| Accounting is a factor of online businesses, | | | | |
| especially small businesses, that is largely | | | | The customer had been requested payment after |
| ignored until the necessity arises, and by | | | | being two months overdue but was not put on |
| then it can be a little late to make up lost | | | | stop because no information was passed on to |
| ground. Whether you run an online small | | | | production or dispatch areas, even though the |
| business or a multinational corporation, a | | | | business only employed just under 30 people. |
| good knowledge of basic accounting is | | | | By the time the so-called finance department |
| essential to you. | | | | put a stop on the account it was too late. |
| | | | |
| If you fail to maintain adequate records of | | | | This is an example of bad accounting and a |
| your financial affairs, and make important | | | | lack of actions at critical points. With a |
| business decisions on inadequate financial | | | | good accountancy system, the slowdown in |
| information, your business could well fail | | | | payments would have been logged and the |
| before it even gets off the ground. It | | | | situation monitored. The whole sorry tale |
| doesn't matter how good you are at what you | | | | could have been avoided if the correct |
| do, or if you have a fantastic product that | | | | information had been passed to those who |
| the market wants, poor online business | | | | should have known of the situation, |
| accounting practices could leave you | | | | particularly the owner who had no idea what |
| destitute with no business to run. | | | | was happening. |
| | | | |
| Your financial records can be used to provide | | | | So what should you do to avoid this |
| you with advance warning of things not going | | | | happening? Good online business accounting |
| as they should, and enable you to take | | | | practices are easy to put in place and |
| remedial action before going under. This is | | | | maintain. Many small businesses cannot afford |
| difficult for many entrepreneurs to | | | | a full time accountant, but still apply good |
| understand, especially if they have a good | | | | accounting practices. An example of this is |
| product and what they consider to be a good | | | | the 'double entry' system, whereby you record |
| business model. Financial statistics can show | | | | each transaction twice. What you do is have |
| what might seem like insignificant trends, | | | | two accounts, and for every entry enter it as |
| but that could be a forewarning of things | | | | a debit in one and a credit in the other. |
| going wrong. | | | | The sum of the two accounts as should always |
| | | | cancel each other out. If they don't then you |
| There was a company once that offered 30 day | | | | should look for the error. That will be a |
| terms, but their major customer was happy to | | | | good start. |
| pay fairly quickly in return for a small | | | | |
| discount. This is common business practice. | | | | Then you should always carry out analysis for |
| After about a year the major customer went | | | | each customer, and record the difference in |
| into receivership owing the company a | | | | time between invoicing and receiving payment. |
| substantial sum of money, and since the | | | | Once that time difference reaches a |
| receiver was unable to pay anything but a | | | | pre-determined warning level, then you must |
| very small proportion of what was owed to | | | | contact the customer. You should also have a |
| each creditor, the company was forced to | | | | stop level at which you stop supplying until |
| borrow money to remain solvent, and | | | | payment is made. That is good accounting |
| eventually went out of business about a year | | | | practice, and that way you won't allow a |
| later. It was unable to recover from its | | | | customer to become dangerously over credited |
| major customer going into receivership. | | | | - that applies irrespective of the size of |
| | | | the customer. |
| There were two reasons for this of course, | | | | |
| one being the loss of business from their | | | | These are two simple ways for a small |
| major customer. However the main reason was | | | | business to keep track of accounting errors |
| the lost payments that their customer could | | | | and bad payment records of customers. Simple |
| not pay. They had to borrow to pay their own | | | | but essential, and they could be critical if |
| suppliers, and that was the beginning of the | | | | you fail to stick to them. The company in my |
| end. | | | | example (a real company incidentally) could |
| | | | still be going strong today had they applied |
| Subsequent analysis indicated that the | | | | the second of these two practices. |
| customer had defaulted fairly early on in the | | | | |
| agreement to make quick invoice payments, and | | | | Even if you are too small for an accounting |
| over time their payments had lengthened and | | | | department, at least apply some simple basic |
| lengthened. Eventually they owed over four | | | | accountancy principles, sufficient for you to |
| months invoices which amounted to a | | | | keep track of your income and outgoings and |
| considerable proportion of the small business | | | | whether or not your customers are paying |
| income. It transpired that the accounting was | | | | their invoices. That way you could save your |
| basic to say the least, and none of this had | | | | company a lot of grief. |
| been noticed until too late in the process. | | | | |