I’ve often said in the past that you should keep good records for many reasons – to know your actual bank balance; to understand how you are performing for the year; to understand how you are performing in comparison to prior years; to make informed business decisions; to make it easier on your accountant to prepare your tax return(s). But for some, I need to take one step back and say to just keep records, never mind good records. It is amazing how many business owners just don’t keep records on some type of General Ledger (G/L) system or allow someone else – your accountant for example – to do it for you.
Common rebuttals are “I know how much I have in the bank by looking at my balance online” and “what types of decisions will I have to make? I make them as they come up.” My responses have been and always will be:
- This “system” doesn’t account for checks that haven’t cleared yet therefore you don’t know how much you actually have to determine which upcoming bills you can pay.
- Your online balance doesn’t factor in any auto debit amounts that you have set up to come out in the coming days. In a G/L system such as QuickBooks®, you can set up these auto debits to be entered automatically and as much as 7 days in advance giving you plenty of notice as to you upcoming balance.
- Based on the above, you will save on overdraft fees.
- When you know where your sales are coming from you can determine where to market more aggressively. For example, let’s say you are seeing a large growth in online sales. You can then focus your marketing dollars to internet advertising. Or if there’s a large uptick in local online advertising, you can increase your reach that way by adding additional towns/cities.
- You can see the relationship between the amount spent on advertising and sales.
- By recording your purchases you can see how much you are spending and possibly negotiate with your vendors for a volume discount or better payment terms.
- You’ll save on professional fees since your accountant won’t have to recreate your books and records and you won’t have to hire representation for unpaid/unfiled taxes.
- You will have a better understanding of your business – cost per sale, net profit, tax liabilities – therefore understanding how different decisions impact your cash flow.
- You will be able to value your business in the event of a sale, bringing on additional owners, drafting a buy/sell agreement, or any other reasons for needing to place a value on your business.
- You will be prepared in case you need financing and the bank needs to see financial statements.
The list can go on and on regarding the types of decisions you can make with accurate records. If this aspect of business ownership is not in your “wheelhouse” then outsource it. Many accountants enjoy doing this work and most have a member of their firm that specializes in it.