WHY IS ACCOUNTING NECESSARY FOR A SMALL BUSINESS?

WHY IS ACCOUNTING NECESSARY FOR A SMALL BUSINESS, AND HOW IS IT DONE? THE ANSWER TO THE FIRST PART OF THIS QUESTION YOU WILL SEE WHEN YOU ASK YOUR BANK FOR A LOAN. EVEN IF YOU ASK A RELATIVE FOR THE MONEY, THE PERSON WILL BE EAGER TO KNOW WHETHER HE/SHE WILL GET THE MONEY BACK.

SO, WHEN YOU ASK FOR MONEY FROM ANYWHERE – ESPECIALLY FOR A BUSINESS – PEOPLE WILL ASK YOU WHETHER YOU MAKE PROFIT. EVEN FOR YOU IT IS BETTER TO KNOW WHETHER YOUR BUSINESS IS PROFITABLE. IF NOT, YOU WILL EAT INTO YOUR CAPITAL – AND YOUR BUSINESS WILL COLLAPSE. THIS SCENARIO WILL THEN SURELY HAPPEN SOONER THAN LATER. (FOR BUSINESS STARTER, IT IS EVEN BETTER, IF YOU HAVE A SECOND SOURCE OF INCOME. AT THE BEGINNING, YOU CAN’T RELY ON YOUR BUSINESS MAKING ENOUGH PROFIT TO LIVE ON.)

SO, HOW WILL YOU DO YOUR ACCOUNTING? YOU DO NOT NEED TO MAKE IT VERY COMPLICATED. NOBODY WILL ASK YOU – AT THE BEGINNING – TO DO SOMETHING LIKE DOUBLE-ENTRY ACCOUNTING, ETC. OF COURSE, IF/WHEN YOUR BUSINESS BECOMES SUCCESSFUL, THIS WILL CHANGE IN THE FUTURE.

FOR NOW, A SIMPLE PLUS-MINUS CALCULATION WILL BE SUFFICIENT. THAT MEANS, YOU HAVE THREE COLUMNS. ONE IS FOR THE DATE,ONE FOR THE INCOME, AND ONE FOR THE EXPENSES. IN THE LEFT COLUMN, YOU WRITE THE DATE. IN THE MIDDLE COLUMN, YOU NOTE THE MONEY YOU RECEIVED, AND FOR WHAT YOU RECEIVED IT. IN THE RIGHT COLUMN, YOU WRITE HOW MUCH MONEY YOU SPENT, AND FOR WHAT YOU SPENT IT. AT THE END OF EVERY MONTH – OR PERHAPS EVERY WEEK – YOU SUM UP WHAT YOU RECEIVED AND WHAT YOU SPENT. READY IS YOU BOOKKEEPING FOR A MONTH.

NOW, FOLLOWING IS A BRIEF EXAMPLE FOR WHAT I JUST WROTE. LET US GUESS YOU SELL SECOND-HAND CLOTHES AND BAGS.:

DATE                                   INCOME                                EXPENSES
1.                                     20 (SALES OF 1 T-SHIRT)
5.                                                                                            15 (ELECTRICITY)
7.                                    50 (SALES OF 2 BAGS)
9.                                                                                           35 (RENT)
11.                                   15 (SALES OF 1 TROUSER)
15.                                  25 (SALES OF 1 BLOUSE)
23.                                 20 (SALES OF 1 T-SHIRT)
30.                                                                                         25 (SALARY)
TOTAL THIS MONTH 130                                            75
INCOME MINUS EXPENSE 130-75=55

THAT MEANS, IN THE RECORDED MONTH, YOU MADE A PROFIT OF 55.
GOOD JOB!

SO, THAT’S  WHY ACCOUNTING IS NECESSARY FOR A SMALL BUSINESS

ON THE NECESSITY OF FINANCIAL LITERACY

I HAVE WRITTEN A LOT ON THE NECESSITY OF FINANCIAL LITERACY AND THE NECESSITY TO LIMIT THE LOSSES O INVESTMENTS. THIS AFFECTS HUNDREDS, IF NOT THOUSANDS OF PEOPLE IN GHANA.  AND IT’S NOT ONLY GHANA WHERE THESE PROBLEMS OCCUR. FURTHERMORE, IT’S NOT ONLY A PHENOMENON OF DEVELOPING  COUNTRIES, ALTHOUGH IT MIGHT  HAPPEN THERE MORE OFTEN. BUT THAT MIGHT HAVE MORE TO DO WITH THE  DIFFERENCES IN THE OVERALL LITERACY THAN WITH FINANCIAL LITERACY IN PARTICULAR.

