Let’s be frank: no one finds account and record-keeping fun. It can be tedious, complicated and involves spending hours hunting through your emails and folders on your computer trying to find documents. One 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 keeping records is too. If you lose key records, or don’t ever store them, it may well come back to haunt you. For instance, 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 penalty if you fail an audit.
So, what kinds of records do you need to keep?
Records small business owners must keep
At its simplest, any small business must keep the following two types of records either on paper, or (if you’re living in the 21st Century), in a digital file:
You need to 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 tons of more sophisticated accounting tools out there for doing this more effectively).
You’re also going to need to keep a record of all the invoices you’ve sent to your customers, as proof of business. It’s wise to separate your invoices out into separate folders for all your different customers, and update these each time you complete a piece of work.
If you want to claim any expenses on your annual tax returns, you’ll need to keep a copy of all your receipts. This includes all your bills related to your property, any money spent on equipment, goods or even cups of coffee when you’re meeting clients to discuss business,
By keeping a consistent record of all your income and receipts, you know that, once it comes to paying your tax bill, you will be able to easily access all the information you need.
How long should these records be kept? At a minimum, your small business needs to keep all these records for three years, although in some cases it’s wise to keep them longer (read more on the IRS’s website here).
Why should small businesses keep records?
Besides basic obligations for when you file your taxes, there are several other serious benefits of keeping all your records as a small business owner. These include:
- See how the business is progressing
By keeping records of all income, you can see how the business’s financial health is doing over time. Hopefully, you’ll be able to plot a continual upward chart of income and profits – but it will also tell you if anything is going wrong.
- Identify where your income is coming from
The greater the variety of services you offer, and the more customers you have, it can be hard to ‘see the forest for the trees’.
For instance, if you have 20 products and 60 customers, it can be difficult to think strategically and decide which products or services are bringing you most value – and which customers are the most important to you. However, if you keep consistent records of where your income comes from, you might decide that 10 of your products bring so little value that you may as well stop offering them, and focus instead on the higher paying work.
- Keep track of deductible expenses
Remember that lamp your bought for the office 9 months ago? Or the lunch you had with a new client the week before? Many business owners short-change themselves by forgetting to state all the expenses they could claim on their tax return. Keeping all your records allows you to do this.
- Demonstrate your finances to banks or investors
If you go to a bank for a loan to help your small business invest in new equipment or premises, they will want to see proof of your cash flow and financial stability. Records will help you prove that your business is financially sound.
How can a small business track records?
Today, many small businesses use some form of accounting software to log all their transactions, and help 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 and files and folders is enough.
Whatever way 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 the information they hold on customers, all the income that’s come from those customers and all the services those customers paid for.
If you offer clients your services by appointment, Book Like a Boss provides an easy to use website where they can book and pay to see you via an online calendar. All that information is stored and organized in the back end in our CRM, where you can then easily access all your customer records.
Learn how Book Like a Boss helps your small business keep your records here.