A project of Volunteers in Asia by: G. H. Barker Published by: G. H. Barker c/o Diani Beachlets P.O. Box 26 Ukunda Mombasa, Kenya Available from: 6. H. 3arker c/o Diani Beachlets P.O. Box 26 Ukunda Mombasa, Kenya Reproduced by permission of the author. Reproduction of this microfiche document in any form is sllbject to the same restrictions as those of the original document. -P=-------- ~-- by G. H. BARKER The Author The author has at various times been: @ Africa (1956 - to present 1 A Government Trade Development Officer req~nsible for the developent of Afrkans in Trade (IO yrs) . A General Manager of a National Trading Corporation. A Head of a Business Studies Dept. in a College of Commerce. An Ekaminer with Ear .’ Frican Examinations Council. A Founder Fellow of .-.. Institute of Management. A Member of the British Executive Service Overseas with voluntary assignments to aid devcinpmxit of small business-men in val3ous colmtries. A private business-man semi-&i&. A bbmging Director of a Distributive Company. A Member of the British Institute of Management. A Cambridge Examiner in Commerce. A lkaining Supervisor with the Gbtributive Industry Training Board. These often parallel experiences have created not merely a wi% and practical knowledge of commerce, particularly in the distributive trade, but a deep understanding of the problems facing African Business- men. Though these problems emerged through cultural and educational causes they were worsenefll by foreign dominance of trade and lack of training opportunities. Few African business-men of today were “born behind the counter”. Economic independence rnz be hastened if a simple and practical introduction to commerce and amounts is encouraged in schools, (and how useful this in all walks of life), and more directly relevant study material made available to budding business-men. Hence this book. Small Industries The Cash-analysis system is adaptable to any business ; one merely needs to increase the number of columns and, or, change their headings. This book is arranged mainly for retailers and small whole- salers but is equally suitable for small industrialists. See Page 36. - 2 - HOW TO CSE THIS BOOK eery business-man needs to cor.:rol his cash, whether this be in his safe or in his cash register or in the bank. By entering all movements of cash in and out he should know at any time what his “cash in hand” is. Likewise tiy entering all cheques drawn and deposits made to his bank he will know the amount of his current account balance. All money received whether in notes, silver, copper, postal o-tiers or cheques is income. Some of tbia will be used in business expenditm. Some, particularly cLeques received, will be banked. These depositi will be entered into the Bank column (2) when physically taken to the bank. Not before. As they are entered in column 2 so also will they be entered as cash going out of column 5, In other words we must not regard ch .ues as being in the bank until actually sent. Initially they are ordinaly income, as cash. The Caah~Cheques-to-Bank entries are known as “contra” entries for cash outgoing entry (col. 5) appears on t& right whilst the incoming entry (col. 2) is written on left, i.e. opposite or “contra”. This is contrary to the normal procedure of making two entries (double- -entry) on one side. This exception has to be, hecause the cash is not in fact leaving the business but merely being transferred inta the bank. Cn the expenditure side we must bear in mind that expendi- means all money going out. Some of this will be in expenses (col. 9) i.e. costs of operations and lost forever. But much will be in purchases of new stock or assets and thus retaining their value for some time. Clhmn 7 shows the amounts spent on purchases. Obviously thess involve movements of cash either through column 5 or by choques through column 6. Thus our double -entries of expenditure are entirely on the right hand page. Money received from selling (usually the contents of the cash- register emptied, apart from our “float”, as we close) must be shown as income (col. 1) and in our Sales column (3). Again both entries are on one side. We appreciate the reason for the two entries when we realise that the system provides us not only with cash control but with the totals of all forms of income and expenditure analysed ready for *se at the end of each trading period. lf we merely kept records of cash and bank movements we would find great difficulty in exkrcting the information we need for our annual accounts. The Transport column is an expenses column but most business- men need to separate this from other expenses. Where the expenditure ls mainly on transpti of goods from sources of buying, as is the case with most African businessmen, then the total transport expenses should be regarded as costs of purchasmg. The amount must appear with purchases in the !Crading Account at the end of our trading period. The Trading A/c tells us how much gross profit we have made, i.e. the difference between our buying costs and our sales income. The Profit and Loss Account, which follows, tells us our net profit, i.e. the balance remaining after aJl the expenses of selling have heen deducted. If our transport costs zm outwards, i.e. in sales deliveries, then they would terminate in the Profit & Loss account. Jf both occur then the delivery costs should be included in column 9, and only transport costs of purchases in column 8. We then do not deceive ourselves as to the true costs of our buying. Our gross profit is accurate. If it is adequate but our net profit is too low then it is to our sel!.hg expenses in column 9 that we must turn to effect economies. The net profit remaining unspent in any business belongs to the investors. In the case of a partnership it should be divided according to the partners capital contributions, In the case of a company it will be allocated as dividends on shares held. The more shares the greater the income. But there may, in any business, be investments in the form of loans. The repayments of these must be made out of net profits before the ordinary business owner or owners receive theirs. Most businessmen cannot <afford to wait until the end of the trading ylear before nceiving their net profit. Therefore a column (No. 10) is provided for the recording of profits drawn. At the end of a trading period the total of Coleman 10 will be subtracted from the net profit realised. The remainder can then either be retained within the business, increasing the owners capital account(s) or withdraivn. Obviously a business can only grow if some net Frofits are “ploughed back”. Drawings are usually enteti as “self or “personal cash” or named. Do not enter money taken out by an owner as wages except in the case of a partnership where there is a working partner and a sleeping partner (or more than one). The salary of the working partner must be paid, like wages, before the net profit is calculated. column 10 can therefore then be used to record the drawing of net profits by any investor. Simply enter their names in the detail column. Their capital accounts plus shares of net profit after drawi.nF wiQ then appear in the Balance Sheet. Other items appearing in the Balance Sheet wiii have teen recta a deci in the “Others” columns (No. 4 and 1.