WHEN FINANCIAL LITERACY IMPROVES, IT WILL BE MORE DIFFICULT TO LURE SAVERS AND INVESTORS INTO DUBIOUS FINANCIAL PRODUCTS. THIS IS VERY OBVIOUS IN THE SO-CALLED “MENZGOLD SAGA”, BUT NOT LIMITED TO IT. HERE, THE QUESTION WHETHER MENZGOLD WAS REGISTERED AND WHERE PLAYS A MORE OR LESS SECONDARY ROLE. THIS IS A QUESTION FOR THE REGULATOR(S). THE PRIMARY CONCERN FOR INVESTOR SHOULD BE TO DIFFERENTIATE BETWEEN HONEST AND DISHONEST INVESTMENT OFFERS.

I OFTEN REFER TO THE OLD SAYING “IF IT SEEMS TO BE TOO GOOD, IT PROBABLY IS TOO GOOD TO BE TRUE”. IF SOMEBODY OFFERS YOU AN INTEREST RATE OF AROUND 40% PER YEAR, IT IS SURELY NOT SUSTAINABLE. SOONER OR LATER, THIS OFFER WILL COLLAPSE. CONSEQUENTLY, TRY TO AVOID SUCH SEEMINGLY “ATTRACTIVE OPPORTUNITIES”.

YOU SHOULD PREFER TO INVEST ANY SURPLUS AMOUNT IN YOUR LOCAL RURAL OR COMMUNITY BANK. THESE ONES OFFER A REALISTIC INTEREST RATE WHICH IS NORMALLY EVEN OVER THE INFLATION RATE. FURTHERMORE, YOU EVEN CONTRIBUTE TO THE DEVELOPMENT OF YOUR DISTRICT. THIS IS BECAUSE  THE BANKS USE YOUR INVESTED MONEY TO DISTRIBUTE LOANS FOR MICRO AND SMALL BUSINESSES. APART FROM THAT, RURAL AND COMMUNITY BANKS USUALLY USE PART OF THEIR PROFIT TO SUPPORT LOCAL INSTITUTIONS.THEY DO THAT IN PURSUING THEIR CORPORATE SOCIAL RESPONSIBILITY.

RECKLING ENTERPRISES THROUGH GHANA RESEARCH WANTS TO CONTRIBUTE ITS PART TO IMPROVE FINANCIAL LITERACY IN THE COUNTRY.

  • FROM BEGINNING OF NEXT YEAR ON, THERE WILL BE BASIC COURSES IN FINANCE AMD INVESTMENT ON ghanaresearch.org  .(THESE COURSES WILL BE COMPLETELY FREE OF CHARGE.)
  • BY END OF NEXT WEEK, I WILL PUBLISH A QUESTIONNAIRE ON THE WEBSITE AND ON SOCIAL MEDIA. IN THIS QUESTIONNAIRE, IN THIS QUESTIONNAIRE, YOU CAN ANSWER SOME SIMPLE QUESTIONS. ACCORDING TO THESE ANSWERS, I WILL TELL YOU WHICH TYPE OF INVESTOR YOU ARE. FROM THAT YOU WILL BE ABLE TO DERIVE HOW TO INVEST YOUR MONEY BEST.

 

I HOPE YOU WILL PARTICIPATE!

SEPTEMBER MEETING BANK OF GHANA MPC – PART 3

MPC-Press-Conf-Release_Sept_20_2019

Summary_of_Economic_Financial_Data_September-2019

IN THE THIRD AND LAST PART OF MY ARTICLE SERIES ABOUT  THE SEPTEMBER MEETING OF THE MONETARY POLICY COMMITTEE OF THE BANK OF GHANA, I WILL DISCUSS FOUR ISSUES.

