Importance of Bookkeeping Process

Welcome Friends, you are welcome to learnvern. I am Anshu Sachan.

In the last session we saw, flowchart and bookkeeping process, as from where does the bookkeeping start from and from where does its record end.

Now what we will do is, we will see the importance of the bookkeeping, as what are the benefits, what will happen, if I continue to follow the whole process properly.

Firstly, the most valuable or most important thing about bookkeeping is that, you would be able to record the transaction on a day to day basis. Right? If you have set a process already, as at this time everyday all the transactions should be recorded. This will result in, not a single transaction getting omitted. Suppose one thing, you had a customer and he gave cash to you and went away. Okay. You were sitting in the business hours, and he gave you some cash and then he left. Okay. Now what happened is, you forgot to record the cash in your books of account. As you are not following a process for the books of accounting. So what happened is, he gave you the cash, and you forgot about it. Okay. You were doing the daily transactions and you got involved in the day to day business and you forgot about the cash. You forgot that someone has given you some cash.

Now suppose that you had made a small voucher describing the amount you have to take from him. And the name of that customer appears again. As you need to take the money from him. But, he has already given you the cash that you have forgotten about. Understanding me? So If the bookkeeping process was there, then these sort of mistakes would not have happened. Sometimes it also might happen that a customer have not given you the money and he says that he has paid you that sum of money. Getting me? You do not have any record or proof that can tell you, that he has not paid or paid you the money. Okay.

Now what happens is. You will implement the process of the bookkeeping, as I have told you, whenever that transaction occurs, the money gets involved, it becomes a financial transaction, so it will be straight away recorded. Okay. The benefit of this is, you would be able to record the day to day transaction, and there will be very low chances of you forgetting to book a transaction. Understood?

02/20

The second one is the real time assessment of financial health. Last time we learned about the balance sheet. What is a balance sheet? It shows your position as on date. As when we go to the doctor, he does a physical examination and tells us what our physical condition is. Are you fit and fine, or are you weak or strong. Similarly, if I want to check the health of the business then in that case, how would I know? From the balance sheet. How will the balance sheet be made? When I will be maintaining the proper books of account, then only I would be able to make a balance sheet and when a proper balance sheet is made then only I will be able to understand the financial health. As this business is right 0or wrong. Is this business weak or strong, or if it is very strong, and can be taken further. It would become an effective decision making tool.

Suppose that you have two locations, there you do sales, okay. Imagine you are in Ahmedabad, so you have one location at Isanpur and another location is at Maninagar, you do your sales in those areas. Now you wish to open another shop. What will I do now? I will be looking at the sales figures of Maninagar and also of Isanpur. Getting me? The amount of sales these two locations are providing me. Now, if they do similar sales in another third area, will it be profitable or not? How are my suppliers? If I purchase the material from there, then would it be cheaper for me? Or not? What is the rate? What was the rate that he sold to me in the past? What is the percent of discount and what are the policies for the discount? As when you make an early payment then does he give you a discount?

How would you know all these details? You will know about these details when you properly maintain a proper books of account. When you have a track record as no this supplier is better or this supplier is providing good quality and quantity, and the deliveries are also not delayed. If you are maintaining inward stock, you all know what an inward stock register is, right? It is a stock register, as when we have given the order and when the product came, it w3ould get registered in the inward stock register. So, you would also know, as when I give the order to this supplier and when I usually get the delivery of the product. Okay. If you want to take a decision of expanding the business, or in the opposing case, if I want to close down a shop. So, is the shop at a break even point? As if the shop is kept running, then the shop would not turn a profit or loss. What is this called? It is known as a break even point. No profit and no loss. When this situation comes then it is called break even point. Understanding me? If you want to close any business. Then it should reach a point below the breakeven point. Getting me? If it reaches the breakeven point then it is called a shut down point, as if I incur this much loss then I will be closing this business down. Right?

