My elder sister is a serial entrepreneur. We both grew up like 5 & 6 - as against other of my siblings - but then when it comes to sense and ruggedness, I won't lie to you, she takes the cake way more than me. What do I even know sef!
Less than two years ago, she called me on phone to inform me that she has just acquired some lands in Lagos and Asaba at the rate of N1,200,000 and N800,000 per plot respectively.
I was excited.
Just last month, she chatted me on whatsapp and informed me that her land in Asaba has appreciated. That it now sells for above N2 million per plot.
Now that's roughly a 200% market appreciation!
I was more excited!
Not too long ago, I started thinking about engaging a professional accountant in our company who would help us maintain better accounting standards, manage the integrity of our financial books, and keep us in check as we build our company. So I called up a certain chartered accountant I know and we all agreed to meet at the beautiful Best Western Plus Hotel in Ikeja, Lagos.
It was a long meeting, as I took time to describe the vision and business model of our company to him, the things we have been up to hitherto, and how we wanted him to come in and, like the new sheriff in town, forced us to become more law-abiding accounting citizens.
Long story short, in the course of that business meeting, this chartered accountant opened my eyes to so many accounting insider issues that at some point I began to feel like someone still wearing diapers.
And then he asked me,
"Chinonso, at this level that your company is, do you create a column for depreciation for your assets?"
Immediately, my pant went down and I swallowed a large ball of saliva.
'Imagine this funny dude starting his work with us without at least first waiting for me to issue him an appointment letter,' I thought to myself.
Okay, let's quickly marry this experience with that of my elder sister above and then use that to set the backdrop for what I want to share with you today.
As young or growing entrepreneurs, it is very easy for us to recognize, rejoice, or attach a monetary equivalent to our business assets when they grow in worth, just like my sister did with her land in Asaba. But then we tend to miss out in providing that same monetary equivalent for depreciation for our business assets and factor that into the entire cost profile & structure as we run our business.
No matter what level you are in business, you will have assets - no matter how little. Even if it is your laptop, sowing machine, your digital camera, business phone, vehicle, or your business suits. So here's the thing. As you use these assets to run your business, they don't remain the same, do they?
They wear and tear.
And a simple asset audit will reveal that.
The cost of such wear and tear is what is called depreciation, and as an entrepreneur you should make provision for that when capturing your costs for running your business. Depreciation is a cost to your business, so making provision for it helps you to properly finance such cost without having to rob Paul to pay Peter.
Whenever you acquire a new asset, activate the depreciation account for it. That way, when it is time for the asset to be replaced, for example, such replacement can be financed from a sinking fund that's powered by the depreciated sum of the asset itself.
That's a mouthful, eh?
Okay, if this whole grammar I am speaking still sounds Greek to you, then please rush now and get yourself a professional accountant.
Those guys know how to do their thing - but with a fee.
Copyright 2016 - Chinonso Ogbogu