Good Recordkeeping – The Path to Success
So, you decide to start a business….you come up with a great idea, create an ingenious business plan to make that idea into a reality and suddenly business is booming. Voila! Your idea is a success and the business is growing and growing fast. Day to day operations are now all consuming and suddenly your time is completely devoted simply to meeting demand. Who has time to “keep the books,” and is it really so important to have good recordkeeping anyway?
The unequivocal answer is YES! Good recordkeeping is essential to the continued, long-term success of your business. In general, good records will provide answers to the financial health of the business allowing necessary decisions to be made with regard to cash flows, increasing profit margin, and determining potential pitfalls.
Investors and financial institutions will want to know the financial position of your company as part of their determination as to whether the risk in investing or loaning money to your company is warranted. Having poor records and struggling to provide the financial information requested could scare away potential financing resources.
2. Financial Position
Good records will enable accurate oversite with regard to the financial position of your company. They will provide the financial data necessary to help you to operate more efficiently, which in turn will increase your profitability. Having strong records will ensure that all assets, liabilities, income and expenses are captured accurately in your financial statements, which can then be used as a mechanism for industry analysis and internal operational analysis. A comprehensive bookkeeping system allows a business owner to analyze spending and revenue one item at a time. The data can be grouped by the week, month, quarter or year to be analyzed and compared to past years. This is one way that business owners can discover ways to cut back on company spending and improve profitability
3. Budget Monitoring
Companies require an accurate report of current spending and revenue to help compare actual results with projections in the annual budget. A bookkeeping system facilitates up-to-date company financial information that can be cross-checked with the budget to make sure that the company is not overspending. Bookkeeping also identifies instances of under-spending so the company may find new uses for the extra money to help productivity.
4. Business Decision Benefits
Bookkeeping records offer benefits that help you make smart business decisions. With bookkeeping, you can identify money-making opportunities, avoid cash-flow problems, and find ways to increase income or decrease spending. For example, your bookkeeping records might show that eliminating the non-productive late-shift would save your business $5,000 per-month. Your bookkeeping records also might show that business income would increase 50 percent by stocking more red socks instead of blue socks. Good bookkeeping records also are beneficial when you’re applying for a business loan. By keeping good and accurate records, you make it easier for lenders to make decisions about your business.
5. Risk-Reducing Benefits
Two risk-reducing benefits associated with bookkeeping are the ability to detect fraud and embezzlement. You might not want to think about it, but there’s always a chance that your business will experience fraud or embezzlement if you have employees or business partners. If your bookkeeper is honest and good at the job, he or she will be able to spot suspicious business transactions. For example, if your business partner uses business funds to pay $1,000 per-month to a mysterious consultant you’ve never heard of, then the bookkeeping records will show the evidence. If you’ve hired a bookkeeper instead of doing it yourself, keep tabs on the bookkeeper to make sure that person is doing an honest job.
6. Tax Returns
Having good records are essential to avoid underpaying or overpaying taxes. Additionally, should your company be audited by the Internal Revenue Service, being able to answer questions accurately and provide the necessary support requested is essential to satisfy their inquiries.
It is never too late to initiate the process of keeping good books and records. The task may seem daunting at first, but will be well worth the efforts required when the true, precise financial position of your company becomes clear and effective decisions can be made to ensure the long term success of your business.
Please contact The CFO Squad with any questions you may have with regard to assistance in cleaning up your record keeping and preparing financial statements at [email protected] or 845-613-3394.