BUSINESS TIP OF THE DAY: What is the Best Way to Keep Business Records? One of the biggest areas of confusion business owners have is how to keep adequate records. This is one of the largest causes for business owners frustrations and even businesses failures (second only to friends or family going into business together without a clear written agreement; but that is a topic for another day). First, one needs to understand why keeping records of financial transactions is necessary, To keep it simple, I will focus on two main reasons. In the United States, business owners are required to self-report income and deductions in order to calculate and pay income taxes. Second, a business should keep records to determine how much, if any, profit the business generates (this number will often be different than taxable income). Using the checkbook register or online bank balance as an indicator of how the business is doing is misleading and can cause a business to fail. Most entrepreneurs who start a business are very good at something. Perhaps the business owner is an excellent carpenter or consultant. What he or she is likely not good at is keeping accounting records. A business may have a large bank balance, but actually be unprofitable. Conversely, a business may have a negative bank balance but be very profitable (albeit with a cash flow problem). Good CPAs understand this. Great CPAs explain it to their clients in a manner the clients understand. Clients or prospective clients of this Firm can expect our advice on how to keep records that will both satisfy the tax collector and, perhaps more importantly, illustrate to the owner how the business is performing. In the current age of smartphones, tablets, and scores of inexpensive accounting software, we may recommend that a business keep records with pen and paper if that is what the owner or responsible party is comfortable with. Some businesses have very few transactions, but each transaction represents a large dollar amount. This type of business lends itself nicely to handwritten records. Alternatively, some businesses may have thousands or hundreds of thousands of transactions where each transaction taken separately represents a small dollar amount, but in aggregate, the sum of the transactions represent a very large sum. In this case, more sophisticated computerized recordkeeping is appropriate. Having established that recordkeeping is both important and diverse based on the type and needs of the individual entity, I still have not mentioned the best method for keeping financial records. This is where your CPA or trusted accountant should enter the picture. As I stated above, this Firm works with clients and prospective clients to set up a recordkeeping system that satisfies the requirements of the United States Tax Code and, arguably, more importantly, provides the owner or decision makers with information in a format they can easily understand and are comfortable with. The owner or decision maker in a business should be able to easily look at key figures (what figures are most relevant will depend on the type of business) and see how the business is performing, how it compares to prior periods, and project how it will perform in the near future. If you are in this position, and your CPA is not helpful is assisting you with the most basic element of operating a business, (“keeping the books”) find one who will (this Firm consists of those who will). Also, this Firm does not sell any software programs. Nor do we accept any rebates for recommending software. If your CPA or accountant is “overly loyal” to a certain brand of software, ask if he or she is a reseller of that software brand. Many reputable Firms are software resellers, but their first consideration should be what is right for each unique business. Having mentioned that an entrepreneur is likely very proficient in his or her field of business, but likely not an accounting whiz, many small businesses are better off outsourcing most or all accounting and tax functions. For this purpose, I define “small business” as an entity that does not have the resources to employ its own qualified accountant or accounting department. I will address the numerous benefits of outsourced accounting in the near future, but if you are not already outsourcing your accounting and wish to get a head start on the numerous financial and peace of mind benefits, contact your CPA. If he or she falls in the “good” but not “great” category, our contact information is on this page. danallencpa
Posted on: Wed, 04 Jun 2014 19:08:54 +0000
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