— GOVERNMENT FISCAL OPERATIONS;

— MONETARY INDICATORS;

— BANKING SECTOR INDICATORS; AND

— STOCK MARKET PERFORMANCE.

FINALLY, THERE WILL BE A CONCLUSION AND  OUTLOOK.

  • GOVERNMENT FISCAL OPERATIONS

HERE WE GET JUST INTO THE CENTER OF ECONOMIC PROBLEMS. THE FISCAL OPERATIONS OF THE GOVERNMENT DIDN’T REACH THE TARGETS AT ALL LEVELS. DESPITE THE DOMESTIC REVENUE AND THE TAX REVENUE INCREASING MARGINALLY, THE OVERALL BALANCE WENT FURTHER INTO MINUS. THAT WAS BECAUSE THE EXPENDITURE INCREASED MORE THAN THE REVENUE. MORE MUST BE DONE TO GENERATE MORE REVENUE. THERE ARE PROBLEMS WITH COLLECTING THE PROPERTY TAX AS WELL AS FUNERAL FEES, E.G. THERE ARE ALSO PROBLEMS WITH TAXING THE INFORMAL SECTOR.

I AM AWARE THAT THE GOVERNMENT HAS IN PLAN MEASURES TO BETTER THE REVENUE COLLECTION. LET’S SEE WHAT COMES OUT OF THAT UNTIL THE END OF THE YEAR.

IN THE NEXT STEP IN THE GOVERNMENT’S FISCAL OPERATIONS IS THE PUBLIC DEBT. THE DEBT/GDP RATIO ROSE TO NEARLY 60%. THIS LEVEL IS USUALLY CONSIDERED THE UPPER LIMIT OF THE RATIO FOR A COUNTRY LIKE GHANA. ANYTHING HIGHER THAN THE 60%, AND THE SITUATION GETS DANGEROUS. WE CANNOT  AFFORD DEBT/GDP RATIOS OF 100% OR MORE LIKE SOME DEVELOPED COUNTRIES HAVE.

THERE IS ONLY ONE “POSITIVE” ASPECT WHEN LOOKING AT PUBLIC DEBT.THAT IS THAT THE DOMESTIC DEBT HAS INCREASED IN DOLLAR TERMS AS WELL AS IN CEDI TERMS. ON THE OTHER HAND.,EXTERNAL DEBT DECREASED MARGINALLY, ALSO IN DOLLAR TERMS AS WELL AS IN CEDI TERMS.

NOT A COMPLETELY ROSY PERSPCTIVE…

  • MONETARY INDICATORS

THE POSITIVE ASPEDT INTHOSE MONETARY INDICATORS IS THAT THE RESERVE MONEY HAS INCREASED TO 15% ANNUAL GROWTH RATE. ALL THE OTHER MONETARY INDICATORS (M1 AND M2) SHOW A SLOWDOWN OF THE INCREASE RATE. THIS IS PROBABLY THE RESULT OF A TIGHTENING OF THE MONETARY POLICY BY THE BANK OF GHANA.

THE PRIVATE SECTOR CREDIT (PSC) HAS RISEN IN NOMINAL AS WELL AS IN REAL TERMS. THIS SEEMS TO BE A GOOD SIGN. THAT MEANS TWO THINGS – THAT CONSUMERS WANT TO BUY MORE, AND THAT COMPANIES INTEND TO INVEST MORE. THE LATTER CORRESPONDS WITH THE BUSINESS CONFIDENCE RISING. WE MUST WATCH HOW THE CREDIT DEMAND AND SUPPLY DEVELOPS IN THE NEXT MONTHS. THIS IS ESPECIALLY NECESSARY AS SOME BANKS HAVE ALREADY MADE THEIR INTENTION CLEAR TO TIGHTEN THE CREDIT SUPPLY.

