Record Keeping Why is it necessary?
Complete and accurate financial record keeping is crucial to your business success for a number of reasons:
- Good records provide the financial data that help you operate more efficiently, thus increasing your profitability. Accurate and complete records enable you, and your accountant, to identify all your business assets, liabilities, income and expenses. That information, when compared to appropriate industry averages, helps you pinpoint both the strong and weak phases of your business operations
- Good records are essential for the preparation of current financial statements, such as the income statement (profit and loss) and cash-flow projection. These statements, in turn, are critical for maintaining good relations with your banker. They also present a complete picture of your total business operation, which will benefit you as well
- Good records are critical at tax time. Poor records could cause you to underpay or overpay your taxes. In addition, good records are essential during a Tax audit, if you hope to answer questions accurately and to the satisfaction of the Auditors
WHAT EXACTLY WILL THE RECORDS TELL YOU?
The specific records a company needs depends on a number of factors, such as the type of business, the company’s goals, management’s needs and interests, and cost factors. Based on the relevant factors, your accountant can help you determine what records to keep and what information they should provide. In fact, you might want to update your record keeping procedures to reflect your current business needs. Here are just some of the questions that might be considered in assessing your record keeping needs:
- How much income are you generating now and how much income can you expect to generate in the future?
- How much cash is tied up in accounts receivable (and thus not available to you) and for how long?
- How much do you owe for merchandise? Rent? Utilities? Equipment?
- What are your expenses, including payroll, payroll taxes, merchandise, advertising, equipment and facilities maintenance, and benefit plans for yourself and employees (such as health insurance, retirement, etc.)?
- How much cash do you have on hand? How much cash is tied up in inventory? What is your actual working-capital budget?
- How frequently do you turn over your inventory?
- Which of your product lines, departments or services are making a profit, which are breaking even, and which are financial drains?
- What is your gross profit? What is your net profit?
- How do all of the financial data listed above compare with last year – or last quarter? How do they compare with the projections in your business plan?
- How do all the financial data compare with those of your competitors? With those of the industry?
It is essential that you try to determine the precise financial condition of your business. It is as critical as maintaining good customer relations. Good recordkeeping is time-consuming and can take away from the time you need to run your business. However, as shown above, it is essential.
THE BASIC RECORDKEEPING SYSTEM
A basic record keeping system, whether on paper or an off-the-shelf computer software program, should be simple to use, easy to understand, reliable, accurate, consistent and designed to provide information on a timely basis. It generally needs:
- A basic journal to record transactions (receipts, disbursements, sales, purchases, etc.)
- Accounts receivable records
- Accounts payable records
- Payroll records
- Petty cash records
- Inventory records
Your accountant can develop the entire system most suitable for your business needs and train you in maintaining these records on a regular basis. These records will form the basis of your financial statements and tax returns.