Why Good Financial Recordkeeping is Essential for Business Success

Why Good Financial Record Keeping is Essential for Business Success

As you are building your business, accounting for small business is often not at the top of you mind, but there are important factors that need to be addressed so that you are set up for a successful future. Putting these systems in place in the early years of the business practices can ensure that you have a strong foundation to build on going forward. Good record keeping should be a focus when you are designing these systems.

Keeping the records organized and sorted ensures that you can retrieve information when it is needed the most. Even though you don’t often refer back to invoices from several years ago, situations might come up that require referencing to the paperwork. For example, if you are audited by the IRS, then you need to be sure that you know where to gather the requested information.

It can be a mess to sort through the information if you don’t have a good system in place. As a result, you could be facing fines or penalties because you can’t show documentation for the tax filings. Additionally, these details are essential so that you can understand the growth and progress of your company. If you don’t measure the financial progress, then it can be hard to determine the systematic changes that need to happen to help your business reach higher levels of success.

Here are a few reasons why you need to be proactive with your record keeping practices:

Measure Your Business Progress

How is your company performing this year compared to the results of previous years? Good records will help you evaluate the way the financial picture is changing. You can see whether the financial health of the company is declining or improving, resulting in insights that can be used to adjust your results going forward.

When you have good records, you can see which products are selling better than others so that you can know where to place your business development resources in the future. Where are your biggest profit margins? Can you identify any areas where you are losing money? These details might seem insignificant, but small changes can have a lasting effect on the long-term results that are achieved.

Accurate Financial Records (P&L, Cash Flow, and More)

If you don’t have good records, then it can be impossible to prepare accurate financial statements. These details will help with the decisions that are made for business management purposes. Gathering and recording the ongoing information of your business activities will ensure that you have the details that support the decisions that are made over the years.

Big decisions can be detrimental to your company if you don’t have accurate information to influence those decisions. For example, you might choose to invest money into new product development, only to find out later that the money was needed for tax payments. It is important that you have detailed records that will affect the decisions that are being made:

  • Profit & Loss (Income Statement)
  • Balance Sheet
  • Cash Flow Statements
  • Payroll Processing Reports

These are just a few examples of financial information that might be needed for your company. The requirements vary depending on the size of the business and your industry. So, the most effective solution is to talk to an experienced accounting team for personalized recommendations.

Not only will these reports be helpful for your decisions, but it is common for creditors and banks to ask for this information as well. So, it is important that the systems are put in place, and accurate books are maintained, giving you the option to provide the reports on-demand as needed.

Track Business Write-Offs

Missing potential write-offs means that you might be paying more taxes than necessary. There is no reason to overpay the IRS! Instead, you need to keep track of the expenses that move through your company. These details will help you maximize the write-offs so that you can reduce your tax burden as much as possible.

Without good record keeping, it is easy to forget expenses that might have been spent throughout the year. Don’t wait until it is time for tax preparation before you begin collecting this information. Instead, you need to have a good system in place right now to ensure that everything is ready to give to your accountant when it is tax season.

If you are going to write something off as a business expense, then you need to keep records of the transactions. For example, you can keep the credit card receipts, cash register slips, petty cash records, and more to document the transaction. Keep these records for anything that was purchased for business purposes.

There are options to write off entertainment and meals if they are business-related expenses. But, you need to prove that the costs were associated with business activities. For example, if you are writing off a meal, then it is best to make a quick note on the receipt about who was in attendance and the reason for the business meal.

Categorize Receipt Sources

In addition to tracking the money that is spent, you also need to keep records of the money that is coming into your company. There are several ways that you might be receiving income, such as sales, interest, property transactions, or business operations.

When it is time to report this information on your tax returns, then you need to be able to categorize the income for accurate tax calculations. Know where the incoming money is coming from so that you can structure the records accordingly. At the same time, you also need to maintain documentation for these transactions. Here are a few examples of applicable documentation:

  • Credit card slips
  • Receipts
  • Cash register tapes
  • Invoices
  • Copies of checks
  • Bank deposit records

Keep Records for Business Assets

In addition to the ongoing transactions that move through your company each day, you also need to keep detailed information about your business assets. These assets might include equipment, furniture, bank accounts, cash, real estate, and more.

Your accountant can help with the right tracking of these assets. In some situations, it might make sense to write-off the total amount of the asset in the year it was purchased. But, there are other times when it is better to calculate depreciation, which will be factored into your taxes for the year.

Filing Tax Paperwork and Returns

Even though your accountant will handle the tax filing, you should still have an independent system to keep these records on hand. Set up a filing method to keep tax documentation and filing paperwork so that it is easy to reference if the information is needed in the future.

Not only do you need the documents that were filed with the IRS, but you also need documentation to support the filing. These documents should include anything related to expenses, credits, and income that was included on the tax return. In the case where the tax return is audited by the IRS, you will be able to find the documentation to support the details, helping you avoid potential fees and taxes.

How Long Do I Need to Keep These Records?

When you move to a digital filing system, it doesn’t hurt to keep the records on file for many years. Since the paperwork isn’t taking up space in your office, it is easy to let the information stay on the cloud.

The length of time to keep the records varies depending on the type of document that you are filing. Certain things need to be kept permanently:

  • Audit reports
  • General ledgers
  • Asset purchases
  • Payroll information
  • Year-end financial reports
  • Trademarks and patents
  • Tax returns and documentation
  • Shareholder records and articles of incorporation

This list is just an overview of the documents that you need to hold indefinitely. If you ever have questions about the length of time that paperwork needs to stay on file, then you can talk to an accounting expert for more details. Our team can offer advice to help with the optimization of your filing system.

Other paperwork can be kept anywhere from 3 to 10 years, depending on the type of document. For example, it is best to keep invoices and AR/AP documents for at least 10 years. But, employment applications only need to be maintained on file for 3 years.

Implementing the Right Record Keeping System

Where should you start if you need to implement a good record keeping system? You might be able to modify your current system to meet the requirements that are suggested by your accountant. But, sometimes it makes sense to start from scratch to ensure that you have a quality system that will last for many years.

One of the biggest mistakes that you can make is setting up the financial records system without consulting with an industry professional. It is important that you tap into the experience and knowledge that comes from a team that understands the nuances of the industry.

Our team at Easier Accounting offers many years of experience helping small businesses set up proven financial systems. Not only will these systems help you maintain compliance and optimize tax results, but they are also beneficial to improve your business success in the future. Call today to learn more about how our services can be used for your company: (888) 620-0770

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