the expenditure that were incurred during the same period in order to determine the profit or loss.

Postings into the Account.

This means actual recording of entries into books of accounts in a ledger. There is a Generally Acceptable Accounting Principle (GAAP) for certain classes of items. For example:

ACCOUNTS To Record Posting into the Accounts

Assets an increase Debit

a decrease Credit

Liabilities an increase Credit

a decrease Debit

Capital an increase Credit

a decrease Debit

Income an increase Credit

a decrease Debit

Expenses an increase Debit

a decrease Credit

5) How to Set up an Accounting System

Accounting systems, for effectiveness and efficiency practically, are tailor made for the

specific requirements and peculiarities of each business organization. The following steps are

a general guide for deploring accounting systems for a start-up company.

Select the accounting method to adopt for the purpose of financial record keeping.

Either cash basis or accrual basis.

Select a date as the accounting year end of the business in line with the accounting

period concept.

Select the accounting policies to adopt in the preparation of the financial records.

Accounting policies are rules and methods set by the management of a business

organization to record financial transactions in line with Generally Acceptable

Accounting Principles (GAAP). For example, method of stock valuation, revenue

recognition, depreciation method and applicable rates thereof etc.

Select a method for recording the transactions. For example, the use of accounting

software, computer spreadsheet program or manual/hand recording.

Determine whether you will run the system yourself or employ someone to run it.

Create a chart of accounts.

Establish a set of financial controls for all the various aspects of your transactions

and implement them.

Initiate the first set of postings using your accounting system.

Review and modify the system as you progress.

6) Budgeting & Cashflow Forecasting

Budgeting is a part of the planning process and it is said to be an effective planning and

controlling mechanism for financial management. It is a plan expressed in money terms, and is

prepared and approved prior to the budget period and may show income, expenditure and

capital to be employed during the appropriate relevant period.

Benefits of Budget – the budget system is not an end on its own but a means to an end. It is a short term control measure put in place to ensure the attainment of business goals. Its benefits are:

Objective – When budget is to be prepared, goals and objectives are first considered and re-evaluated to determine if they are still on track or not. Goals and objectives are the reasons why the business was created in the first instance. Any item to be included in the budget will be evaluated to determine whether or not it will lead to the realization of the overall goals. This ensures that the business has a sense of purpose and direction.

Planning – Budgeting process ensures that businesses plan for the future operations and that they consider how conditions in the next year might change and what steps they should take to respond to these changed conditions. In other words managers look ahead; setting targets and anticipates challenges/constraints. The essence of anticipating challenges is to input the likely effect it may have into the budget in order to make it achievable.

Communication – The only way through which subordinates can understand their role and how to go about it is communication. It has been discovered over time that standards are difficult to develop accurately, let alone the application. These two exercises are made worse by poor communication especially from top management to the lowest person in the system.

Motivation – If individuals have actively participated in preparing the budget, and it is used as a tool to assist managers in managing their departments, it can act as a strong motivational device by providing a challenge. People will willingly work towards the achievement of plans which they have input rather than that which was dictated to them.

Control – Budget creates responsibility. It assists managers in managing and controlling the activities for which they are responsible.

Performance Evaluation – Budgetary system is used as a basis for judging actual result. Budgeted goals and performance are generally regarded as being more appropriate than past performances. Budget serves as a yard stick for measuring performances. The actual achievement is compared with the budget so as to identify which manager/department performs better or worse and which aspect of the business needs remedial/urgent actions.

Coordination – It helps in coordinating the activities of various departments and sub-units so as to achieve corporate goals.

Authorization – The budget can be used to authorize the expenditures contained in it. For instance, the admin manager may not seek for approval before the scheduled fumigation exercise is carried on. Approval may not be requested from the CEO before the generating set is given a general service. What this does is that bureaucratic delays or procrastinations in execution of plans are thereby reduced to the barest minimum.

Types of Budgets – There are various types of budgets. However for the purpose of this discussion, we would consider three main types; these are Income Budget, Expenditure Budget and Cash Budget.

Income Budget – is an estimate in monetary terms of the income derivable from the activities an organization is proposing to be engaged in during the budget period. Income budget may be classified as:

Recurrent Income Budget – this comprises:

Expected Sales of goods and services

Expected income from other activities e.g. rental income, investment income, sales of assets etc

Any other expected income generated as a direct consequence of the day to day operational activities of the organization.

