Financial Record-Keeping 101 for Small Businesses

Thoughtware Article Published: Sep 02, 2021
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One of the most important responsibilities small business owners face is keeping current and accurate accounting records. Keeping track of a company’s income and expenses can feel burdensome and even overwhelming. However, maintaining accurate records can help you make informed business decisions and answer questions such as:

  • When can I pay my vendors?
  • Can I pay my employees this week?
  • Can I pay my taxes in six months?

There are several more significant reasons to keep your financial records updated and accurate:

  • Legal Accountability – Documents such as contracts, licenses and permits, insurance policies, leases, and HR/payroll information must be retained and accessible for reference purposes.
  • Tax Preparation – When preparing to file federal, state, and local tax forms, maintaining income and expense records is crucial, as business expenses can lower a tax bill.
  • Performance Tracking – Records that track income and expenses on a regular cadence are critical for measuring how well your small business performs.
  • Strategic Planning – Planning for the future is a necessity, and thorough record-keeping allows a business to plan a strategic course for the future.

Financial record-keeping is simply keeping records of all the financial transactions of your business, e.g., recording sales, entering vendor bills, and processing payroll. Basically, you will be tracking all movements of your money, both in and out of your bank account.

It is common in the early stages of owning a business to create your own “free” spreadsheet system to track all the company transactions; however, this can be time consuming, cumbersome, and inefficient. Even the most basic accounting software will keep track of all your business transactions in a more effective manner and is a worthwhile investment.

Whether you are using an accounting software program or a manual Excel spreadsheet, it is important to know what types of records you should keep. To track your business transactions appropriately, you should keep any receipts that will substantiate your operating expenses, gross sales receipts, and vendor purchases.

  1. Gross receipt documents can include:
    • Point-of-sale (POS) end-of-day reports 
    • Deposit information, both cash/check and credit card, i.e., merchant services processing reports
    • Any 1099-MISC or 1099-NEC forms provided to you
    • If no official POS system, keep any cash register tapes and cash receipt books
  2. Vendor purchase and operating expense documents tend to overlap and can include:
    • Canceled checks
    • Cash and credit card register receipts
    • Business credit card statements
    • Vendor invoices

While businesses do not need physical receipts/invoices to file federal, state, or local tax returns, it is beneficial—as well as a good business practice—to keep these records in a meaningful and organized manner. Instead of keeping paper receipts and paid invoices in file cabinets, small businesses may find several cloud storage subscription options useful, which can help generate a paperless back-office environment. No matter how you choose to store/save your income and expense documents, it is essential that you follow the general rule of record retention, which is “until the period of limitations for that return runs out.”

Current and accurate books and records will help enable you to monitor your business today and plan for tomorrow. By continually reviewing financials, you can:

  • Prevent fraud or theft
  • Manage cash flow
  • Make data-driven business decisions
  • Meet organizational goals

Regardless of who manages your business’s books and records, it is important to understand four basic documents/reports:

  1. Income Statement – Shows your business’s profitability as well as how much money your business has made or lost in any given time period.
  2. Balance Sheet – Provides an outline of your business’s financial standing at a single point in time. The balance sheet also shows the business’s retaining earnings, which is the amount of profit that has been reinvested into the business instead of distributed to owners.
  3. Cash Flow Statement – Analyzes your business’s operating, financing, and investing activities to show how you are receiving and spending money. The cash flow statement differs from an income statement because a cash flow statement also tracks money spent on assets or money borrowed on a note payable as well as ignores noncash items such as depreciation. 
  4. Bank Reconciliation – Compares the transactions you have posted to the general ledger/book to what has posted in your bank account (this is the process of reconciling your book balance to your bank balance).

A variety of quality cloud-based accounting solutions are available on the market (like these). These accounting systems streamline accounting processes and serve to make the record-keeping process simple and useful. Using accounting software to keep track of income and expenses allows the business owner to make informed decisions as well as spend more time focusing on operations and less time on administration. Cloud-based platforms have made accounting systems accessible and affordable, and there has never been a better time to upgrade your business’s financial record-keeping. 

For more information, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below. If you'd like to learn about our accounting solutions for small to midsize businesses, check out our Outsourced Accounting Services webpage.

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