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The
Importance of Good Record Keeping
© 2005 by Lynne
Ganoe
For most small business owners, keeping timely and accurate business records is not high on their list of "things I love about owning my own business". Unfortunately, it is one of the most important things a business owner can do to be successful. There are many reasons why this is so important:
The IRS says so - the IRS requires that you keep good documentation of all of your business activity. When you file your taxes, you need to provide them with an accurate accounting of your revenues and expenses. While they won't tell you how to set up your record keeping system, they do require all business transactions to be well documented and provide an accurate representation of your business activities. Types of source documents will include sales slips, paid bills, invoices, receipts, deposit slips, and cancelled checks. These documents will support the entries in your books and on your tax returns, and should be kept in a safe place and in an orderly fashion.
The success of your business may depend on it - many small businesses have failed for the sole reason that they did not have a complete and accurate picture of their financial health. Simply knowing how much is in your bank account at any given time is not enough. How much money do your customers owe? How much money do you owe your suppliers? Are you coming up to a slow time of the year, and will you have enough cash on hand to keep your business going during that slow time? Without good records, you have no way of getting a true and accurate picture of your company's financial health, and it will be very difficult to anticipate problems before they occur.
Keeping current on your payroll obligations - if you have employees, it will be necessary to pay employer payroll taxes and deposit taxes withheld from your employees' paychecks. The IRS is very strict when it comes to making sure that they get these funds in a timely manner. Good payroll records will help make sure you stay in the good graces of the IRS, and avoid costly penalties.
Am I really making money when I sell this widget? - in order to make sound business decisions, you need to know the profit margin of your products. By determining the actual cost to produce or sell each item, including your overhead considerations, you can decide where to cut costs, raise prices, or discontinue unprofitable products. You also need to be able to evaluate the financial consequences of your decisions. Sound business decisions can only be made if you have good records to base them on.
Do I have enough inventory or do I have too much? - good records allow for the careful monitoring of your inventory. While a large inventory allows goods to be delivered when they are ordered, too large an inventory represents an excess investment. If your inventory does not turn over quickly, your business may lose profits due to obsolescence, deterioration or excess investment.
So the bottom line is, know your bottom line. It may not be fun, it may not be exciting. But if you want your business to be successful and profitable, keeping good business records is essential.
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