In the rush to start a new business, the simple act of keeping records often gets put on the back burner. But poor record keeping has been the demise of many otherwise successful businesses.
The entrepreneur needs clear and accurate records to help manage the challenges of the startup. These records can help manage cash flow and will provide financial statements that can help monitor the progress of the new venture.
The IRS expects even the smallest of businesses to document deductible expenses and support all items reported on tax returns.
Also, bankers monitor the progress of their business customers using financial information. If you cannot supply timely and accurate financial statements and other required information to your banker, it will hurt your ability to get loans when your business is at the stage where it could otherwise qualify.
The first step in establishing a record keeping system is setting up a separate checking account for the business. The deposits into this account should include any initial investment you make to start your business, the proceeds from any startup loans or investments, and all revenue from customers.
This checking account should be used to pay all expenses for the business, but not any personal expenses. As an owner you can draw money from this account, which can be deposited into a personal checking account to pay personal bills and living expenses.
Carefully document every expense paid from the business account. If paid by check, make careful notation of the check number, date of the check and purpose of the expense for each purchase. If paying with business debit or credit cards, keep detailed notes on each expense. Writing this on the back of each receipt is a good habit.
Set up a filing system, which can be either hard paper copies or scanned records, to track all documentation on receipts and expenses. Think ahead when setting up the filing system so it can accommodate the business as it grows. Use separate files for each vendor and customer and organize these files by type of expense or receipt.
Accounting software, such as QuickBooks, can help organize financial information. But remember that no system runs itself. Any system for record keeping relies on proper and timely input of information from you.
One lesson that many entrepreneurs learn the hard way is that you should not delegate financial record keeping to employees too quickly. Sadly, fraud is common in small startup businesses, and it often leads to the failure of an otherwise healthy business. Keep a close eye on financial records and put in systems of checks and balances. For example, never let the same person who handles revenues from customers also pay the bills, as this makes stealing money easier to cover up.
Record keeping may seem mundane compared with the other aspects of starting a business, but it is a critical step to ensure a healthy business. Record keeping systems should be simple to use. The job of the entrepreneur is to use this system to keep accurate, timely, consistent and compete records of all activity in the business.
Now, really.
This article is far too simplistic. There are far more important things to worry about as a small business person than which account you’re putting expenses in or using Quick Books.
Quick Books can be a pain to set up, and our mentors don’t recommend using it until one is up to several employees, and we find it’s probably one of the first items to farm out to someone.
Keep your expenses on an .xl spreadsheet, take them from your checkbook and debit/credit charges. Your tax preparer will sort it out when he does your annual tithe to the government.
Keep track of your competitors, not your expenses. Keep it simple.
John Heinrich, Chief Mentor
American School of Entrepreneurship
http://www.theasoe.com
Thanks! Two things I would want to note. First the records for one’s company should not be limited to financial transactions but also to various kinds of procedures, cover letters, document drafts. All these may be very useful for your company going forward. Second, financial transactions records are also essential because they serve as project management indicators (you know what you have done, at which point and how much it costs).
I think that keeping records is not helpful, it is crucial for the success!
This is a really helpful article for new business owners! Maybe John thinks its common sense, but I surprised with how many new business owners do not take the time to get their internal records and corporate formalities in check. As an account manager at Direct Incorporation I often have to explain this critical step to clients starting their small business!
You are right to bring up fraud as a real concern for small businesses as well as legal action. Keep all corporate formalities in check and complete, even if you think no one but you is likely to see them, is critical!