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by The Bean Team on June 26, 2018
5 MIN READ
As a business owner, recordkeeping is a non-negotiable necessity that can impact the success of your business. While you’re legally obligated to keep certain records, recordkeeping is about more than satisfying regulations or legal requirements. It helps you understand your business—now and in the future.
Your business records tell the story of your company and can help you drive your business forward, allowing you to better plan your business’s future. Keeping good records helps you run a better business, providing a check on whether your business is improving and highlighting changes you should make.
Good records help you:
- Monitor your progress
- Prepare financial statements
- Identify sources of income
- Keep track of deductible expenses
- Prepare tax returns
- Support items reported on your tax returns
If keeping good records is so important and can help shape the success of your business, why are so many business owners so bad at it? With complex regulations, good recordkeeping can be tough, especially if you don’t know where to start. A 2017 survey suggests many business owners know very little about recordkeeping; so little, in fact, that the average business owner scored just 24% on a basic recordkeeping quiz—yikes! With that in mind, let’s set the record straight on recordkeeping.
Keeping Track of Details while Keeping an Eye on the Future
Business owners have a lot of details and data to keep track of. Even if you have a great memory, without a proper recordkeeping system, you’re bound to forget a thing or two. If you aren’t keeping good records, you’re more likely to overlook important business details, which can negatively impact your ability to best serve your clients. Put another way, good recordkeeping can bolster your bottom line.
When people think of recordkeeping, often they think of accounting and tax records. While those records are important, recordkeeping is more than that. Client files and contracts are also records you want to keep—and keep well.
You obviously want to keep records of the work you’ve done and the business agreements you’ve made, but client files should include details beyond monetary transactions. They’re an invaluable opportunity to document notes about a client’s preferences, or anything else unique to that client worth remembering.
If you do not know details about your clients—like their pain points and values—you may impair your ability to satisfactorily meet their needs. You risk disappointing a client, which can in turn irreparably damage that relationship. A good recordkeeping system helps you track important details of your business beyond just the financials.
What Records Should I Keep?
According to the IRS, you can choose any recordkeeping system that works best for your business as long as it clearly shows your income and expenses and includes a summary of your business transactions. This summary includes purchases, sales, payroll, and other transactions, all of which generate supporting documents (e.g. receipts, invoices, deposit slips). You should keep any documents that support the entries in your business books (e.g. accounting journal or ledger). The IRS lists the following as examples of the types of records you should keep:
Gross receipts. These are the income you receive from your business. Supporting records include deposit information, receipt books, invoices, cash register tapes, and Forms 1099-MISC.
Expenses. These are the costs you incur to run your business. Supporting records include account statements, cash register tapes, canceled checks, credit card receipts and statements, and invoices.
Travel, transportation, entertainment, and gift expenses. These include travel, transportation, entertainment, and gift expenses that you deduct and must therefore be able to substantiate.
Assets. These are the properties (like furniture or office space) that you own and use in your business. Supporting records include purchase and sales invoices and real estate closing statements. Supporting records include purchase and sale invoices, real estate closing statements, and canceled checks.
Employment taxes. These are records of employment that must be kept for tax-reporting purposes.
These are specific examples of records you should keep as recommended by the IRS; you can also follow more general guidelines. While the records you keep vary based on your line of business, in general, you should keep the following types of records:
Business documents. This includes records that establish your right to conduct business (e.g. articles of incorporation and accompanying by-laws).
Financial data. This includes records that reflect your financial transactions (e.g. accounts payable/receivable, payroll records, and tax filings).
Business agreements. This includes records that demonstrate your business’s obligations to your clients, supplier, vendors, and staff (e.g. contracts and employee benefit packages).
Executive decisions. This includes records that show how business decisions were made and how commitments were honored (e.g. meeting minutes and actions).
Regulatory compliance. This includes records that show you have met legal and regulatory requirements.
How Long Should I Keep Records?
While there are various opinions as to how long business owners should hold on to records, we advise our clients to keep records for seven years given the IRS’s ability to audit six-years-worth of tax returns. The seven-year rule of thumb helps keep clients out of trouble with the IRS.
To the Cloud
A lot of people have a love-hate relationship with technology, but when it comes to recordkeeping, technology is certainly more friend than foe. In this digital age, there’s no reason to file everything away in filing cabinets and desk drawers. While some businesses still prefer paper-based recordkeeping, cloud-based systems are quickly becoming the norm.
There are many options for cloud-based recordkeeping, from very robust business-specific software programs and apps to simpler software, like Google Drive. FA Bean Counters now offers a free subscription to HubDoc, a document collection and management software system that allows you to keep your financial documents—like receipts—in the cloud. This eliminates the need to store paper receipts, which can accumulate quickly. QuickBooks also has the option to link receipts directly to expenses, allowing you to easily pull receipts or invoices if need be.
With so many options in the vast world of technology, the choice ultimately comes down to what will benefit your business the most. Learn to leverage technology in a way that works best for you.
A Word of Caution
Whether your records are hard copy or digital, ensure that they’re safe. Have backups and protect files from unauthorized access, taking extra precautions to protect confidentiality and personally identifiable information.
What Records Should I Toss?
With all of the records you have to keep as a business owner, it’s easy to fall into the habit of keeping everything—why not err on the side of caution? Excessive recordkeeping can cost you time and money, two things no business owner wants to waste (or has to spare). When it comes to records that you are not legally required to keep, ask yourself if you’ll need the information to make business decisions or transactions, to meet regulatory or statutory requirements, or to satisfy the requirements of any litigation in which you’re involved. If the answer to these questions is no, then you likely no longer need the information.
There are many fun aspects of being a business owner (like being your own boss!), but recordkeeping typically doesn’t top the list. It can be tedious and overwhelming if you don’t have a good system in place and are unsure of what records you should and shouldn’t keep.
Know what you need to track (and what you can toss), use software to simplify the process, and make recordkeeping a habitual part of your routine so paperwork doesn’t pile up. Soon, recordkeeping will be another task that, although not the most fun, is entirely manageable.