Keeping records is a critical part of running a business correctly. Effective entrepreneurs develop internal systems to organize all financial information. For many businesses, the internal systems start and stop with an accounting software and box of receipts, but it is also important to keep all paperwork organized and accessible.
Keeping good records of all business transactions helps you create accurate financial statements to assess the health of your business. Inaccurate records make planning pointless because there is no way to gauge your progress. Should you need to borrow for growth or plan to sell your business down the road, accurate records are an absolute must. If you allow errors in your accounting system, you will end up spending hundreds, if not thousands, of dollars to have an accountant find the mistakes and correct them before a banker or buyer will even talk to you.
You also need to keep good records to minimize your tax burden. Whether your business is taxed at the entity level or your profits flow through to the owners, managing your tax liability is a year round effort. Receipts should be entered into the accounting system, marked with any missing information, and filed such that any particular receipt can be retrieved within a minute or two. The filing specifics are up to you filing by business name, product type, date, or any other particular will work, as long as you can find what you are looking for when you need it.
Recordkeeping is made much easier through small business accounting software. Every business needs to use one of these programs. The free download versions are very basic useful only for very small businesses with very few transactions. The best option for any startup with plans for growth is Peachtree Accounting. Peachtree is a better option than the ever popular Quickbooks for many reasons, but the most important is that Peachtree is entirely GAAP compliant. That is, the way the system works and the way your entries are posted meet the standards of the Generally Accepted Accounting Principles. GAAP compliance means your financial statements will accurately reflect what is going on with your venture, and, as long as you set it up correctly and review all error messages, your financial statements will require far less work to be presentable to bankers.
Paper records such as receipts, contracts, deeds, and purchase orders, should be kept in an organized fashion. In the spirit of going green and preserving work space, you might consider purchasing an electronic storage system for all paper transactions. These programs allow you to scan in the document, add labels and notes, and file in electronic folders for safekeeping. If you choose the electronic route, be sure you have TWO backup systems in place, at least one of which is online. If your office should be completely destroyed, an online backup service will save your business.
The amount of time you need to hold on to business records depends on several factors. The IRS requires a 3 year history of any document used to support an accurate tax return. However, if you are audited for suspected fraud, the IRS can look back at least 6 years. If you file a bad debt deduction, those records must be kept for seven years. In addition, your insurance company or creditors may require you to maintain documentation even longer. If you opt for electronic storage, holding the records is no problem. If you keep paper files or 3 ring binders, place everything over three years old in storage, but be sure the boxes are clearly labeled and kept in a safe, dry place.
When you are just starting your business, establish good systems for keeping records. Buy and install your accounting software early in the process, and decide on a filing system that will work best for you. Keeping records is a critical aspect of business success and it deserves your ongoing attention.
Author Resource:
K. MacKillop, an entrepreneur with a J.D. from Duke, is co-founder of LaunchX LLC and authors a business startup blog. The LaunchX System, a complete package of step-by-step business startup procedures, key software and more, answers the question, "Where do I start?" Visit http://www.LaunchX.com .
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