Good record keeping is a must for any business that wants to be successful. However, record keeping is one of the tasks most frequently overlooked or neglected by many individuals starting a new business. After all, who wants to deal with all those figures and details?
Keeping good records will provide you with essential information for the financial survival of your business. If you keep good records, the preparation of your tax returns will be relatively easy and the financial status of your business will be positive. On the other hand, if you do not, the experience can be very stressful, time consuming and unpleasant. Good records provide you with the information you need to do the following.
You need to keep records that will help you monitor the progress of your business. Well-organized and maintained records will show whether your business is improving, which areas need emphasis or change, and which merchandise is selling.
Tracking and managing your cash flow is critical if you want to be successful. You want enough cash on hand to meet all of your expenses and debt obligations. Your business receives cash from sales, accounts receivable, and sale of assets. The outflow of cash pays business expenses and debt obligations. You need to manage the cash flow to ensure that you have enough cash on hand to meet these obligations. This sounds simple, but poor management of cash flow is the main reason businesses of all sizes fail.
To be competitive in your trade, you need to be able to take advantage of purchasing discounts. A shortage of cash could cause you to miss out on this benefit, cause you to default on the payment of your debt obligations, or result in bankruptcy.
There are several ways you may improve your cash flow:
The records you keep are important to your ability to sustain and expand your business. Without proper records you take the risk of experiencing cash flow problems, wasting money, and stifling your ability to expand. When you set up your record keeping system, remember that it needs to help you manage your business and enable the Tax Commission and the Internal Revenue Service to evaluate and verify your business activity. As long as your record keeping system meets these objectives, it can and should be as simple as possible.
A small business may elect to use software to keep track of business records. Excellent software is available for less than $500. Before investing in computer automation you need to evaluate whether or not it will save you time, allowing you to spend more time running the business. Generally it will, but there are cases when record keeping could be efficiently handled on paper.
When starting a new business consider consulting with a good accountant. An accountant can assist you in selecting and setting up a record keeping system that is the most efficient and cost effective in meeting the needs and nature of your business.
Financial statements are important documents which give you a snapshot of how well your business is doing. These statements consist of a balance sheet and a profit and loss statement.
The balance sheet provides a snapshot of your business's financial position on a particular date. It shows your business assets, liabilities, and equity. You can quickly see the ratio between your accounts receivables and available cash, and your accounts payables and other liabilities. If your liabilities are greater than your receivables, adjustments need to be made to improve your income or your business may soon be in bankruptcy.
The profit and loss statement gives you a detailed look at the sources of your income and expenses over a period of time. This statement can be a very useful tool to identify problem areas in your business.
These financial statements are essential when dealing with your bank or creditors. Every creditor will require these statements before extending a loan to your business. These statements provide you with information needed to help you determine whether or not you should plan for future expansion.
You will receive income or property from various sources. You need to keep records that identify the source of this income. Receipts or invoices if properly documented will help you separate receipts and invoices into business versus non-business. Your receipts also help you categorize your receipts into taxable and non-taxable income.
You need to keep good records of all of your expenses. Record and categorize your business expenses which will save you time and stress when preparing your tax return. It is best to record them as they occur so you do not forget any. You need to make sure you claim all of the deductible expenses to which you are entitled.
You must have records to support the income, expenses, and credits you report on your tax returns. Generally these records are the same records you use to prepare your financial statements. These records must be kept and made available to the Tax Commission or Internal Revenue Service if your return is selected for an audit. If selected for an audit, you may be asked to verify the items reported on your return. Well-documented and organized records will streamline the audit process, saving you time and stress.
All income, expenses, credits, and deductions claimed on your return must be substantiated with records you have kept for the taxable year. If you have systematically kept good records throughout the year, preparation of your return will be easier and less expensive if someone prepare your returns. Most accounts and accounting firms charge their customers on a time and product basis. The more organized you are, the less money you will pay to have a return prepared.
