Many small businesses today are focused on growing their revenue. While this is the lifeblood of any business, accurately tracking this revenue and related expenses is just as important. While most owners would agree with this sentiment, over 60% of small business owners report that they are not knowledgeable about the accounting and finance of their business. This sometimes leads to financial records being ignored until requirements for the business like compliance or taxes emerge.
Operating in this manner can introduce a whole host of time-consuming (and sometimes costly) issues for the business when the time comes to begin the transition out. Therefore, it is paramount for a business to have accurate financial records to operate efficiently on a day-to-day basis. In this post, we will cover the importance of updating your records and how your business can integrate accurate bookkeeping into your core operations.
Table of Contents
What are financial records?
Financial documents are all the forms of records that summarize your business’s transactions. They are basically any document containing information regarding your business’s financial activities. It can be both physical and electronic documents. It is best to have electronic or ‘soft’ copies of these documents to make them easier for others to review.
Some of the common financial records that a business has included:
- Income statement / profit and loss (P&L) statements
- Balance sheet
- Statement of cash flows
Importance of financial records
Accurate, up-to-date records are crucial for several reasons, including:
Know what is going on with your business:
Without up-to-date records, you are unaware of what is going on in your business financially. These records enable you to know exactly what your business makes and spends. This can help you make the changes needed to grow your business.
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Ability to forecast future revenue and expenses:
These records are also a great tool to use to forecast the revenue and expenses of your business. This is extremely important for peak periods during the year, such as holidays. You can adequately prepare your business to handle volume orders from customers by forecasting your finances. Therefore, make appropriate staffing decisions and significant purchases to help run the business efficiently.
Tax filing:
Your records are essential for filing your taxes. Without accurate financial records, you can expose your business to fines and additional legal issues related to taxes. Having accurate records will also save time and money when a CPA prepares your return.
Obtaining a business valuation when planning to exit:
When your business reaches the stage where you’d like to exit, you will need up-to-date records for your prospective buyers. Their review of the evaluation is part of due diligence and generating an accurate business valuation. In addition, buyers may use this information to model scenarios for growing the business and increasing profitability.
When do you need to update your financial records?
Compliance:
Depending on your business’s industries, you need accurate records to meet compliance requirements. Compliance programs and officials are known for their in-depth investigation, so you need to produce the most accurate and up-to-date records to be compliant with requirements.
You need to have clear processes to ensure that financial reporting to compliance programs is accurate. Inability to produce these records for your business can lead to considerable fines, penalties, and even business closure. Hiring a professional CPA or expert with experience meeting compliance requirements is a good idea.
Tax season:
Updating your records before tax season will help avoid issues related to inaccurate returns. Put simply, your taxes simply cannot be done without accurate and real-time financial reports. Using inaccurate financial reporting for your taxes will lead to many financial and legal issues for you personally and your business.
The IRS requires you to keep various financial reports for specific lengths of time. Therefore, a lack of updating can lead to many hours wasted trying to retrieve invoices, statements, and similar records.
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How can you update your financial records?
Organize your financial records. :
The organization is the backbone of your records; this is the first step your business needs to take to update your records. Just taking inventory of what your business is making and spending each month can be a huge step in organizing your financial records. This will show you the inefficiencies in your business, and you can stop paying for unneeded services.
Your business should have a protocol or system to capture, file, and store the records. This means each time a financial transaction occurs, there should be systems in your business that allow you to track it and store it. Some of the records your business should be organizing include invoices, receipts, bank account statements, credit card statements, tax returns, and more.
Use accounting software
Most experts agree that using accounting/bookkeeping software such as Quickbooks or Xero is helpful and can save business owners time and money.
Accounting software is one of the most cost-effective ways to update your record. Accounting software can enable you to do automated bookkeeping, which will help get your records up to date. In addition to accurate financial statements, accounting software can simplify payroll and give you more insights into improving your finances.
With accounting software, you can generate financial reports quickly and identify areas of expense mismanagement in your business. These reports are based on the financial data of your business, and you can start saving hundreds if not thousands of dollars per month immediately.
Outsource bookkeeping:
Outsourcing bookkeeping and tax preparation to a professional bookkeeper or CPA is probably the best solution to ensure you have current and accurate financial statements. A professional accountant will update and reconcile your records and ensure your business meets all legal, tax, and compliance requirements related to your finances.
Not only will a professional stay on top of your financial records, but it also leaves you more time to grow your business. In addition, an accountant lends significant experience with helping businesses improve their finances and grow and has insights as to what has worked for other businesses.
A great accountant will focus on meeting your needs. In other words, they will tailor their solutions to help your business grow. Accountants can also help you with other related aspects like consulting, financial planning, investing, and more.
Don’t wait if your finances are not up to date or simply not sure. Instead, take the step and hire the right resources to help – you’ll be glad you did.