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THE IMPORTANCE OF GOOD RECORD KEEPING
As the owner or manager of a small business, you invest tremendous time and energy to ensure your company’s success. You want the greatest possible return on your investment, and good financial records can help.
Your Key to Success Is Information
Think back to the steps you went through to open your business. From the start, you’ve done everything right. You invested a tremendous amount of time in gathering information - about your abilities, finances, market, customers and competitors.
You understood why you wanted to go into business - the opportunity to be your own boss, a desire for financial independence, the freedom to set your own course.
Then you chose the business “right” for you. And, more importantly, your market research showed that your particular “business dream” was in demand.
You then took all this information and developed a business plan- the same business plan that helped you get the loan you needed to open the doors. You demonstrated your business skills to the bank stating precisely how much money you needed, why you needed it, and how you were going to repay it.
What Went Wrong?
While it’s true that success often brings success, it’s equally true that success often breeds failure - particularly for a small business.
That’s because as a business begins to grow rapidly, the owners often work frantically to simply meet demand, minimizing the time they devote to keeping good records.
If escaping paperwork was one of your reasons for starting abusiness, it is critical that you hire someone to perform the necessary task of keeping your financial records. Although you must pay for these services, bear in mind that solid financial advice frequently can increase your profits, more than covering the professional fees.
Good records will help you answer important questions about your company’s financial health. What’s really happening in my business? Why is cash flow always a problem? How much is real profit anyway? If you’re not exactly sure, then it’s time to return to the basics - the basics of good record keeping.
WHY?
Simply put, a small business that fails to keep complete and accurate financial records places its long-term success and survival in grave doubt.
Complete and accurate financial record keeping is crucial to your business success. Here’s why:
1. Good records provide the financial data that help you operate more efficiently, thus increasing your profitability. Accurate and complete records enable you, or your accountant, to identify all your business assets, liabilities, income and expenses. That information, when compared to appropriate industry averages, helps you pinpoint both the strong and weak phases of your business operations.
2. Good records are essential for the preparation of current financial statements, such as the income statement (profit and loss) and cash-flow projection. These statements, in turn, are critical for maintaining good relations with your banker. They also present a complete picture of your total business opera tion, which will benefit you as well.
3. Good records are critical at tax time. Poor records could cause you to underpay or overpay your taxes. In addition, good records are essential during an Internal Revenue Service audit, if you hope to answer questions accurately and to the satisfaction of the IRS.
What Exactly Will the Records Tell You?
The following checklist highlights the type of information your financial records should provide to assure your success:
* How much income are you generating now, and how much income can you expect to generate in the future?
* How much cash is tied up in accounts receivable (and thus not available to you), and for how long?
* How much do you owe for merchandise? Rent? Utilities? Equipment?
* What are your expenses, including payroll, payroll taxes, merchandise, advertising, equipment and facilities maintenance, and benefit plans for yourself and employees (such as health insurance, retirement, etc.)?
* How much cash do you have on hand? How much cash is tied up in inventory? What is your actual working-capital budget?
* How frequently do you turn over your inventory?
* Which of your product lines, departments or services are making a profit, which are breaking even, and which are financial drains?
* What is your gross profit? What is your net profit?
* How do all of the financial data listed above compare with last year - or last quarter? How do they compare with the projections in your business plan?
* How do all the financial data compare with those of your competitors? With those of the industry?
While your review of this checklist may have uncovered some glaring deficiencies, it’s never too late to correct problems related to poor record keeping. It may take a bit of time and effort to ana lyze the company checkbook, take inventory, review bank statements and, in general, catch up on your paperwork.
It is essential, however, that you make the effort to determine the precise financial condition of your business. It is as critical as maintaining good customer relations.
What to Look for in an Accountant
Let’s assume you follow the path of many successful entrepreneurs and seek professional assistance from an accountant. How do you find an accountant who is knowledgeable, capable and discreet? You should seek an individual with high ethical standards who is a respected member of the community.
Due to the ever-changing complexities of tax laws and developments in accounting methods, the accountant must keep up. Look for an accountant who takes advantage of educational seminars, professional publications and other continuing education opportunities.
You will probably want your accountant to assist you not only as a record keeper, but also as a consultant and financial advisor who understands your business affairs almost as well as you. Seek out an accountant with broad experience and a well-rounded education.
Professional accountants are listed in telephone directories under accountants, public accountants, bookkeepers and tax preparers. Look for references or recommendations from local business associates, your banker or attorney.
The Basic System
A basic record-keeping system, whether on paper or an off-the-shelf computer software program, should be simple to
use, easy to understand, reliable, accurate, consistent and designed to provide information on a timely basis.
It needs:
* A basic journal to record transactions (receipts, disbursements, sales, purchases, etc.)
* Accounts receivable records
* Accounts payable records
* Payroll records
* Petty cash records
* Inventory records
An accountant can develop the entire system most suitable for your business needs and train you in maintaining these records on a regular basis. These records will form the basis of your financial statements and tax returns.
Without knowing where your business is financially, you may be forced to close or sell, despite an excellent customer base. You could find yourself in this trap if -
* your cash flow is desperate.
* you are unable to pay creditors.
* too much of your cash is tied up in old inventory and accounts receivable. Sure, owning a business places tremendous demands on your time. It’s easy to let things slip. Resolve now to avoid the trap of letting the books wait until you are less busy … or more rested… or have time to start and finish the job all in one sitting… or ….
Make a pledge now to maintain your records and assure your success!
For More Information
Information is power. Make it your business to know what is available, where to get it and, most importantly, how to use it.
Sources of information include:
U.S. Small Business Administration
* SBA District Offices
* Small Business Development Centers (SBDCs)
* Service Corps of Retired Executives (SCORE)
* SBA OnLine (electronic bulletin board)
* Business Information Centers (BICs)
The SBA has offices located throughout the United States. For the one nearest you, look under “U.S. Government” in
your telephone directory.
You also may request a free copy of The Resource Directory for Small Business Management, a listing of for-sale publications and videotapes, from your local SBA office or the SBA Answer Desk.
Other Sources
* State economic development agencies
* Chambers of commerce
* Local colleges and universities
* Libraries
* Manufacturers and suppliers of small business products and services
* Small business or industry trade associations
Did you know the SBA …
* Has a portfolio guaranteeing over $27 billion in loans to 185,000 small businesses that otherwise would not have had such access to capital?
* Guaranteed over 60,000 loans totaling $9.9 billion to America’s small businesses in fiscal year 1995?
* Last year extended management and technical assistance to nearly 1 million small businesses through its 950 Small Business Development Centers and 13,000 Service Corps of Retired Executives volunteers?
* Provided more than 45,000 loans totaling $1.2 billion to disaster victims for residential, personal property, as well as business losses in fiscal year 1995? Has 7,000 private sector lenders as partners providing their capital to small business?
* Has increased its venture capital program with more private capital in the past two years than in the previous 15 years combined?
* Provides loan guarantees and technical assistance to small business exporters through U.S. Export Assistance Centers in 15 cities?
Did you know that America’s 22 million small businesses …
* Employ more than 50 percent of the private workforce,
* Generate more than half of the nation’s Gross Domestic Product, and
* Are the principal source of new jobs?
All of the SBA’s programs and services are provided to the public on a nondiscriminatory basis.
