June 4, 2020  
 
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Developing a Comprehensive Recordkeeping System

Smart business owners are organized. Everything has a place and is in its place. If you own a business and want to develop a comprehensive recordkeeping system, this is a must-read article.

This year is going to be different, asserts Fred Stenstrom.
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Fred owns his own small nursery. He enjoys being his own boss, but he dreads tax time.

"I'm not very organized. It's not so much of a problem in my day-to-day business because I always know which plants are which. Tax time, though, I'm always working late because I don't keep my bills or invoices up to date. If I could just get organized once, I think that I could keep it up. The real problem is that I don't even know how to get started."

To meet your small business, home office and family needs, we offer guidance on the following topics to help you get your record-keeping act together for the coming year:

Make Sure Your Business and Personal Records Are Disaster-Proof
The fire alarm is going off. You have minutes to clear out of your home or office with no time to start grabbing piles of folders. How would you decide what to save? Where would you keep the records you need to save for easy retrieval?

By spending a little time planning now, you can avoid a catastrophic loss of your records in the event of flood, fire, hurricane or manmade disasters.

Organizational expert, Barbara Hemphill, president of Hemphill & Associates in Raleigh, N.C., has these suggestions for the safe keeping of records:

  • Collect important personal papers and information related to financial transactions.
  • Identify a single location to file all crucial papers, such as a fireproof box or safety deposit box.
  • Create copies (certified in cases of birth certificates and other crucial documents) for future needs with government agencies.
  • Put important original documents in plastic covers to protect them and to help you identify them as the original document.
  • Notify the appropriate people where important information will be located, in case you're not available when disaster strikes.
  • As you work through the day, always be aware of the kinds of information you should add to your filing system. Keep notes on a card you carry with you or buy a mini tape recorder to save your thoughts.
  • Identify the records you or your financial institutions keep only on computer, since they may not be available in case of a large scale power failure.
  • If you keep records in a safe deposit box, don't carry the key with you and make sure someone else (perhaps a trusted relative or your lawyer) has a copy of it.
  • Create backups of your computer records and if possible, store them off site. This can be done on diskettes, compact discs, zip disks or DVD-Rs.

What should you collect for safekeeping?

  • Bank account records
  • Marriage certificates or divorce decrees
  • Identification records
  • Titles, deeds, registrations for property and vehicles owned
  • Mortgage and other loan information
  • Insurance policies
  • Investment records
  • Credit card statements
  • Employer benefit statements
  • Income tax information
  • Report of earnings from Social Security
  • Social Security card
  • Trusts
  • Wills
  • Birth certificates

Maintain contact information for:

  • Banks and other financial institutions
  • Clients
  • Employers
  • Employees
  • Insurance agents
  • Power, light, gas and other utility companies

Which Type of System Is Right for Your Business?
Most small businesses or home offices maintain their own records. It's less expensive and gives the business owner a better grasp of what's going on with the business. In some cases, it might be more efficient to have an outside firm maintain your business records, especially for bookkeeping. But remember, even if you hire out your record keeping, all applicable tax laws are still your responsibility. If there's a problem, it is yours to solve.

In general, there are two basic ways to maintain records:

  • Computerized record keeping. Consider acquiring a simple-to-use home accounting program. There are many popular ones on the market. The program eliminates the need for a handwritten set of books. Most programs resemble a checkbook register and categorize each item as a type of expense or income using either a number or name that you specify. In most cases, you can add "cash" or "credit card" payments in the same way. You can save a lot of time with the computer's ability to quickly print out the records you need, and the program eliminates easy-to-make, but hard-to-find math errors.
  • Manual record keeping. Eventually you may outgrow a manual record keeping system, but most small businesses or home offices start with a manual system. Manual records will satisfy the tax codes as long as they are accurate and easy to understand. You can use inexpensive, pre-formatted record books found at any office supply store. You can also use a pad of ledger sheets. Your records might use broad categories (i.e. advertising, utilities, supplies) across the top of the ledger sheet and list each transaction for the category going down the page. Be sure to include whether a payment was "cash" or "credit card." At the end of the month, total up each column, and you will have an accurate record of payments. This is called a "single entry" system," meaning you enter each transaction only once.

