Importance of Good Records
Unless your business is accounting or bookkeeping, keeping financial records
is probably not what you do best. Most likely, you'd rather spend your time
selling your product or service. However, if you are going to run a successful
business, accurate and timely financial information is a must. Here are some of
the reasons why you need a good financial recordkeeping system:
- 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. A banker will usually want to see financial
statements: a balance
statement, and cash
flow budget for the most 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 your business has reached
the point where you need to take in a partner, any prospective partner will
want to become intimately familiar with your financial picture. If you need
capital and are thinking of taking in an outside investor, 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 your outside
accountant, but it is based on your day-to-day recordkeeping.
- Budgeting. All businesses should use 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 probably 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.
- Preparing your income tax return. Whether your business is a sole
you must file an income tax return and pay income taxes. 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 your underpaying or
overpaying your taxes and/or filing late (and paying penalties). If your
accountant prepares your income tax return, poor records will almost
certainly result in your paying higher accounting fees. If your business is
a partnership, not only will you have to prepare a partnership tax return,
but partnership return amounts will pass directly to the tax return of each
partner. So your recordkeeping will directly affect the tax return of each
- Complying with federal and state payroll tax rules. If you have
employees, you are aware of the myriad rules and regulations relating to
payroll taxes. Payroll tax deposits must be made according to strict
deadlines. Late payment of payroll taxes results in severe, and unnecessary,
penalties. Also, you must file a payroll tax return every quarter, which you
must reconcile with the payroll deposits made during the quarter. Then at
the end of the year, you are required to give your employees and the
government W-2 forms, which must agree with your quarterly payroll returns.
Sound bookkeeping practices will make compliance with all these payroll
rules easy. Poor records will make it impossible.
- 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.
- Distributing profits. If your business is a partnership, you will
need good records to determine the correct amount of profits to distribute
to each partner. If you are operating as a corporation, you must determine
the company profits that you will be paying out as dividends to the