Enterprise development experts have observed that failure to streamline standard record keeping systems by enterprises could be among the leading hindrances to the progress of the local banking sector operations and government tax administration exercises.
Experts note that record keeping is an essential aspect of any entrepreneur seeking to run a successful enterprise as it helps track financial transactions, monitor cash flow, and assess profitability.
However, according to Charles Ocici, the Enterprise Uganda executive director, many businessmen in Uganda, especially small and medium-sized enterprises (SMEs), struggle with maintaining proper financial records. Poor record-keeping practice leads to significant financial challenges, one of the most pressing being the accumulation of bad loans.
He observed that financial institutions require accurate financial information to assess a business’ creditworthiness, but when records are poorly kept, it becomes difficult to determine the actual financial health of a business. This results in businesses acquiring loans they cannot repay, ultimately leading to financial distress and closure.
“I caution entrepreneurs against becoming a liability to the lending institutions, some of them have a habit of obscuring the truth while securing loans, they forge books of accounts to make the business appear better than real, at the end, they maneuver and access loans their enterprises cannot service,” he said.
He was speaking to the media last week on the sidelines of a six-day training event in Kampala during which the first cohorts of the Informality Management for Compliance and Resilience (IMCORE) program were trained to adopt the globally certified business systems designed under the Empretec program, promoted by the United Nations Conference on Trade and Development (UNCTAD) to streamline operations and boost profitability.
LACK OF FINANCIAL TRANSPARENCY AND POOR CREDIT ASSESSMENTS
One of the primary reasons why poor record-keeping leads to bad loans is the lack of financial transparency. Many Ugandan businessmen operate informally and do not maintain proper books of accounts.
Banks and lenders rely on financial statements, profit and loss accounts, and balance sheets to assess a business’s ability to repay loans. Without proper records, banks may either deny credit or, in some cases, issue loans based on incorrect assessments.
According to data at the Central Bank, the Non-Performing Loans (NPL) affecting the local banking industry are partly blamed on the lack of integrity and honesty reflected in the way most businesses keep their records used in securing loans from lending institutions.
The overall NPL ratio rose from 4.7% in December 2023 to 5.1% by March 2024. The trade and commerce sector faced the highest default rates at 7.4%, followed by real estate at 7%, and community services at 6.9%. By June 2024, the NPL ratio had decreased to 4.9%, down from 5.2% in March. This improvement was primarily observed in shilling-denominated loans, where the NPL ratio dropped to 5.4% from 5.7%.
RECORD KEEPING FOR TAX ADMINISTRATION EFFICIENCY
According to Richard Mubiru, the Finance Ministry’s Lead Officer Enterprise Growth and Development, government is now more focused on reducing informalities through introducing modern management systems in small businesses through the IMCORE program, improving records being a key area of focus.
“The IMCORE program is a brainchild between the finance ministry, Enterprise Uganda and UNCTAD, the intention is to ensure more enterprises have improved systems, formalize and have the recording systems go electronic to partly help in the field of tax administration,” he said.
In recent years, the Uganda Revenue Authority (URA) has faced significant challenges in meeting its tax collection targets, particularly from local businesses. A key factor contributing to this shortfall is the widespread poor record-keeping practices among enterprises.
Small and medium-sized enterprises (SMEs), which constitute the backbone of the country’s economy, often operate with inadequate or inconsistent financial records, making it difficult for the URA to assess and collect the correct amount of taxes.
Speaking at the closing of the event, the Empretec program coordinator Lorenzo Tosini encouraged entrepreneurs to always practice the skills attained from the Empretec Entrepreneurship Training Workshop 74 for them to be guaranteed of sustainable enterprise growth.
“The skills you have attained are of international standards, all you need to do is ensure you make them your everyday ingredients of your enterprise management systems. As you apply the skills, serve as change agents and share the same knowledge with other entrepreneurs so that the impact is widely propagated,” he said.