Capital Income Budget – this comprises:

Expected profit on sales of investment/assets

Expected amount pledged or receivable from subscribers to the memorandum and article of association of the organization

Any other expected income that is not attributable to the day to day operations of the company

Expenditure Budget – is also an estimate in money terms of the recurrent and capital

expenditure profile necessary to be incurred in order to generate the income estimates during the budget period. Expenditure budget may be classified as:

Recurrent Expenditure Budget – this comprise:

Expected printing & stationery cost

Expected rental cost

Expected salaries and wages cost

Expected landscaping & beautification cost

Expected donations, grants & subscription cost

Expected vehicle repairs & maintenance cost

Expected equipment repairs & maintenance cost

Expected electricity cost

Expected fuel cost

Any other expected expenditure needed to be incurred in other to generate the expected recurrent income estimates

Capital Expenditure Budget – this comprises:

Expected cost of buying vehicles

Expected cost of buying land

Expected cost of buying buildings

Expected cost of buying equipment and plants

Expected cost buying furniture, fittings and fixtures

Expected cost of buying investment

Any other expected expenditure needed to acquire fixed assets

Cash Budget – is the most important budget prepared in a business. It shows in summary form, the expected cash receipt and expected cash payments during the budget period. Note that liquidity and cash flow management is a key factor in the successful operation of any business enterprise; hence it is with good reason that the cash budget should receive close attention from the entrepreneur. Cash budgets are usually subdivided into reasonably short periods – months or weeks.

Need for Cash Budget 1. To ensure that there is just sufficient cash in hand to cope with budgeted

activity 2. It may reveal that there is likely to be a deficiency of cash in some future

period in which case an overdraft may be arranged

3. It may also reveal that there is likely to be a surplus of cash in some future period in which an appropriate investment or use of the surplus fund can be planned.

What is in a Cash Budget? – A cash budget must contain every type of cash inflow or receipt and every type of cash outflow or payment. The timing of these cashflow must be taken into consideration.

Typical Cash Receipts includes:

Cash sales

Receipts from debtors

Proceeds from sales of fixed assets

Receipts of interest, royalties, rent, fees and dividend

Proceeds on issue of new shares and loan stocks

Receipt of loan repayment

Typical Cash Payment includes:

All payments to creditors for stocks and material purchases

Wages and salaries including all bonus payments

Payment for overheads and expense items

Purchase of fixed assets

Payment of dividend, interest and taxation

Repayment of loans

Approaches to Budgeting – There are various approaches to budgeting. These are: Fixed Budget – A financial plan based on a single level of activity.

Flexible Budget – A recognized financial plan that allows analysis of costs into fixed and

variable elements. By so doing, budgets can be flexed or adjusted for various activity levels.

Incremental Budget – A financial plan that builds on the estimates or actual figures of prior and/or current period.

Rolling or Continuous Budget – this is a financial plan that is constantly been reviewed and modified due to rapidly charging conditions in which case a, every quarter or half yearly, reviews are carried out on the budget for the following twelve months.

Zero Based Budget – A budgeting approach whereby it is assumed that the cost allowance for an item is nil or zero and will remain so until the responsible officer/department justifies the existence of the cost and benefits the expenditure will bring. This approach is highly recommended.

(S A M P L E C A S H F L O W B U D G E T) DAYSTAR BUSINESS FORUM ENTERPRISES

CASH FLOW BUDGET FOR THE 6 MONTHS ENDING 31ST DECEMBER 2011

D E T A I L S Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 TOTAL

INFLOWS =N=’000 =N=’000 =N=’000 =N=’000 =N=’000 =N=’000 =N=’000

Capital 10,000 - - 5,000 - - 15,000

Investors - 25,000 - - - - 25,000

Bank Loan - - - - 10,000 - 10,000

Cash Sales 24,000 40,000 60,000 80,000 100,000 120,000 424,000

Receipt from Debtors - 36,000 60,000 90,000 120,000 150,000 456,000

TOTAL INFLOW 34,000 101,000 120,000 175,000 230,000 270,000 930,000

OUTFLOWS Purchases of Stocks - 39,000 65,000 97,500 130,000 162,500 494,000

Rent 6,000 - - - - - 6,000

Purchase of Van 3,500 - - - 3,000 - 6,500

Shop Renovation 1,000 500 500 - - - 2,000

Salary 250 250 250 250 325 325 1,650

Van Maintenance 70 70 70 70 130 130 540

Fuel 110 160 200 230 380 490 1,570

Shop Furniture 750 - 1,500 - - 500 2,750

Loan Repayment - - - - - 10,000 10,000

Interest on Loan - - - - 2,000 - 2,000

Stationery 150 200 50 - 50 - 450

Telephone 30 30 30 30 30 30 180

TOTAL OUTFLOW 11,860 40,210 67,600 98,080 135,915 173,975 527,640

Opening Balance - 22,140 82,930 135,330 212,250 306,335 -

Net Cashflow 22,140 60,790 52,400 76,920 94,085 96,025 402,360

Closing Balance 22,140 82,930 135,330 212,250 306,335 402,360 402,360

Note: Cash Sales is based on an estimate of 600 units in month 1, 1000 units in month 2

and an increase of 500 units per month thereafter at a fixed selling price of N100,000

each. Note that only 40% of total sales value is paid as deposit in the month of sales. The

balance is paid one month thereafter.

