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For business owners, keeping good records takes on special significance, since it's only by keeping a watchful eye on your operations that you can determine whether your business is on the right track.
One of your most important management tools is financial analysis, based on your business records. Here are some of the reasons why you need a good financial recordkeeping system for your business:
Monitoring the success or failure of your business. It's hard to know how your business is doing without a clear financial picture. Am I making money? Are sales increasing? Are expenditures increasing faster than sales? Which expenses are too high based on my level of sales? Do some expenditures appear to be "out of control?"
Providing the information you need to make decisions. Evaluating the financial consequences should be a part of every business decision you make. Without accurate records and financial information, it may be hard for you to know the financial impact of a given course of action. Will it pay to hire another salesperson? How much will another production employee cost? Is this particular product line profitable?
Obtaining bank financing. Before approving a loan, a banker will want to see your financial statements: a balance sheet, income statement, and cash flow budget for the current and prior years, as well as your projected statements showing the impact of the requested loan. A banker may even want to see some of your bookkeeping procedures and documents to verify whether you run your business in a sound, professional manner.
Obtaining other sources of capital. If you need capital and are thinking of taking in an outside investor or a partner, you will need to produce a lot of financial information. Even your suppliers and other creditors may ask to see certain financial records. Such information may be produced by an outside accountant, but it is based on your day-to-day recordkeeping.
Budgeting. All businesses should create a budget for planning purposes. A budget will help keep your business on track by forecasting your cash needs and helping you control expenditures. In addition, if you are seeking bank financing or other sources of capital, a banker or prospective investor will want to see your budget as evidence that your business is well planned and stable. You must have solid financial information to prepare a meaningful budget.
Submitting sales taxes. If you collect sales tax from your customers, good records will make it easy for you to compute the tax due and prepare the required reports.
Preparing your income tax return. With good records, preparing an accurate tax return will be easier and you're more likely to be able to do it on time. Poor records may result in you underpaying or overpaying your taxes and/or filing late (and paying penalties). Furthermore, you will have the records necessary to prove your income and deductions, should questions arise or should your return be selected for a tax audit.
Like many small business owners, you may find that it's too expensive to pay an accountant to do routine bookkeeping chores. Someone in your organization must take on the responsibility of keeping an accurate set of financial records. Fortunately, you may find this task easier than you thought, especially if you use your computer.
In most cases, with a little study and help from computer software, you should be able to manage your most basic financial records without the help of an accountant. This includes the daily recording of sales, recording of incoming cash if customers' payments come in after the sale is made, and maintenance of your disbursements. Depending on the size of your business and how it is set up, you may need to maintain other types of records such as accounts receivable and accounts payable ledgers.
You should also be aware of your need to maintain: