Small business owners do everything from product design to janitorial work. No wonder they sometimes struggle to keep up with recordkeeping.
Good records are vital to help business owners in the following:
- Monitor the progress of their business. The decisions made daily in business can be instinctual or based on actual sales. Those based on actual sales, can make the difference in the future of the business and possibly help you see new potential your business may have. When you don’t keep records updated, you make real time monitoring impossible and by the time you see patterns, they may be gone.
- Preparation of financial statements. The financial statements are necessary not only for tax reporting requirements, but any time you seek financing, whether for business or personal. Keeping the records as you go will avoid cramming work into a short period.
- Identification of income sources. Good records help business owners identify trends, target markets and super consumers. Know your market, by knowing your records in real time.
- Track expenses. Just as you need to know where your income comes from, you need to know what you are spending your income on, and whether you are getting a return on that investment. You may find areas of expenses that you can cut, and other areas to apply funds to create larger profit margins. But you can only do this when you are tracking your expenses as well as your income sources.
- Preparation of tax returns and support of items reported on those returns. If you claim it, you need to be able to prove it – from income to deductible expenses. Rushing to do this at year end creates costly omissions and other mistakes. Good regular record keeping can save business owners from many recurring tax issues.
Record keeping must clearly show income and expense, and all business transactions; not just for the current tax year, but for at least three previous years, according to the IRS. Note that there are exceptions. Talk to a tax professional for guidance on this issue. Visit our site acctservices.org to be connected to a licensed accountant who can assist you.
Employment tax records need to be kept at least four years according to the IRS. These documents need to be in a secure location regardless of whether they are hard copies or electronic copies. You will need an electronic back up if you keep electronic copies, and should use a safe or locked drawer or cabinet if you are keeping paper versions of your employment tax records.
Good record keeping, with backup copies can both help your business grow and can protect your business from costly tax errors and omissions. If you haven’t already begun, now is a good time to begin organizing your records and keeping up to date.