A ledger book sits among its companion volumes. Photo via wikimedia.org
Accurate business records are a critical and valuable tool for your business. Keeping and maintaining financial records is important for a wide variety of reasons.
Requirements from a lender, insurance companies, suppliers and the IRS establish specific criteria for information and reporting.
Additionally, keeping consistent records allows you to track the progress of your company more effectively and provides you with valuable insight when making risk management and proactive financial decisions.
If these aren’t reason enough, the IRS says accurate company records can assist a business in several ways.
- Prepare your financial statements
- Identify the sources and purposes of receipts
- Keep track of business deductible expenses
- Prepare your tax returns
- Support items reported on tax returns
Monitoring the progress of your business is important from a financial and personal standpoint. Financially, showing the progress of your business will increase its likelihood of success and also provide a sound backdrop for achieving a loan. Creating a benchmark or dashboard to monitor your business and track it to industry standards illustrates your company’s stability and scalability through active financial management. These are important factors when evaluating a new customer’s potential, hiring the next employees and developing a plan for sustainable growth. Having an accurate history helps create a realistic future.
Often, small business owners don’t utilize or trust their financial statements as a business management tool. As a result, this crucial information might not be used to manage the company or determine future financing needs. Accurately entering information into financial software like QuickBooks or Peachtree will help create the profit & loss statements and balance sheet to effectively manage cash and support growth planning. Accurate financial reports assist in creating future budgets, achieving financing and producing “what if” analysis for new projects.
Once the accounting system is in place, data integrity is the focus! Receipts document the type of expense your company is claiming and are important for tax returns. The receipts can be for a donation, capital expenditure, general business expense, etc. Developing a system to track your expenses and maintain receipts is invaluable at tax time. It’s impossible to remember every expense for an entire year. Keeping accurate records on a weekly or monthly basis will help save time and frustration when filing tax returns. There are several examples of receipts documenting expenses: canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash receipts. Capital expenditures require special record keeping and typically address a long-term business need, such as the purchase of equipment or a building. Consulting an accountant regarding deductions, depreciation and disposal of an asset is recommended.
Maintaining accurate records might not be the small business owner’s strength, but it’s a critical component to success. A system needs to be developed to document and maintain business activities. For small business owners just starting out, finding someone to assist is a strategic investment to ensure long-term success. As businesses grow, active management and accurate financials are critical. The business owner needs to find a way to leverage their strengths and delegate as needed to ensure the ongoing success of their business.