The Importance Of Good Record Keeping

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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.

YOUR KEY TO SUCCESS IS INFORMATION
Think back to the steps you went through to open your business. From the start, you've done everything right. 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 you 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 stating precisely how much money you needed, why you needed it, and how you were going to repay it.

WHAT WENT WRONG?
While it's true that success often brings success, it's equally true that success often breeds failure-particularly for a 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 real profit anyway? If you're not exactly sure, then it's time to return to the basics- the basics of good record keeping.

WHY?
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. Here's why:

1. 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 operations.

2. 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.

3. 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 TELL YOU?
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 long?
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?