It costs N65,000 to buy each unit, payment for which is made exactly 30days thereafter.

Points to Note:

1. A Master Budget is the summary of ALL other budgets and is expressed as a Budgeted Trading, Profit and Loss Account (operating statement) and Balance Sheet.

2. It is quantities/volumes/units etc which are budgeted and are converted into

financial terms as a common measure. Money figures should not be directly budgeted.

3. The problems of budgetary slacks are frequently being encountered in budget preparation and processes. Budget slacks is the term used to describe the way some managers and/or budget officers obtain a budget larger than is strictly necessary so that they can spend more than actually required or indicate that they are efficient.

4. In capital budgeting, the principle to follow is “Life Cycle Costing” or “Terotechnology.” That is, it is important to consider the totality of the cashflow in the economic life of the asset, that is, the total acquisition cost outlay, cost outlay of operation/service/maintenance during the useful life of the asset and the cost outlay incidental to disposal at the end of the life of the asset viz-a-vis the estimated benefit in money terms during the same period.

5. In other to have a proper and encompassing budget, one key requirement is the establishment of a functional system and process in the business which must be

adequately coordinated and organized by the entrepreneur himself/herself.

7) Cash Management Basics

Cash is your business's lifeblood. Managed well, your business remains healthy and strong. Managed poorly, your business goes into cardiac arrest.

If you haven't considered cash management an important issue, then you're probably undermining your business’s short-term stability and its long-term survival. But how can you manage cash better?

When it comes to properly managing the cash flow of your business, the best way is to move from where you are now to where you want to be in the future. The benefits cashflow management includes: Increasing the likelihood that your business never runs out of cash. Eliminating the constant worry associated with not knowing what your cash balance is

right now or what you expect it to be in the near future. Improved relationships with your vendors because they are no longer banging on your

door demanding that their past dues/invoices be paid immediately. The ability to see cash flow problems long before they can happen.

In short, you free yourself to focus your unique talents and abilities on growing your business rather than fighting the constant cash flow fire.

Cash Flow Rules:

Here are 10 cash flow rules you can implement immediately that will transform the way you manage your business from this point forward. These rules are the keys to creating the kind of financially successful business you desire.

1. Never Run Out of Cash.

Running out of cash is the definition of failure in business. Make the commitment to do what it takes so it does not happen to you.

2. Cash Is King

It's important to recognize that cash is what keeps your business alive. Manage it with the care and attention it deserves. It's very unforgiving if you don't.

Remember, Cash Is King, because No Cash = No Business organization.

3. Know the Cash Balance Right Now.

What is your cash balance right now? It's absolutely critical that you know exactly what your cash balance is.

Even the most intelligent and experienced person will fail if they are making financial decisions using inaccurate or incomplete cash balances. That's the reason why business failures are not limited to amateurs or people new to the business world.

4. Do Today's Work Today.

The key to keeping an accurate cash balance in your accounting system is to do today's work today. When you do this, you will have the numbers you need - when you need them.

5. Either You Do the Work or Have Someone Else Do It.

Here is a simple rule to follow to make sure you have an accurate cash balance on your books. You do the work or have someone else do it.

Those are the only two choices you have. The work must be done. You can't just ignore it. Someone has to do it. That means either you do it or have someone else do it.

6. Don't Manage From the Bank Balance.

The bank balance and the cash balance are two different animals. Rarely will the two ever be the same. Don't make the mistake of confusing them.

It's futile (and frustrating) to attempt to manage your cash flow using the bank balance. It's a prescription for failure. You reconcile your bank balance. You don't manage from it.

7. Know What You Expect the Cash Balance to be Six Months from Now.

What do you expect your cash balance to be six months from now? This one question will transform the way you manage your business.

This question really gets to the heart of whether you are managing your business or whether your business is managing you.

8. Cash Flow Problems Don't "Just Happen."

You would be shocked and amazed at the number of business that fail because the managers did not see a cash flow problem in time to do something about it.

The key is to always be able to answer the question - what do I expect my cash balance to be six months from now?

9. You Absolutely, Positively Must Have Cash Flow Projections.

Cash flow projections are the key to making wise and profitable business decisions. They give you the answer to the all-important question from Rule number 7.

It's impossible to run your business properly without them.

10. Eliminate Your Cash Flow Worries So You Are Free to Do What You Do Best.

This is the real key to your success. The reason you have to make sure you have the cash flow of your business under control is so you are free to focus all your time and talents where you can make the most difference in your business.

When you have your cash flow under control, you are free from worry, doubt and concern. You have the cash flow information you need to make sure that everything you do each day in your business is clearly focused on making your business better.

You have the information you need to measure your progress using the amount of cash you generate (and keep) for yourself and your business as your ultimate financial measurement.

Pre-read_on_Basic_Book-keeping_for_Trainees_@DBA_102 (Pre-session_briefing)

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