As an owner, you need to keep a lot of records relating to your business, and you'll need to keep track of your finances. Actually, you'll need to act as a small business executive.
Many people shy away from paperwork — thinking it will be too confusing — and just muddle along, hoping someone else will do it for them or that everything will work out okay. Or, they think they can keep everything in their head. All this is a big mistake! You must maintain organized written records, even if you are a one-person shop. Here's why:
- Accurate records let you keep track of how well you are doing in reaching your business goals.
- Good records will help you make sound business decisions — to determine if you're running at a profit and, if so, how much of a profit.
- From accurate records, comparative profit and loss statements can be prepared that tell you at a glance how you are doing this year compared to the prior year. This can help you determine the trend of the business and if you need to adjust the way you are operating.
- Profit and loss statements are also valuable in comparing your figures with those of competitive businesses.
- You need accurate records for your tax returns. They will in fact, help you minimize your taxes.
- Good records will also let you know how much you are spending out of pocket, and how much it is costing you to keep your business running.
Maintain a separate business checking account. Don't mingle your business records with your personal records! By having a separate bank account, your business income and business expenses will be clearly documented. You will readily be able to see how well you are doing. Use this account ONLY to write business checks. If you wish to pay yourself income, make the check out to yourself, not to cash. In fact, avoid writing any business checks made payable to "cash." It is harder to document the purpose of checks made payable to cash.
Some record keeping suggestions include the following:
- Have a separate credit card for business purchases.
- Try to make all disbursements by check.
- Have a second telephone devoted solely to business.
Support all your transactions, both income and expense: Keep the originals of invoices, canceled checks, paid bills, deposit slips, and any other records that support a business transaction.
Record keeping basically flows from four sources:
- Business checkbook and bank statements
- Contract documents
- Itemized receipts for expenditures
- Other documentation and receipts, such as contracts for the purchase of equipment and loan records
You'll need to keep track of your expenses — all expenses, whether tax-deductible or not.
Financial records can be kept on a computer. Dozens of software packages are out there just waiting to help you. If you can do it with pencil and paper, you can do it on a computer! If you like doing it yourself, try a spreadsheet program such as Excel. Again, you have to ask yourself if you're willing to do the work.
Caution: Remember, you need to keep original supporting documents in addition to your computerized records.
Hot tip: Always make sure you keep back-ups of your computer files in a safe and secure place.