Record-keeping. The most exciting part of owning a business? Not so much. If you’re like most, you cringe and think “I’ll get organized once I come up for some air”. While rummaging through that familiar pile of receipts you need for your taxes, you resolve not to go through this pain again only to find yourself in the same situation the following year. Sound familiar?
Getting organized and putting an efficient record-keeping process in place is probably not the first priority for most small business owners. You spend most of your time fighting fires and keeping the lights on. But I want to share a few reasons why you want to give this topic some serious thought and share some tips that I hope will get you on the right track.
Why it’s Important
Business owners must accurately record everything. Data from each transaction flows into your income and cash flow statements, balance sheet, tax returns and other metrics used to asses a company’s performance over time. Without accurate and complete records, it would be difficult to assess a company’s financial position or to make important day-to-day and long term decisions.
Failure to keep accurate records can also cost businesses in lost opportunities (e.g. deductions) or even worse, in tax penalties. Every business owner needs a system that tracks tax-relevant statements to support the income, expenses and deductions that are being claimed.
What Makes a Good Record-keeping System?
A good system will grow as your business grows. It must be able to scale. It's a good idea, even as a startup to think through a process that minimizes manual input and is able to handle small and large transaction volumes. Manually entering information into spreadsheets is OK if you are just starting your business, but this can get unwieldy once your business starts to grow. And the more manual the process, the greater the risk of errors being introduced into the system. Which brings me to my next point.
A good system minimizes manual data entry and transposition. Implement a system that doesn’t depend on manual data entries. You want a system that is automated as much as possible. For instance, generating an invoice should trigger a process by which sales, costs, tax and customer-related information is saved into a database. This makes the automation of reports very simple and error free. By contrast, you want to avoid a process in which invoices are issued manually, then transposed to a spreadsheet which is then transposed into other financial reports as discussed above.
A good system should allow you to track, all relevant revenues, expenses, gains and losses in order to determine the net income for your business. As you think about creating (or tweaking) your record-keeping process, think about the data that is needed downstream, meaning as input into other reports or required forms (e.g. tax returns) and make sure that you are capturing this information upfront as part of your automated data stream. On the revenue side of the equation, you will focus on automating invoicing as an example. On the cost side, you will want to automate invoice payments. This should include the ability to flag invoices that have tax implications or exemptions.
The good news is that there are many off the shelf software packages that allow you to do much of what I’ve just discussed. These come in desktop, mobile and cloud-based options. For example QuickBooks is a solid option for small business. The cloud-based option offers most of the key capabilities you need for a relatively small monthly fee including:
Automating invoice payment
Tracking income and expenses
Syncing with bank accounts
Built-in reports including balance sheet, cash flow, profit & loss statements
Finally, I will leave you with some best practices to incorporate into your own record-keeping process:
Record transactions and expenses when they occur
Make it a habit to check entries on a daily basis to make sure you’ve captured them all
Limit manual entries as much as possible
Separate personal and business expenses
Save all of your receipts!
Find ways to organize your information
Consider scanning your receipts and organizing them on a virtual drive like Carbonite or Dropbox and get rid of the paper!
Follow the IRS record retention schedule located here: IRS - How Long Should I Keep Records?