You may well be asking do I really need to maintain accounting records for my business? Surely at the end of the year I can just give my accountant a big shoe box full of receipts and invoices.
Well, you could do that, but here are some good reasons for maintaining accounting records.
- Monitor your financial performance
- Satisfy IRS record keeping rules
- Budgeting and forecasting
- Obtaining funds for the business
Monitor Your Financial Performance
This should be the number one reason for maintaining accounting records. Without regular financial updates from management accounts it becomes difficult if not impossible to monitor the performance of your business.
One of the top reasons businesses fail is poor accounting. Without knowing how well the business is doing the owners will often not discover until it is too late they have a problem. This can often be the case where the owners of the business concentrate on only one performance measure such as sales. It is no good having rising sales if those are not converting in to profits and cash.
How often you monitor your financial performance will depend on the complexity of your business. For some very small businesses it may only be quarterly but for most it will be at least monthly.
If you don’t have the skills yourself to monitor the financial performance of your business talk to your accountant. The relatively modest investment in their time and skills will go a long way to improving the financial performance of your business.
Satisfy IRS Record Keeping Rules
The IRS expects you to keep accounting records to support the entries on your income tax return. Without reasonable accounting records it is going to be difficult to do effective tax planning so that you get the best tax position for your circumstances.
Apart from supporting your income entries, good accounting records provide the support for the deductions you claim. So keep all those receipts for expenses that you claim and make sure they are correctly analyzed in your accounting records.
If you are not sure what information to keep and record to help with the preparation of your tax return talk to your accountant or tax preparer. You can also read our article on a tax year end accounting checklist.
Budgeting and Forecasting
This ties in with monitoring your financial performance. Without up to date financial information you will not be able to properly budget or forecast for the future.
As noted above many businesses fail due to poor accounting and that includes not making sensible if any profit and loss or cash flow forecasts for the future.
Obtaining Funds For The Business
Most lenders or investors are going to want to see up to date financial statements as well as budgets or forecasts. Don’t expect to get a favorable response if you approach them with your shoe box of receipts.
Although maintaining accounting records can be tedious and often gets relegated to the bottom of the pile it is a very key part of running a business. Don’t fall in to the trap of putting it to one side. Start today at getting your accounting records up to date and if you need help talk sooner rather than later to your accountant.
Posted by Mark Smith an accountant and tax preparer with over 28 years accounting experience helping clients to maintain effective accounting records. He is the owner of Cranmere Accounting and Tax Services LLC. Although Mark would be happy to deal with your shoe box of receipts he would much prefer to see your business succeed by maintaining good records. Contact Mark on (480) 363-4808 or by email at firstname.lastname@example.org.
Disclaimer – This article does not constitute personal accounting or tax advice to the reader and is only offering general information. You should seek professional advice for your own situation as the most appropriate accounting and tax planning depends on your personal and unique circumstances.