  • BANKING SECTOR INDICATORS

THE FINANCIAL SECTOR – OF WHICH THE BANKING SECTOR IS A PART – IS VERY IMPORTANT FOR THE DEVELOPMENT OF AN ECONOMY. AFTER THE CLEAN-UP OF THE BANKING SECTOR, IT SEEMS THAT THE SECTOR HAS STABILISED. THIS COMES TO LIGHT WHEN LOOKING AT THE AGGREGATE BALANCE SHEET. ALL  SUB-INDICATORS – TOTAL ASSETS, TOTAL DEPOSITS, AND TOTAL ADVANCES – HAVE INCREASED. THIS IS SURELY THE RESULT OF THE CLEAN-UP OF THE SECTOR AND THE FOLLOWING STABILISATION.WE CAN SEE THAT FROM THE FACT THAT THE AGGREHATE BALANCE SHEET BALANCE SHEET OF FEWER BANKS IS ACTUALLY BETTER THAN THE AGGREGATE BALANCE SHEET OF MORE BANKS VEFORE THE CLEAN-UP.

THE CAPITAL ADEQUACY RATIO HAS GONE DOWN MARGINALLY. BUT IT IS STILL HIGH ENOUGH NOT TO SHOW ANY PROBLEMS.

THE ASSET QUALITY HAS ALSO INCREASED, AS  THE PERCENTAGE OF NON-PERFORMING LOANS (NPL) DECREASED. THIS IS ESPECIALLY TRUE FOR LOW-CATEGORY NPL WHICH IS ANOTHER INDICATOR FOR THE STABILISATION OF THE ECONOMY.

MANAGEMRNT EFFICIENCY IS EFFECTIVELY FLAT, WHILE RETURN ON ASSETS AND RETURN ON EQUITY BOTH INCREASED.WITH THIS, BOTH INDICATORS WENT BACK ON A POSITIVE PATH, AFTER THEY DECREASED CONSIDERABLY IN THE MONTH BEFORE.

CONSEQUENTLY, THE BANKING SECTOR APPEARS TO BE ON HARD GROUND AGAIN. STAKEHOLDERS IN THE BANKING INDUSTRY SHOULD ONLY BE CAREFUL THAT THEY DON’T  OVERDO THE CAUTION IN CREDIT SUPPLY.

THE BANKING LIQUIDITY IS THE ONLY NEGATIVE SHOWING IN THE BANKING SECTOR INDICATORS.BOTH COMPONENTS WENT DOWN, THE CORE L;IQUID ASSETS TO SHORT-TERM LIABILITIES EVEN CONSIDERABLY.

  • STOCK MARKET PERFORMANCE

ANOTHER PART OF THE FINANCIAL SECTOR IS THE STOCK MARKET. UNFORTUNATELY, I CANNOT SAY MUCH POSITIVE ABOUT THE PERFORMANCE OF THE STOCK MARKET. BOTH INDEXES – THE COMPOSITE AND THE FINANCIAL – WENT SOUTHWARDS. THAT ONE THEY DID FOR THE LAST THREE MONTHS UNDER REVIEW. FURTHERMORE, THE TREND WENT ON IN THE LAST WEEKS. THEREFORE, BOTH INDEXES ARE ON THEIR LOWEST POINTS SINCE YEARS. AS THE MARKET CAPITALISATION SHOWS THE SAME TREND, WE CAN ONLY HOPE FOR BETTER TIMES.

  • CONCLUSION AND OUTLOOK

AS WE COULD EXPECT, THE FAILURE TO REACH THE REVENUE TARGETS IS THE MAIN PROBLEM. TOO MANY OTHER COMPONENTS DEPEND ON THE SUCCESS OF REACHING THE TARGETS. IF THAT COULD BE THE CASE, THE DEBT/GDP  RATIO WOULD SURELY BE IN A BETTER STATE, ALSO, MANY OTHER INDICATORS NOW IN THE NEGATIVE TERRITORY COULD GO UPWARDS. AS I ALREADY MENTIONED, THE GOVERNMENT WILL PUT IN PLACE MEASURES TO IMPROVE REVENUE MOBILISATION. ESPECIALLY THE TAX REVENUE  COULD IMPROVE SIGNIFICANTLY THROUGH THESE MEASURES.

WE MUST WAIT WHETHER THESE MEASURES CAN BE IMPLEMENTED SUCCESSFULLY. BUT IF THAT IS THE CASE, THE GHANA ECONOMY WILL SURELY TAKE A MAJOR STEP FORWARD.