There are two things. First one is, break even, neither profit nor loss, and the second one is the shutdown point. That is decided as if it gets below that then I will be closing down the shop. Okay? Now, the data that I require for this, as the total number of shops that I have, I want to close it. Then what is it that causes this amount of expenses. Why is it earning less money. Are my efforts not enough, or my marketing skills are not good enough, or should I change my marketing strategy? Or else there are some expenses that are useless or are not providing a benefit to the business. Meaning they are not proving to be useful. So, should I be able to avoid this business expense? If yes, then I should stop making that expense. Along with that, try to minimise the expenses that are not that useful to the business. Okay?

So all the things like, expansion, or closing down a shop, or cutting down on the expenses, or if I want to make a budget. Then how would I be able to know all the things? I will know all these things only when I have enough data. So what happens is, the decision regarding my expansion, or any other important decision regarding the business. For that, if I require any data, then it will be available. If I have done the bookkeeping, I will find the financial data from there.

Then after that, there is forecasting and budgeting. I have made a lot of profit from the last two years, the sales were very good. But the thing that happens is, whenever the season is here, I am usually out of stock. I did not have materials at that time and I became out of stock. Or else, I had hoped that in the next 6 month I will be generating this much profit but I am not able to achieve so. So, what you will do is, you will do forecasting. Meaning, if today is september then I will do a forecast for the month of December. As to how much profit can be generated and how much sales can be made. How much will be my expense? And what will be my profit for the month of december, meaning budget. Are you understanding? Forecasting, meaning to think of ahead. To predict what will be happening in the future. To take a guess of the future as to what will happen in 6 months in the future. The people who are doing business, need to think 6 months or 1 year in advance. As to what the position of the business will be in the next 1 year. After 1 year what will be the performance of my business, based on that I will be taking adequate actions today. For instance, I want to

increase my sales by 25 percent in the next 6 months. If I have 1000 sales today and I want 1250 sales, then how will I be able to do it? What are the effective tools, which kind of marketing strategies that I can use. Should I give an advertisement in the newspaper, or make a hoarding, or advertise it on television. It depends on where you are getting more customers from. Okay?

To make these marketing strategies, for forecasting as to how much would be your expected income and expense. In future, if there is a profit and loss. What should I do, that my losses are less, and what should I do to sustain my profit. Like there was covid, in which there was very less sales and in these times what happens is, no business will think about expansion, but the business thinks of survival. As what should the business do to make it survive? Okay. Meaning, if it is on a break even point, its not making profit or loss, but my business should keep on functioning. How would all this be possible? It will be possible when you have a lot of data, and you are able to properly forecast it, with your forecasting skill.

What will happen by maintaining the bookkeeping system. You can run your business in a more organised way. Let's take a simple example. Suppose you are maintaining a bank book. Okay. So you might know, as of now what my bank balance is, so should I issue this cheque or not. Sometimes what happens is, we issue a cheque and that cheque gets bounced. Why? Because of insufficient balance. Sometimes what you think is, you will receive the money from this customer and then you will pay this supplier, and the check will be cleared. Okay. If you are working haphazardly, you do not maintain a record. If you are like this customer will give me the cheque and once its cheque is cleared then the cheque of the supplier will also be cleared. Okay. That means you are working with a risk. As once this happens then this will happen. Many times it happens that your cheque is bounced, due to insufficient balance. This leads to low credit in the market.

Now, if you are maintaining a proper books of account, then you would be aware about how much amount you have in your bank account. How many cheques you have written, and which cheques are there that you have given to the supplier, that will be deposited in the bank. So, you would know the real time cash balance or the real time bank balance, then you can decide if you should issue a new cheque or not, if you are issuing it then on which date. Okay, this was a small example.

In this way if you are maintaining a proper books of account, then you can run your business in an organised way. Okay. You won't have to guess, you would not have to run your business on chance. You will be having a record, and data, based on that you can do analysis and based on that, if you take the decisions. Then your business would run in a well structured way. Okay.

