Recordkeeping Tips for Small Business Owners
The importance of keeping accurate records for your small business goes beyond tax purposes (though that’s certainly a key reason).
Solid recordkeeping allows you to monitor the progress of your business, increases the likelihood of success and can add to your company’s value. Alternately, a poor recordkeeping system could be a security risk to your company.
The Small Business Administration calls creating and maintaining an effective recordkeeping one of the most important responsibilities as a small business owner.
Small business experts and tax professionals share these tips and reminders about organizing and keeping good records:
Set up a recordkeeping system that works for you.
Recordkeeping ranges from simple file folder systems to more complex online electronic systems. The most effective methods are those that provide adequate storage and retrieval of your records. Choose a system or systems that you’ll use consistently, or it won’t work.
Whether it’s digital, hard copy files or business software, or a combination, identify a method or methods that will make it easy for you to track and collect detailed records for your business.
Learn about the records you need and expand as you grow.
The Small Business Administration recommends starting with a simple recordkeeping system when your company is new and expanding as your business grows to accommodate more records and increasing complexity.
Your accountant can advise you on the type of records specific to your business needs for tax purposes, but educate yourself as well – a better understanding can help guide your recordkeeping and methods. Keep records that show a summary of your business transactions, typically made in accounting journals and ledgers.
You should be able to see your gross income, as well as your deductions and credits. If you’re like most small businesses, your business checking account is the main source for entries in these records. (Understanding debits, credits and journal entries will also be helpful if you decide to use accounting software.)
What you want is an accurate picture.
The better your recordkeeping, the more accurate financial statements you’ll produce. This is how you see income and expenses and prepare items such as profit and loss statements and balance sheets, which show assets, liabilities and equity in the business. “Good records” indicate whether a business is improving, which items are selling, or what changes are needed.
Reliable recordkeeping helps you effectively manage your business and have a clear financial picture to present to your bank and creditors.
Consider accounting software.
Accounting software keeps track of business financial records such as sales, expenses, inventory, and assets – helping you to execute, manage, and track critical financial transactions and related activities. Using software has advantages over manual methods, including fewer human errors.
“Small business accounting software saves you time compared to handling the books manually and is usually more efficient than using a simple spreadsheet because it reduces or eliminates redundant data entry,” says Rochelle Robinson, president of Wealthidian, a business & financial management agency, in a blog on SCORE.org.
Choose software that fits your business needs.
The best software will depend on your needs, which differ by business type and operation, i.e., retail or wholesale, service or product-based, a one-person operation or a large establishment, housed in a commercial space or home based, etc. Your business may also have unique needs, requiring industry-specific software.
To narrow your choices, identify the features needed to run your business – from inventory management, sales tracking, payroll, and tax reporting.
Contracts are important elements of your recordkeeping.
Maintaining contracts – whether with vendors, service providers or customers – is a critical component of your small business records. Create a system that helps retain contracts for services, sales, financing, leasing, or purchasing. You may need to refer or access a contractual obligation as activities are being executed.
“For your own protection, keep track of contractual obligations by always maintaining originally signed copies of all legally executed contracts,” the SBA advises in its Financial Education Curriculum guide on recordkeeping for small businesses.
The why behind your good records
Keeping good records will help you monitor the progress of your business, prepare your financial statements, identify sources of income, keep track of deductible expenses, keep track of your basis in property, prepare your tax returns, and support items reported on your tax returns.
“One reason why business owners fail to take all of the deductions they are entitled to is poor record-keeping,” says Barbara Weltman, an attorney, author and president of Big Ideas for Small Business. “Without the required records to back up your claim for a deduction, the write-off can’t be accepted.”