SEPTEMBER MEETING BANK OF GHANA MPC – PART 1

Summary_of_Economic_Financial_Data_September-2019

MPC-Press-Conf-Release_Sept_20_2019

THE MONETARY POLICY COMMITTEE ((MPC) OF THE BANK OF GHANA (BOG) HELD ITS SEPTEMBER MEETING LAST WEEKEND. IT KEPT THE MONETARY POLICY RATE UNCHANGED AT 16%. IN THE FIRST OF THREE ARTICLES I DISCUSS THEE OPINION OF THE MPC AS WELL AS SOME OF THE ECONOMICAL AND FINANCIAL DATA. (YOU CAN DOWNLOAD THE PRESS RELEASE OF THE MPG AND THE SUMMARY AT THE BEGINNING OD THIS ARTICLE. YOU CAN ALSO DOWNLOAD THESE DOCUMENTS FROM THE WEBSITE OF THE BOG.
IN THIS FIRST ARTICLE, I’LL PRESENT THE PRICE DEVELOPMENT, THE REAL SECTOR INDICATORS, AND THE NOMEY MARKET RATES.
1) GENERAL ASSESSMENT
BUT LET’S FIRST OF ALL START WITH THE GENERAL OPINION ABOUT THE GLOBAL AND THE LOCAL ECONOMY.
I CAN AGREE WITH THE MPC’S ASSESSMENT OF THE GLOBAL ECONOMY. THIS IS ESPECIALLY TRUE FOR THE IMPACT OF A WEAKER ECONOMY IN DEVELOPED COUNTRIES ON DEVELOPING ONES.
VIEWING THE LOCAL ECONOMIC DEVELOPMENT, THE MPC INTERPRETS THE DATA A LITTLE BIT MORE POSITIVE THAN I WOULD DO. THE MPC IS OF THE OPINION THAT ECONOMIC GROWTH HAS REMAINED STRONG WITH 5.7% INCLUDED OIL AND 4.3% EXCLUDED OIL. (NOT 4.1%, AS I MENTIONED EARLIER, SORRY!) IT IS TRUE THAT 5.7% IS A RATHER POSITIVE FIGURE; MOST COUNTRIES WOULD BE HAPPY TO HAVE SUCH A GROWTH. BUT WE SHOULDN’T OVERLOOK THE FACT THAT IT’S THE THIRD CONSECUTIVE TERM THAT THE GROWTH DECREASSES. FURTHERMORE, THE GAP BETWEEN GROWTH INCLUDED OIL AND EXCLUDED OIL INCREASES. ALTHOUGH THERE IS NO REASON WHATSOEVER TO CRY ABOUT THE ECONOMIC GROWTH YET. BUT WE SHOULD LOOK AT THE DEVEKOPMENT OF GROWTH IN THE NEXT TERMS MORE CLOSELY.
2) PRICE DEVELOPMENT
THE CONSUMER PRICE INDEX (CPI) WENT DOWN 1.6% TO 7.8% COMPARED WITH AUGUST 2019. WE CAN ATTRIBUTE THIS DOWNWARD DEVELOPMENT MOSTLY TO ITS REVISION AND CHANGED WEIGHING BY THE GHANA STATISTICAL SERVICE (GSS).SUCH CHANGES OF THE UNDERLYING BASKET AND WEIGHING FROM TIME TO TIME IS ABSOLUTELY NECESSARY. WE MUST NOW SEE HOW THE CPI WILL DEVELOP IN THE NEXT MONTHS ON THE BASE OF THE BEW CALCULATION. FOR NOW, THE INFLATION RATE IS OUTSIDE THE RANGE OF 8+/-2% ON THE DOWNWARD SIDE, SET BY THE BOG. THIS IS BY ALL MEANS A GOOD SIGN.
OTHER MEASURES CONCERNING PRICE DEVELOPMENT LIKE THE RELATION OF FOOD PRICE DEVELOPMENT TO NON-FOOD PRICE DEVELOPMENT CANNOT BE DISCUSSED HERE. THIS IS DUE TO THE LACK OF AVAILABLE DATA FOR THIS MONTH. THIS, IN TURN, IS AGAIN DUE TO THE NEW CALCULATION BASE.