No matter which system you decide to use, you will still need to keep "source" documents in folders or boxes by type of document: receipts, bank statements, purchase invoices and so on. These will substantiate the numbers in your record-keeping system.

Setting Up Financial and Record-Keeping Systems for Your Small Business
A basic record-keeping system should be easy to use, understandable, reliable, accurate and timely. You'll need some type of business journal to record transactions and a well-organized filing system. You should also be generating monthly financial statements that include cash flow, accounts receivable, accounts payable, payroll, overall income statement and balance statement.

Set up a baseline set of information for your business. Remember, the usual rule of thumb is that you should have enough money on hand to operate your business for one year.

Include these operating expenses:

  • Down payments on property, rent, equipment
  • Equipment
  • Legal/accounting services
  • Licenses/permits
  • Marketing
  • Office space
  • Professional fees
  • Remodeling/installation of equipment
  • Salaries (including your own)
  • Supplies
  • Utilities

A financial management system can be created or maintained by you or your accountant and should include the following elements:

  • Income statement showing income and expenses for a given time period (month, quarter, year)
  • Balance sheet comparing your assets and liabilities
  • Operating budget showing your estimate for flow of cash over each month of the year
  • Cash flow statement, one of the most critical documents you can prepare. A cash flow statement can answer these questions:
    • Are the operating activities generating cash?
    • Which working capital components have large uses of cash?
    • How much cash is provided for investing in activities?

A basic financial record-keeping system should include information on banking relationships, bill payments, money collection, purchases, sales, professional relationships (accountant, bookkeeper, suppliers) and information gathering and reporting.

Set up a separate checking account for your business. Set up a ledger to record all transactions (either computer or handwritten). Store receipts in the same order as they are in the ledger. Check your bank statements and credit statements monthly. Keep basic information for each customer and employee. Each piece of equipment needs it receipt and service schedule.

This may sound daunting, but there are some basic elements of a good system that will help you get started in your organizational activities:

  • Use a calendar devoted only to deadlines and other events that are important to your business.
  • Create a filing system in either alphabetical or chronological order. Decide what records need to be kept permanently and which ones can be discarded after a certain amount of time. (See Business Records: What to Keep and What to Toss for guidelines.) Don't worry about setting up your filing system perfectly at first. Make it adaptable, so you can change it as you gain experience or your business changes.

Creating and Maintaining a Personal Record System
Personal records are just as important as your business records, but often they are not kept in a logical or secure manner. You need accurate records for income tax purposes; for use in the event of death, fire or theft; for important transactions (mortgages, car purchases, etc.); to shorten the time it takes to collect insurance, veteran's benefits or income tax refunds; and for future financial planning for the family.

A personal record-keeping system might be set up in a home office or it could be as simple as a drawer in the kitchen or a filing cabinet in the family room. Whatever you use, make sure one person in the family is in charge of the system and that it is updated on a regular schedule.

Some records, such as identification, credit cards, organization and member cards, insurance information and important medical information (insurance cards, blood type, allergies) should be carried with you. Other records can be kept in a filing system at home, and still others should be housed in a fireproof box or safety deposit box.

Divide your files into the following major categories:

  • Current financial records, including employment records, credit card information, insurance policies, health records, warranties and guarantees, education records, bank statements, household inventory, tax records and cancelled checks
  • Inactive financial records, for items included in the current files but that are at least three years old
  • Permanent records and very important papers that should be saved in a safety deposit box or home fireproof boxes. (See the section above on safe record keeping for what records you should include here.)

It wasn't the most interesting weekend in his life, but Fred Stenstrom spent the last two days organizing his business office. He set up a new filing system and learned how to use a new software program to balance his books.

"I missed out on some football games I wanted to see, but otherwise I'll survive," he says. "I'm going to make up the time by taking a vacation to play golf in April instead of wasting every waking hour pulling my files together for the accountant. And I'm backing up all my financial and client information every night. It all fits on one DVD." Fred grins. "I've got the backup copy at home."

Article provided by Socrates. Socrates is the leading source of do-it-yourself books, kits, forms and software that help small business and real estate property owners take care of legal and related matters themselves. Each Socrates solution is relevant, compliant, comprehensive and a lower cost alternative to traditional legal and professional services.

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