~). ‘I’ypical of tilese will be EL loan coming in from the bank or from an owner ur partner, (COB i a.~3 4) or the repayment of these (cola. 5/C a ii) or Ule purchase of new asseb. Tht: iaiier wiii ‘~ aciritd t” e~~ig ~~tj iii me ~a!;;;;~ sheet. Assets include premises, equipment, motor vehicles etc. Sales debtors, i.e. persons owing us money for sales purchased on credit, are also regarded as assets. however, in the cash-analysis book we make no entry of any transaction until it is paid. Therefore when debtors pay to us their account= : ?,e money simply goes through our cash rewter and is uicluded along \mth our duy sales. Obviol;sly we should keep seperate customer records showing goods taken and payments made in order to knUw and control our c.r&it accounta. ‘~‘&%e records must appear m another book. Wise tratiers endeavour to avoid these debts. ‘Ihey remove precious capital from our business. LuaUrally, ir we do have credit sales outstandmg at the end of a trading period tnese must be included m that period accounts for sake of a~cutxu~cy. In the cash analysis system we do ths by adding the total sales 0uLstancling to our c10suly SLUck hg-Llre. YtuAy spaking a3 atock still belongs to us. Purchases on credit help our capital earn more protits. We are using a suppliers stocks to supplement our own. Thererore waen taking N.inx at tne close 01 a tratig tJerLoa we Ueuuct the hgure of pur&ase- creW.ors before entering our c~osmg stock figure m me bitlace sheet. Stocks unpaid are not really ours. 'thus., agam, there IS no entry in the Cash-analysis book unto we pay our crec~tors. The fact that we might buy in one trading penoci and then pay in the next period bnnga no inaccuraxlcy to our accounmg. vve have already aqusted for this in our stock ligure. A simple method of keeping account of credit purchases is to use a bill tile (or simply a nail standing upright through a piece of wood!) for filing of invoices. We then later check these against the suppliers montnly statement before payment and -try. Assets purchased on credit will cause no entry in our cash- dyBis book until we make payment. lf Uns occurs around the end of a trading penod we smq~~y kgnore ule new asset unul we make payment. In other words Lve exl.luae it irom our bamnce sneet valuatlols of assets mess paid for. Expenses on credit should likewise be ignored until payment is made. Any smaiI amounts outstaxicling for electricity or repairs etc. at a trading period end can be left for entry in the new period. One year’s outstamimgs will be approxim&ely ouset by the mxt. However should we have a large debt and a desire for greater accurancy we can include the amount outstanding in our Profit & Loss A/c expenses (not in the cash book) and then show it also as a Liability in our Balance Sheet. When payment is later made it is essential that the amount is entered not in the expenses column but in column 11 under Other expenditure. For if we have included it in last years final accounts (without decrea- sing our cash) we cannot include it again (though it now reduces our cash) in next years expenses. All items in the two “Others” columns ere extracted singly and dealt with when we “close our hooks” at the trading period end. Returning to the income side; many businessmen prefer to keep a daily sales book or “Salts l?ay-Zook’ rather than handle their main cash book repetitively. They then transfer or “post” their sales figWc for a week or a month into their cash book income column and column 3. The page of examples shows Clrst the daily method and then the weekly. For a monthly entry one can use the foot line opposite “Totals” These simplifications save time and wear on the main book. They also obviate the need to write daily the same word - “sales”. F’inally there is no necessity to reserve an entry line for a particular day. Sometimes we might make several payments in one day and then none for subsequent days. It is of course easier. for the purposes of ohecking, to show contra entries on the same line. It is not essential. Contra entries need, as shown, merely be described as C in the reference column. Payments should show receipt or cheque numbers. The check or trial balance below the expenditure columns proves that all transactions have been entered twice. Cash columns should be balanced and physical cash checked, the bank ~:olumns balanced and later reconciled with the bank stat.ement. Balances remaining unspent at the close of one page are carried forward to the next. \,‘hen a bank account is overdrawn the balance will, of course, appear on the left (foot of column 21 and be carried forward to the right (expenditure column 6) of the following page. This entry is naturally iIXpXSi’Jle with cash since we cannot use more than we have!. The following examples will help the reader to understand the purpose of book-keeping ; to control a business and to measure ita growth. Please make allowances throughout this book where figures seem unrealistic due to differing currency areas. Let us say a man begins business with 2,000-00 of capital. He finds premises to rent, spends ZOO-00 on equipment, 1,500# on stocks and retains 300-00 for immediate expenses. He could prepare hla firat balance sheet like this:-- Openlug Balmm Shwt as at l/6/79 Liabilities Asset9 Premises nil capital 2,000~00 hlquipment 200-99 Stocks 1500-M) 300-00 2,OOO-Oo 2,000-00 - as yet there are no other liabilities (such as bank loans) and if the business were sold the assets would realise sufficient to repay the owner hia investment. It is “solvent”. Now let us assume that he begins business and makes the transactions shown as example entries in this cash-analysis book. Ist us then further assume that he wishes to close the trading period aa at the end of June (lyear would be more normal). He would first value his stock (see note) then prepare a Trading Account as follows: Trading A/c: for June 1979