Maintaining Good Records
As the owner or manager of a small
business, you invest tremendous time and energy
to ensure your company's success. You want
the greatest possible return on your investment,
and good financial records can help.
What Went Wrong?
While it's true that success often
breeds success, it's equally true that success
often breeds failure -- particularly for small
business. That's because as a business begins
to grow rapidly, the owners often work frantically
to simply meet demand, minimizing the time they
devote to keeping good records.
If escaping paperwork was one of
your reasons for starting a business, it is critical
that you hire someone to perform the necessary
task of keeping your financial records.
Although you must pay for these services, bear
in mind that solid financial advice frequently
can increase your profits, more than covering
the professional fees.
Good records will help you answer
important questions about your company's financial
health. What's really happening in my business?
Why is cash flow always a problem? How much
is really profit? If you're not exactly
sure, then it's time to return to the basics --
the basics of good record keeping.
Simply put, a small business that
fails to keep complete and accurate financial
records places its long-term success and survival
in grave doubt. Complete and accurate financial
record keeping is crucial to your business success.
- Good records provide the financial data
that help you operate more efficiently, thus
increasing your profitability.
Accurate and complete records enable you,
or your accountant, to identify all your business
assets, liabilities, income and expenses.
That information, when compared to appropriate
industry averages, helps you pinpoint both
the strong and weak phases of your business
- Good records are essential for the preparation
of current financial statements, such as the
income statement (profit and loss) and cash
flow projection. These statements, in
turn, are critical for maintaining
good relations with your banker.
They also present a complete picture of your
total business operation, which will benefit
you as well.
- Good records
are critical at tax time. Poor
records could cause you to underpay or overpay
your taxes. In addition, good records
are essential during an Internal Revenue Service
audit, if you hope to answer questions accurately
and to the satisfaction of the IRS.
What Exactly Will the Records
The following checklist
highlights the type of information your financial
records should provide to assure your success:
- How much income are you generating now,
and how much income can you expect to generate
in the future?
- How much cash is tied up in accounts receivable
(and thus not available to you) and for how
- How much do you owe for merchandise?
- What are your expenses, including payroll,
payroll taxes, merchandise and benefit plans
for yourself and employees (such as health
insurance, retirement, etc.)?
- How much cash do you have on hand?
How much cash is tied up in inventory?
What is your actual working capital budget?
- How frequently do you turn over your inventory?
- Which of your product lines, departments
or services are making a profit, which are
breaking even, and which are financial drains?
- What is your gross profit? What is
your net profit?
- How does all of the financial data listed
above compare with last year - - or last quarter?
How do they compare with the projections in
your business plan.
- How does all the financial data compare
with those of your competitors? With
those of the industry?
While your review of this checklist may have uncovered
some glaring deficiencies, it's never too late
to correct problems related to poor record keeping.
It may take a bit of time and effort to analyze
the company checkbook, take inventory, review
bank statements and, in general, catch up on your
paperwork. It is essential, however, that
you make the effort to determine the precise financial
condition of your business. It is as critical
as maintaining good customer relations.
What to Look for in an Accountant
Let's assume you follow the path
of many successful entrepreneurs and seek professional
assistance from an accountant. How do you
find an accountant who is knowledgeable, capable
and discreet? You should seek an individual
with high ethical standards; who is a respected
member of the community.
Due to the ever-changing complexities
of tax law and developments in accounting methods,
the accountant must keep up. Look for an
accountant who takes advantage of educational
seminars, professional publications and other
You will probably want your accountant
to assist you, not only as a record keeper, but
also as a consultant and financial advisor; who
understands your business affairs almost as well
as you. Seek out an accountant with broad
experience and a well-rounded education.
Professional accountants are listed
in telephone directories under accountants, certified
public accountants, bookkeepers and tax preparers.
Look for references or recommendations from local
business associates, your banker or attorney.
The Basic System
A basic record-keeping system,
whether on paper or an off-the-shelf computer
software program, should be simple to use,
easy to understand, reliable, accurate, consistent
and designed to provide information on a timely
. It needs:
- A basic journal to record transactions
(receipts, disbursements, sales, purchases,
- Accounts receivable records,
- Accounts payable records,
- Payroll records,
- Petty cash records, and
- Inventory records.
An accountant can develop the entire system most
suitable for your business needs and train you
in maintaining these records on a regular basis.
These records will form the basis of your financial
statements and tax returns. Without knowing where
your business is financially, you may be forced
to close or sell, despite an excellent customer
You could find yourself in this
- your cash flow is desperate.
- you are unable to pay creditors.
- too much of your cash is tied up in old
inventory and accounts receivable.
Sure, owning a business places tremendous demands
on your time. It's easy to let things slip.
Resolve now to avoid the trap of letting the books
wait until you are less busy ... or more rested
... or have time to start and finish the job all
in one sitting ... or ....Make a pledge
now to maintain your records and assure your success.