Financial Auditor, Oluwole Adenuga, Shares On How To Carry Out Effective Bookkeeping For Your Fashion Business
One of the foundations of any business is finance. Without finance, no business can thrive and scale-up in the local or international market space. From the start of a business, bookkeeping is one thing that should not be overlooked because it goes a long way in determining the future of that business.
This week, we spoke with Financial Auditor, Oluwole Adenuga, on effective bookkeeping practices for fashion entrepreneurs, what it entails, the laws surrounding it, and its benefits.
Mr. Oluwole Adenuga is a qualified chartered accountant who is practicing in one of the Big 4 auditing firms in the world. His work as an auditor allows him to examine financial records of different companies and to validate that the books have been fairly stated. Auditors play a leading role in the functioning of the capital market by promoting transparency and supporting investors’ confidence
What is Bookkeeping?
According to him, "Bookkeeping by itself is well defined. It is the act of keeping financial records of the day to day running of a business."
Keeping records makes it easy to be able to account for the position and the performance of the business at any given time.
It is by bookkeeping fashion entrepreneurs, investors, and so on, can examine the inflows and outflows of cash and carry out projections on the business based on historical trends.
Processes to go Through in Carrying Out Effective Bookkeeping for Your Fashion Business
Every business regardless of its size needs to keep records for accountability purposes.
Fashion designers could be entrepreneurs or registered companies. Fashion designers need to understand the basic concepts of income, expenses, equity, assets, and liabilities to be able to keep proper records of their activities.
- Income is the money you earn from your clients when you sell the fashion items you have made.
- Expenses are all the spending you made while designing an outfit, accessory, or footwear for a client. Administration (salaries) and other expenses incurred by your business are also classified as expenses. A net off of expenses against income will make you know how profitable or otherwise your business is at a particular time.
- Assets are resources you have control over and from which you intend to achieve the inflow of cash. Therefore, the tools you use in your business are assets, for example, your sewing machine can be categorised as an asset because it is expected that you will use your sewing machine to sew clothes that will bring in an income for your business.
- Liabilities, on the other hand, are things you need to pay for because you have used them already and when you do pay for them they result in an outflow of economic benefit. For example, if you are on a post-paid electricity plan, you will use electricity for your business before the bill arrives, when the bill comes you are obliged to settle it and this results in the outflow of economic benefit.
- Equity is the money you used to start your business. This money grows over time if the profit made after you deduce expenses and tax are re-injected into your business. Simply put, Equity = Assets - Liabilities.
Bringing all this together, as a fashion designer, you can easily track sales and expenses by daily recording your activities in dedicated books called journals. At the end of each month, you can then compile these journals to prepare your trial balance which will then be the basis for preparing your financial statement.
A typical financial statement is a statement of profit or loss account, statement of financial position, statement of cash flows, statement of equity, and notes to the financial statements.
- Statement of Profit and Loss is a statement that shows the income and expenses of your business. When you take out your profit from your income, it shows if you have made a profit or a loss.
- Statement of Financial Position shows the assets and liabilities of your business, as well as your contribution to the business as the business owner (equity).
- Statement of Cash Flow shows the actual cash movement in the business. It shows clearly cash inflows and outflows, i.e. where cash is coming from and going to.
- Statement of Equity focuses on the movement of your contribution to the business. For instance, if you make some profit and decide to put it back into the business, the statement of equity will show this. This statement will show your initial balance in the business and the new balance as a result of the re-injected profit.
- Notes to Financial Statement provides a more elaborate breakdown of the information in the financial statement. For example, if the revenue is showing N10,000 on the profit or loss account, this note will show the various streams of revenue that resulted in this.
In curating all of this, however, employing the help of an accountant is advisable as you might need a professional to provide you with directions on how to record your daily transactions which will eventually make up your financial statement.
In Nigeria, the majority of fashion entrepreneurs run SMEs and all they do is basic accounting, which is just to recognise the income and expenses of their business on a cash basis principle. The cash basis principle means all they do is to recognise their income when a payment is received and to write out expenses upon settlement of liabilities. From this, they get their profit and loss.
While this is not exactly wrong, if you have plans for the expansion of your fashion business in the future, it is not advisable to do so. You will need to have proper financial records to show to financiers, investors, and lending institutions before they can trust you enough to partner with you or to invest in your fashion business.
What are the Laws Surrounding Proper Bookkeeping In Nigeria?
Section 332(2) of the Companies and Allied Matters Acts, 2004 requires a company to preserve its accounting records for not less than six years from and including the date on which they were created. This law is also applicable for tax requirements, as the statute of limitations for tax reviews in Nigeria is 6 years.
Also, according to section 331(2), the accounting records shall, in particular, contain:
- entries from day to day of all sums of money received and expended by the company, and the matters in respect of which the receipt and expenditure took place; and
- a record of the assets and liabilities of the company.
So, having proper financial records for your business is not something you should do only to make your business more attractive to investors and financiers, but it is something you should do to obey the laws of the land.
What is the Importance of Effective Bookkeeping Practices for Fashion Brands?
1. It helps keep you Accountable
Keeping proper records ensures that you can account for the transactional activities of your fashion brand. It helps you know where your money is going and lets investors and financiers see how well you manage the finances that come into your business.
Lack of records makes accountability difficult and also limits the scope of expansion of the business because for angel investors, commercial banks, and other lending institutions to provide financial aid for your fashion business, they would want to analyse its financial records as presented in the financial statements.
2. It helps you Measure the Growth of your Business
When you have proper financial records in your fashion business, you will have insight into how well your business is doing for a particular period. It also helps you monitor the growth or retrogression of your business over time.
3. It shows Stakeholders the Performance of your Business
Apart from letting you know how your business is doing over time, keeping proper records also informs stakeholders (financial institutions, investors, etc.) about the performance of your business. It helps them have a basis for projection into the future and determine if they can trust you with their money or not.
4. It keeps your Business on the Right Side of the Law
Effective bookkeeping is important because the law says so. The law states that bookkeeping should be done by all companies in Nigeria. This is useful for determining tax liabilities and it serves as a basis for enjoying concessions provided by the government where applicable. Failure of any registered fashion business in Nigeria to keep proper accounting records is punishable by law.
In closing, Mr. Oluwole said, "Bookkeeping is pertinent for fashion entrepreneurs to track their investment, fulfil statutory requirements (e.g. the payment of tax), and enjoy government concessions. It also provides a basis on how their business is faring which can be used for persuading investors and financiers."