A good record-keeping system is extremely important for any business.  Only with complete financial records can a business owner make sound management decisions.  Good records help the business owner cut costs, maintain or increase profits, obtain financing, control inventory, separate business and personal expenses, know the bottom line, track cash flow, and avoid costly mistakes.

All businesses are required to keep records for local, state and federal regulatory and tax purposes.  According to the Internal Revenue Service, your record-keeping system should include all of your business transactions.  Your “books” must show gross income, deductions and credits.  Purchases, sales, payroll and other transactions must provide supporting documents, such as invoices and receipts.

Records must be kept to account for:

• Gross receipts (income you receive including amounts and sources)
• Purchases (items you buy and resell to customers or cost of all raw materials or parts purchased for manufacture of products including amount paid and for what)
• Expenses (costs you incur to carry on your business including amount paid and for what expense)
• Assets (property, such as equipment and furniture, you own and use in your business.  Records on assets are used to calculate depreciation and gain or loss on sale of assets.)
• Payroll (amounts and dates of all wage, annuity and pension payments; amounts of tips reported; W-4 and time cards for employees, year-end W2s, quarterly payroll reports; employee information including names, addresses, social security numbers, occupations, and dates of employment; and more)

All records supporting tax returns should be kept for the current year and at least three years prior.  Payroll records and insurance records should be maintained for four years.  Tax returns, financial statements, corporate minutes, records of real estate purchases and of major equipment purchases, legal correspondence and pension plan records should be kept permanently.

For detailed information on what records to keep and for how long, read IRS Publication 583: Starting a Business and Keeping Records.  Other government agencies, Including the U.S. Department of Labor, the Florida Department of Revenue and the Florida Department of Insurance also required that records be kept available.

Many simplified record-keeping systems, both manual and computerized, are available to small-business owners today.  Manual systems may include a checkbook, a cash receipts journal, a cash disbursements journal, a sales record, an accounts receivable record, a payroll book, an inventory log, a petty cash fund, a vehicle mileage log, and entertainment receipts. The pegboard or one-write record-keeping system uses ledger sheets, customer/vendor cards and checks and allows the business owner to record expenses at the same time the check is written.  Computer systems can generate detailed and summary reports including financial statements, general ledger, payroll, inventory, and more.

These systems must be carefully studied by the owner for suitability to his or her business prior to purchase.  The business’ accountant and the SBDC at UCF can assist in this decision-making process.

A balance sheet and income statement are two of the most important financial statements for the business and should be updated on a regular basis.  These documents will enable the business owner to determine his or her investment, debt, net worth and profitability of the business, as well as providing a basis for comparing the business’ performance to the industry standards.

Even though most small-business owners depend upon the expert advice of an accountant on tax and financial issues, a successful business owner still must learn to read and understand financial statements and how they affect his or her net income.  These financial documents, based on fact rather than guesswork, are invaluable in making sound management decisions.  In addition, the balance sheet and income statement are used for tax purposes and are essential when approaching a financial institution for debt financing.

Cash flow is the lifeblood of the small business.  Although the income statement may show a profit, there may be no ready cash on hand to pay bills.  Cash-flow statements and projections provide the business owner with assistance in:

1. Determining the venture’s viability
2. Projecting capital requirements
3. Determining break-even point
4. Evaluating lease vs. purchase options
5. Controlling the flow of cash

Cash-flow projections estimate the cash coming into your business and flowing out of your business, month by month, for 12 months.  From these projections, you can determine the amount of working capital the business will need to sustain it until revenues exceed expenses.  Use the following sample cash-flow spreadsheet to project your cash flow for the first six months.

Conclusion

Adequate records are required of all businesses, large and small, by the IRS and other government agencies.  In addition, adequate records provide the business owner with facts on which to base sound management decisions.