Effectiveness of Record-Keeping in SMEs for Strategic Operational Efficiency

Small and medium-scale enterprises (SMEs) are essential to every nation’s socio-economic development. They play vital roles in the economy of both developed and developing countries, such as employment generation and poverty reduction, among others. According to the Central Bank of Nigeria (CBN), an SME is a company that employs from 11 to 100 people and has assets between N5 million to N500 million.

Globally, the issue of maintaining incomplete records or not keeping accurate records among small enterprises has drawn much attention from academic scholars, professional accountants, financial institutions, and governments.

The importance of the availability of accurate financial information to stakeholders for measuring performance and operational efficiency cannot be over-emphasized, as correct financial records help in making informed decisions.

What Does Record-Keeping Mean?

According to U.S Small Business Administration (SBA), “Record-Keeping refers to the orderly and disciplined practice of storing business records”. Record-Keeping is the act of keeping track of the history of business activity, generally by creating and storing consistent, formal records. Nonetheless, record-keeping is maintaining good records or units of preserved information in some permanent form (written documents, photographs, recordings, etc.). Record-keeping comprises identification, classification, summarization, storage, protection, communication, retention, and disposal of records to prepare financial statements.

Types of Record-Keeping

There are two types of record-keeping, namely:

• Manual Record-Keeping
• Computerized Accounting Systems.

Manual Record-Keeping: There are two types of manual accounting records. These are single-entry bookkeeping and double-entry bookkeeping systems.

• Single-entry bookkeeping: This is a “Casual” or “Informal” accounting framework where a system user makes only one entry in entering business transactions. In single-entry bookkeeping, accounting records like cheque book, cash receipts, and cash disbursements are just recorded once per transaction. It does not align with the double-entry rule of Debit and Credit.

• Double Entry bookkeeping: This system is the standard framework utilized by organizations to record financial transactions. A trained bookkeeper will record all transactions chronologically, i.e. Cash receipts, Cash disbursements, Sales, and Purchases and journalize others, then post them in general ledger accounts and prepare a trial balance.

Computerized Accounting System (CAS): The innovation of CAS has led to simplicity, speed, and precision in how accounting information is recorded for the running of business organizations. Many SMEs now like to chase their financial transactions with computerized software rather than rely on a manual system of bookkeeping recording. The benefits of using accounting software include easy reconciliation of stock and preparation of assets register, speedy processing of transactions, enhanced completeness and accuracy etc.

The reason why SMEs need to keep records

Accountability: Accountability is a sense of being responsible. Every business requires a sense of responsibility to its customers, investors and even to the government. Customers need quality goods and impeccable services, Investor requires a high Return on Investment (ROI), and the government involves fulfilment of tax obligation. Even society needs Corporate Social Responsibility. An adequate record-keeping system will help SMEs and businesses generally to track the progression or impact of their activities on various stakeholders because, from a proper record-keeping system, the business owner can see the trajectory of their profitability at every point in time and put adequate measures in place to maintain or grow profitability.

Exposure to opportunities: Opportunities abound all over the world, for example, grants opportunities like the Tony Elumelu Entrepreneurship Programme (TEEP), launched in 2015 to provide 10,000 USD in seed funding for entrepreneurs across Africa. To mention few others, the Bank of Industry (BOI) recently launched a youth empowerment program for young and talented entrepreneurs looking to venture into various sectors of Nigeria’s economy. We have the Grofund Fund, YEEN Financial Grants (Africa’s Young Entrepreneurs), Lagos State Entrepreneurs Trust Fund (LSETF) etc.

These opportunities seek ready business owners to make use of them, and opportunities don’t come sitting on people’s laps. They are available only to ready users. One way for businesses to access these opportunities is by being prepared with detailed financial records that show an accurate and fair view of the position of the company at every point in time.

The attraction of viable investors: Investors are often drawn by what they see or perceive. They often make decisions based on when they see a relatively viable business through what is obtainable in the company’s books/records. Often, when high-worth investors want to invest in trades, they search for companies that share similar motives in terms of profitability, position and visibility to the general market and growth prospects which can only be seen at least at a surface through a business records/books/statements that are available on request, easy to understand and practical for decision making.

Challenges of Record-Keeping in SMEs

Despite the importance of record-keeping in monitoring businesses, some SMEs do not pay needed attention to record-keeping. Some of the reasons include:

Lack of knowledge of record-keeping: There is a need to emphasize the lack of understanding about the contribution made by poor record-keeping in SMEs. According to Muteti et al.,(2018), SMEs face a big problem due to lack of knowledge on record-keeping in their business ventures, indicating that SMEs do not regard record-keeping as a contributory factor to the success and business performance of their businesses.

High investment from a low capital base: Several SMEs have a low capital base to fund the acquisition of relevant tools to be used for effective record-keeping, as this is a dilemma that most SMEs find themselves in. Oftentimes, SMEs are not even able to pay for training and development sessions that will help enhance their business, and this is usually a difficult place to be as a growing SME.

Lack of suitable accounting software or ERP: The difficulty in getting suitable accounting software or an Enterprise Resource Planning (ERP) package to use is a problem peculiar to most SMEs which hinders effective record-keeping. This happens because, for an ERP to be specifically tailored to serve the need of a particular SME, the developer must understand the business needs and develop a specific and suitable record-keeping system for such SME.

Technology-Driven Innovation:  Technology-driven innovation means the progress and idea generation that occurs vis-a-vis the development of new technological capabilities. However, the difficulty in using technology to drive the business process to achieve accurate record-keeping often proves difficult, as getting highly skilled professionals who can handle the development of the required software for record-keeping is one difficult problem SMEs face.

Solutions to overcome the challenges of record-keeping in SMEs

Invest in Experienced Personnel or Professionals: As SMEs begin to grow, business owners might want to think about investing in experienced, and trained personnel or professionals. There are benefits to hiring personnel to assist with the organization’s record-keeping. First, a business task deduction. Secondly, without worrying about keeping your business records, you will have the time to focus on growing your business while knowing that your documents will remain current.

Acquisition of relevant tools/ ERP for Record-keeping: Acquiring appropriate ERPs such as Xero, NetSuite, QuickBooks, Desktop Pro, QB Enterprise, SAP Business One, Microsoft Dynamics etc., for financial record-keeping is a good investment for any SME. This will aid accurate and effective record-keeping, which will bring about strategic operations.

Networking and Collaboration: There’s a citation that reads ‘Team-Together Everyone Achieves More’ coined by Aristotle which suggests that by working in a Team, there is the possibility of more significant achievement, and is not left out in being operationally strategic. SMEs can come together to share knowledge on appropriate ways to keep records (financial or otherwise), sharing what has worked and is not working.

Conclusion

In conclusion, we cannot over-emphasize the importance of record-keeping in SMEs for strategic, operational efficiency. We, therefore, recommend that SMEs operators should seek basic accounting knowledge to enable them to keep proper records, acquire business-tailored CAS, invest in employees training and development, and, where possible, engage the services of SMEs professionals who will help or guide them in keeping records properly and prepare relevant financial report at a minimal cost for the business stakeholders.