10/20

We saw a tool, where we can do forecasting. We forecasted today, in September for the month of December. We had forecasted the budgeted profit and loss. We made a profit and loss by taking a calculated guess and we also made a balance sheet in the same way. Now, I am on December 31. I have actual data now. Okay? Now what I will do is, the forecast that I made in September, for the profit and loss and the balance sheet. I will be comparing the forecast with the actual data. This is called the comparison of Actual versus Forecast. The thing that you predicted, that there should be a profit of this much in the month of December, and as on you are in December then what is the data. So, you will be able to calculate the difference between the two, the variance between the two. Then you will check for which reason there is this variance.

Suppose you thought that there would be a profit of 50 thousand, but when you came into December then the actual profit is of 30 thousand only. Why did this happen? Where did the loss of 20 thousand occur? So, there was an expense that I had not calculated, that was office expense. Okay. And in the month of December or November, I needed to make a repair, so there was an office expense. So, 10 thousand was spent there.

Now, what was this? You had not budgeted for this but it still happened. So, there will be a difference between the budget versus actual. You will get to know the variance of 20 thousand, and you will also get to know the reason for it. As to, this reason was correct or if I could have avoided this reason, or not. Then based on that you will be able to make predictions for the next 6 months. Okay.

The third one is, real time information of cash liquidity. As I gave you an example, if you are maintaining the bank balance properly then you will know who to give the cheque and who not to. From whom you have to take money and from whom you do not have to. Which debtors are there of whose cheque I have deposited and it was dishonoured. Meaning the cheque was bounced and I have to remind them again. As this was a transaction, and for that you had given this cheque number, but this cheque was bounced, due to insufficient balance. So, provide me with another cheque.

12/15

It might be the case as the, bank balance is very low so you need to deposit your personal fund. You need to do capital introduction. It might happen as you have issued a cheque to a party, but you do not have the balance so, you need to add it from your personal fund. So how would you know all of these things? You will know about it when you are properly maintaining the record. As I have to take money from my home to put it in the bank, will my cheque be properly cleared? You will get to know all this real time information, when you are properly maintaining the books of account. Then the next one is Y on Y analysis. You know anyone who does business, the earn a certain amount of profit, they do business expansion. No one does business for loss. Okay.

So, if you want to increase the profit as the years progress then you would have to do a Y on Y analysis. So that you can understand how much are your sales increasing year on year, and how much are your expenses increasing. Are sales increasing more than the expenses and, are the expenses increasing along it? If the rate of increase of the sales is matching with the rate of increase of expense then the profit would not increase. Okay.

Like, the sales are increasing by a rate of 100 percent, but the expenses are also increasing at a rate of 80 to 90 percent. So you are not making enough profit. When will you know about this? When you will be comparing the current year with the previous year. So what this is, this is year on year analysis. Okay. Then the second one is, as in India there is taxation. So we need to file the tax return. So, when you will go to the CA for filing your tax return. Then what will he say? He will say, “Give me books of Account.”, or at least he will ask for the profit and loss account and balance sheet for the year. You need to tell him the profit for the current year. As according to the profit, the tax return would be filed. You tax return will be made and your tax liability will be decided according to that. As you need to pay this much in tax liability. Understanding me?

If you are not making the books of account or if you are not maintaining the books of account then, how will you provide the profit and loss account or the balance sheet. How much of the profit would you tell him? You would have to guess it, if you have not recorded the books of account properly. Then what will happen is, at the end, when you would have to file the tax return then you would have no information. Getting me? You do not know the income. You do not know the expense. You do not even know the assets that you have purchased. So, all this would be mashed up. Then at the end what will happen is, you would not be able to file the income tax. One thing that you might know is that, if you are paying the income tax late then you will have to pay the late charges and interests and your expense would increase.

So, these are all the benefits of maintaining the book keeping. If you are maintaining the bookkeeping then at the last moment you would not have to run to different places or worry about different things. You would not have to guess or make estimates. Apart from that you would not have to make predictions, the reality would be with you. When you will be doing bookkeeping then the real time data would be with you, that will be correct. Okay.

So this was our importance of bookkeeping.

If you have any queries or comments……

In the next session, we will be learning about fixed assets. Which kinds of fixed assets are there, tangible, non tangible, in-tangible and all that things.

Until then, thank you.