3) REAL SECTOR INDICATORS
AS THE BOG ITSELF ADMITTED, THE COMPOSITE INDEX OF ECONOMIC ACTIVITY (CIEA) SLOWED DOWN CONSIDERABLY COMPARED WITH LAST YEAR FROM 4.3% TO 2.1%. ON THE OTHER HAND, THERE IS AN INCREASE IN CIEA FROM 1.5% TO THESE 2.1% COMPARED WITH LAST MONTH. THE CIEA HAS GENERALLY GONE DOWN IN THE LAST MONTHS COMPARED WITH LAST YEAR. BUT FOR MY UNDERSTANDING, IT IS TOO EARLY TO DRAW ANY CONSEQUENCES FROM THAT. WE MUST AT LEAST SEE UNTIL THE END OF THIS YEAR HOW THE FIGURES DEVELOP.
I HAVE ALREADY DISCUSSED THE GROSS DOMESTIC PRODUCT (GDP) BEFORE. BUT IT MIGHT BE.
INTERESTING TO LOOK AT THE CONTRIBUTION OF THE THREE SECTORS, AGRICULTURE, INDUSTRY, AND SERVICES.
a) AGRICULTURE
THE AGRICULTURAL SECTOR OFFERS – AS USUAL – THE LEAST CONTRIBUTION TO GDP OF THE THREE SECTORS. ON THE OTHER HAND, IT GREW 3.1% COMPARED WITH THE LAST TERM. WITH THAT, THE AGRICULTURAL SECTOR IS THE ONLY ONE WITH A GROWTH IN COMPARISON. THIS CAN POSSIBLY BE DUE TO THE WEATHER.
b) INDUSTRY
THE INDUSTRY SECTOR IS THE SECOND BIGGEST CONTRIBUTOR TO GDP. BUT ITS ANNUAL GROWTH FELL FROM 8.4% TO 6.1%. AS MUCH OF THE INDUSTRY ALSO DEPENDS ON THE WEATHER, RAIN MIGHT CONTRIBUTE TO THIS DECREASE. WORRYING IS ONLY THAT THE INDUSTRY SECTOR GROWTH WAS NEAR TO 100% BETTER ON THE SAME MONTH OF LAST YEAR.
c) SERVICES
THE SERVICES SECTOR IS THE LATGEST CONTRIBUTOR TO GDP, IT ALSO LOST COMPARED WITH LAST TERM. BUT THE ANNUAL GROWTH ONLY DECREASED FROM 7.2% TO 6.5%. MOREOVER, CO,PARED WITH ONE YEAR AGO, THE ANNUAL GROWTH INCREASED FROM 0.5% TO 6.5%. THIS GENERALLY SHOWS THAT THE SERVICES SECTOR IS STILL STRONG IN THIS COUNTRY.

LET US FINALLY UNDER THIS PARAGRAPH LOOK AT THE CONSUMER AND BUSSINESS CONFIDENCE INDEXES,
WHEREAS THE CONSUMER CONFIDENCE INDEX WENT LOWER BY ABOUT THREE POINTS, THE BUSINESS CONFIDENCE INDEX ROSE BY APPROXIMATELY 4 POINTS. THE DECREASE IN THE CONSUMER CONFIDENCE IS PROBABLY CAUSED BY THE INCREASE IN UTILITY PRICES. THE BUSINESS CONFIDENCE IS MORE FORWARD LOOKING. THEREFORE, IN MY OPINION, THE CONSUMER CONFIDENCE INDEX WILL ALSO INCRREASE IN THE NECT MONTHS. LET’S SEE…

4) MONEY MARKET RATES
I CONCLUDE THIS ARTICLE WITH A LOOK AT THE MONEY MARKET RATES.THIS LOOK CAN BE RATHER SHORT. TOGETHER WITH THE MONETARY RATE AT 16.00%, NEARLY ALL MONEY MARKET RATES REMAINED THE SAME. THIS INCLUDES THE INTERBANK WEIGHTES AVERAGE.ONLY THE SECONDARY MARKET MOVED TO SOME EXTEND.