5 Reasons Great Small Business Records are Essential

5 Reasons Great Small Business Records are Essential

Small businesses are oftentimes understaffed and the owners are overworked. But that is no excuse for maintaining poor small business records. Some small businesses don’t understand the “records” part of their business to the point that written records are almost non-existent.

Not keeping detailed small business records, or no records at all causes serious problems for your business and the agencies that regulate your business. For some, record keeping is just one of the tasks they want to avoid, others complain they don’t have the time.

No matter what the reason for poor small business record keeping, the reasons for good records are immense. The reasons range from not missing important tax deductions to preparing financial statements.

Budgeting For Small Business Starts With an Affordable Car

Here are 5 major reasons for keeping detailed small business records:

1. Maintain business ethics and stay honest with the IRS and other regulatory agencies, as well as your own peace of mind
2. Support items reported on tax returns
3. Monitor Your Small Business Progress for Profits
4. Understand Your Net Profit Subject to Tax
5. Prepare your financial statements

  • Maintain Business Ethics and Regulations

It depends on the industry your business is aligned with that determines which agencies regulate your business. But, no matter what agencies regulate your business, good records will keep you prepared if you are questioned. Honesty is an absolute must, to maintain the integrity or your business product and service, and keep your doors open. Staying honest will avoid having to worry about being caught for dishonesty later, effectively maintaining business peace of mind.

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  • Identify Your Source of Receipts To Support IRS Deductions

When the IRS scrutinizes your business the first thing they want to see are authentic and honest receipts. Keep them to keep your business honest. All receipts must be original and not tampered with. Keep your receipts organized and safely stored. The last thing you want is for the IRS to be forced to guess your actual costs due to poor record-keeping and no proof of costs.

To facilitate your tax preparation and reporting, as well as your responses to potential IRS inquiries, it is beneficial to record and store your documentation of any transactions between related parties. An example of transactions between related parties, i.e., a corporation and its sole shareholder, may be subject to special scrutiny.

For great small business records you must know your finances like the back of your hand

  • Make a Profit and Monitor Your Small Business Progress

You need to know how much you are spending on your business to keep it running efficiently. Understand your break-even point to arrive at a profit. For example: “How much do I need to spend to create and sell my product or service?” Always keep good records of all of the costs of taking your product or service to market. You can avoid having a business that loses money each time you sell a product or service without knowing it. A sure road to small business failure is not knowing the exact cost of every item of your business.

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  • Calculate Your Lowest Net Profit Subject to Tax

You cannot deduct expenses that you approximate or estimate. You must be able to prove (substantiate) your business expenses with timely and accurate records to support the amounts deducted to compute your net profit. The burden of proof is on you if you are ever audited. The proof is inaccurate and honest receipts, expenses, and your small business records

Borrow Money From a Banking Institution or Other Commercial Lender

Potential lenders are going to check your credit and analyze projections to repay a business loan. All business assets, sales, and receipts will be verified. Business relationships are sometimes subjected to scrutiny. Keep personal finances separate from small business finances, to avoid confusing regulatory agencies and prompting an audit, or prevent your ability to get small business bank funding. Understand the difference between your business and personal affairs by maintaining separate accounts for each.

Lois Center-Shabazz | Course Delta Agency

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5 Reasons Great Small Business Records are Essential

7 Responses

  1. Lozelle Mathai

    This article hits the nail on the head!!! Some many small business owners don’t pay attention to their record keeping until it is tax time. I tell this to clients all the time, “bookkeeping and keeping organized records are just as important as getting and obtaining clients”.

  2. Kate | Life of a Ginger

    All of this, yes! When I first started my business I didn’t realize the importance of good record-keeping. Boy I learned that lesson fast!

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