No one finds accounts and business record keeping very fun. Unless you’re an accountant, record keeping will probably feel tedious, complicated and time consuming. A recent survey of small business owners found it was the second biggest time-wasting annoyance they have – after email.
But, we also know just how important it is to keep records too. If you lose key records, or don’t ever store them, it may well come back to haunt you. If you can’t prove certain expenses you might have to pay the IRS (or the tax service in your country) more in taxes, or could even end up with a fine if you fail an audit.
Record keeping is therefore sensible. So, what kinds of records do you need to keep?
Records That Entrepreneurs Should Keep
Any small business must keep the following two types of common records:
You must keep a record of all income (profits and losses) the business generates. At the most basic, this should be kept in a spreadsheet, detailing how much the income was, what date it was logged and who the client was (there are also many accounting tools out there that make this process a lot easier).
You would also be wise to keep a record of all the invoices you’ve sent your customers, as proof of business. It’s wise to separate your invoices into separate folders for your different customers, and update these each time you complete a piece of work.
You need to keep a copy of all your receipts, so you can accurately claim expenses on your annual tax return. This includes all bills related to your property, spending on equipment, goods or even lunch when you’re meeting clients to discuss business.
By keeping a record of all your income and receipts, you know that, once it comes to paying your tax, you will be able to easily access all the information you need.
At a minimum, you need to keep these records for at least three years, although in some cases it’s wise to keep them longer (read more on the IRS’s website here).
Why Should Entrepreneurs Keep Records?
Besides basic obligations for when you file your taxes, there are several other major benefits of keeping all your records. These include:
- View business progress
By keeping records of income, you can view the business’s financial health over time. Hopefully, you’ll be able to plot a continual upward chart of income and profits – but it will also tell you if there are any problems.
- Identify sources of income
The greater the variety of services you offer, and the more customers you have, it can be hard to work out where money actually comes from.
For instance, if you have 20 products and 60 customers, it can be difficult to think strategically and decide which products or services bring you most value – and which customers are the most important. However, if you keep consistent records, you might decide that 10 of your products bring so little income that you may as well stop offering them, and focus instead on the higher paying work.
- Remember deductible expenses
Remember that table you bought for the office 11 months ago? Or the lunch you had with a new client last June? Many business owners short-change themselves by forgetting to state all the expenses they could claim on their tax return. Keeping all your records makes it ess likely you’ll forget, so you can claim the tax back on expenses.
- Prove your finances to banks or investors
If you go to a bank for a loan, they will expect to see proof of your cash flow and financial stability. Records help you prove that your business is financially sound.
How Can Your Business Track Records?
Many small businesses use some form of accounting software to log all their transactions, and this helps them work out their tax bills. Alternatively, that kind of technology might not be right for your business, and simply keeping all your financial data in a series of spreadsheets will be enough.
Whatever approach you choose, you also need to keep other documents – such as invoices – in a central place, and most firms now opt for a customer relationship manager (CRM) where they can accurately track all information they hold on customers, and all the services those customers paid for.
Once your record keeping practices are in place, you’ll be able to focus more of your attention on growing your business, and less time on paper work!