Keeping accurate and clear business financial records can, for many business owners, be the most difficult, and frankly the most stressful, part of running a business.
Simply understanding these records is often challenging. And yet maintaining a set of clear and understandable financial records is perhaps the single most important factor that separates successful businesses from those that fail.
Good decision-making requires it. And you, the business owner, must take responsibility for obtaining this knowledge.
Use the basic principles of sound financial management on a daily basis – you can leave the more complicated accounting work to professionals, but don’t underestimate your need to know!
Maintaining good financial records is a must. For all of the things you will want to achieve in building your business – saving on taxes, obtaining financing, selling your business, monitoring your business’ progress – a solid bookkeeping system is essential.
Why You Need Good Records
Develop good habits from the beginning. Although you’d much rather spend your time selling your product or service, take some time to learn about financial records. Accurate and timely financial information is a must. Here are some of the reasons why you need a good financial record-keeping system:
- To monitor the success of your business
- To get the information you need to make decisions
- To obtain bank financing
- To obtain other sources of capital
- To budget your money
- To prepare your income tax return
- To ensure compliance with federal and state payroll tax rules
- To properly submit sales taxes
- To distribute profits
Record Keeping Tips
For many small businesses the most common bookkeeping errors are also the easiest to fix. Use these six tips to help keep your business on sound financial footing.
- Use the right accounting system
- Maintain daily records
- Handle and review checks carefully
- Get a bank statement with a month-end cutoff
- Leave an audit trail
- Use a computer
There are five basic records that are required for any small business record-keeping system:
- Sales records
- Cash receipts
- Cash disbursements
- Accounts receivable
- Accounts payable
Other important records include Payroll. This is perhaps the most complex function when it comes to accounting. There are myriad state and federal forms that must be completed, and highly specific payroll laws that must be followed.
Most businesses have several types of insurance and, for each policy, you should keep detailed information about what is covered and the effective dates.
In addition, keep an accurate list of business equipment. The list should describe the equipment and provide serial numbers, date of purchase and original cost.
Finally, keep records of your transportation expenses – those are the ordinary and necessary business expenses of getting from one place to another in the course of your business.
Record Keeping Requirements
There are four basic requirements your record keeping system must fulfill:
- It must be simple to use and easy to understand. The information will be kept current if the system is “user-friendly.”
- Your record-keeping system should be both relevant and accurate. It should be specific to your business in order to minimize time recording information, and recording only what is needed and necessary. “Accurate” means it should be free of errors, thus conforming to the standards you have for your record-keeping system.
- Your system should ensure that records are kept current. The information will only be effective if records are done in a timely fashion.
- Your record-keeping system should be consistent. The same standards and principles should be followed throughout the system, and at all times.
Knowledge of finances and financial record keeping is essential to business success. Good decisions are only made with the benefit of quality information. No matter how skilled you are at creating, manufacturing, selling or marketing your product, any profit you might earn will quickly dissipate if you do not know how to track it, save it, spend or invest it.
For more on this topic, please check out my book “Secrets of Small Business Success in the San Francisco Bay Area“.