The Importance Of Good Record-Keeping
You arrive at work this morning and look around with a sense of accomplishment.This business is yours!From the start, you’ve done everything right.You conducted meaningful market research.Your product is in demand. You understand the competition and have identified your competitive advantage (i.e., cost, service, and/or quality).You’ve established the optimum price.Business flows steadily through the doors. Yet, this bright sense of accomplishment begins to fade slowly as you acknowledge those little nagging questions that ever seem todisturb your great American dream.”Why is my cash flow always a problem?How much real profit is in my business, anyway?I’ll deposit the payroll taxes well enough . . . but, why is it going to be tight again this quarter?”What’s really happening in your business?If you’re not exactly sure, then it’s time to return to the basics — the basics of good record keeping.
Bluntly, a small business that fails to keep complete and accurate financial records places its long term success and continuance in grave, grave doubt. The following three points discuss some of the major reasons that good (i.e., complete and accurate) financial record keeping is crucial to the success of your business.
- Good records provide the financial data that help you operate more efficiently, thus increasing the profitability of your enterprise.This is because accurate and complete records enable you, or your accountant, to identify all your business assets, liabilities, income, and expenses, which, when compared to appropriate industry averages help you pinpoint the strong and weak phases of your business operations.
- Good records are essential for the preparation of current financial statements, such as the Income Statement (Profit and Loss) and the Cash Flow Projection.These, in turn, are critical for maintaining good relations with your banker.They also will present a complete picture of your total business operation which will benefit you as well.
- Good records are required for the preparation of complete and accurate tax documents.For example, poor records often lead to the preparation of income tax returns that result in underpayment or overpayment of taxes.In addition, good records are essential in an IRS audit situation, if you hope to answer questions accurately and to the satisfaction of the IRS.
The Key to Success is Information
Think back to the steps you went through to open your business.First, you invested a tremendous amount of time in gathering information — about your abilities, finances, market, customers and competitors. You understood why you wanted to go into business — the opportunity to be your own boss, a desire for financial independence, the freedom to set your own course. Then you chose the business “right” for you.And, more importantly, your market research showed that your particular “business dream” was in demand. You then took all this information and developed a business plan — the same business plan that helped you get the loan you needed to open the doors.You demonstrated your business skills to the bank when you stated precisely how much money you needed, why you needed it, and how you were going to pay it back.
What Went Wrong?
While it’s true that success often begets success, it’s equally true that success often breeds failure — in a small business as well.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 one of your reasons for starting a business was to get away from paperwork, it is critical that you hire someone to perform the necessary task of keeping your financial records.Although you must pay for the services of a public accountant, bear in mind that their professional advice frequently can increase your profits, more than covering the professional fees.
What Exactly Will The Records Tell You?
The following checklist highlights the type of information your financial records should provide in assuring your success:
- How much income are you generating now and how much income can expect to generate in the future?
- How much cash is tied up in accounts receivable (and thus not available)
- How much do you owe for merchandise?Rent?Equipment?
- 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? 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 does it compare with the projections in your business plan?
- How does all of the financial data compare with that of your competitors?With that 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 habits.It may take you a bit of time and effort to analyze the company checkbook, take inventory, review bank statements and, in general, just catch up on your paperwork. It is essential that you make the effort to determine the precise financial condition of your business at present.It is just as critical as maintaining good customer relations.
What to Look for in an Accountant
How do you find an accountant who is knowledgeable, capable and discreet?Here’s what you should ask possible candidates: How do you find an accountant who is knowledgeable, capable and discreet? You will be seeking an individual with high ethical standards who will be a respected member of the community. Due to the ever-changing complexities of the tax laws and development in the methods and practices of accounting, the accountant must be alert to the value of continuing professional education. Look for an accountant who takes advantage of educational seminars, professional publications and other study opportunities.
You will probably want your accountant to assist you in many ways, as a consultant, financial advisor, counselor, etc., who understands your business affairs as well as you. So, seek out broad experience, as well as education, in selecting your accountant. Professional accountants have year-around offices and are listed in telephone directories under accountants, public accountants, bookkeepers and tax preparers.Look for references or recommendations from local business associates, your banker or attorney Look for memberships in state and national professional accounting societies. This generally proves a commitment to continuing professional education and the profession. Additionally, in most all cases, membership requires adherence to a strict code of ethics and high standards for professional performance.
The Basic System
A basic record keeping system should be simple to use, easy to understand, reliable, accurate, consistent and designed to provide information on a timely basis. It needs:
- A basic journal to record transactions (receipts, disbursements, sales, purchases, etc.)
- Accounts receivable
- Accounts payable
- Payroll records
- Petty Cash records
- Inventory: Equipment & Goods
Without knowing where your business is financially, you may be forced to close or sell, despite an excellent customer base.You could find yourself in this trap:
- if your cash flow is desperate, or
- if you are unable to pay creditors, or
- if too much of your cash is tied up in old inventory and accounts receivable.
Make a vow now to maintain your records and assure your success!If yours is a small firm just starting out in the exciting world of business, resolve now that you will not fall into the trap of letting the books wait until:
- you are less busy
- you are more rested
- you have more time available to start and finish the job all in one sitting
- or whatever excuse you use at the time.
Remember, too, there are experts available to help you in all aspects of your new business.There are people who can assist you with market research and advertising/promotion, there are those who can help you with your real estate needs, transportation and shipping, telecommunications needs and more. But most important of all, there are professionals available to help you maintain and manage your financial records.They are public accountants, and they are ready to serve you and your business.
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