"This year is going to be different," asserts Fred Stenstrom. Fred owns his own
small nursery. He enjoys being his own boss, but he dreads tax time.
"I’m not
very organized. It’s not so much of a problem in my day-to-day business because
I always know which plants are which. Tax time, though, I’m always working late
because I don’t keep my bills or invoices up to date. If I could just get
organized once, I think that I could keep it up. The real problem is that I
don’t even know how to get started."
Socrates to the rescue. To meet your small business, home office and family
needs, we offer guidance on the following topics to help you get your
record-keeping act together for the coming year:
Make Sure Your Business and Personal Records Are Disaster-Proof
The fire alarm is going off. You have minutes to clear out of your home or
office with no time to start grabbing piles of folders. How would you decide
what to save? Where would you keep the records you need to save for easy
retrieval?
By spending a little time planning now, you can avoid a catastrophic loss of
your records in the event of flood, fire, hurricane or manmade disasters.
Organizational expert, Barbara Hemphill, president of Hemphill & Associates
in Raleigh, N.C., has these suggestions for the safe keeping of records:
-
Collect important personal papers and information related to financial
transactions.
- Identify a single location to file all crucial papers, such as
a fireproof box or safety deposit box.
- Create copies (certified in cases of
birth certificates and other crucial documents) for future needs with
government agencies.
- Put important original documents in plastic covers to
protect them and to help you identify them as the original document.
- Notify
the appropriate people where important information will be located, in case
you’re not available when disaster strikes.
- As you work through the day,
always be aware of the kinds of information you should add to your filing
system. Keep notes on a card you carry with you or buy a mini tape recorder to
save your thoughts.
- Identify the records you or your financial institutions
keep only on computer, since they may not be available in case of a large scale
power failure.
- If you keep records in a safe deposit box, don’t carry the
key with you and make sure someone else (perhaps a trusted relative or your
lawyer) has a copy of it.
- Create backups of your computer records and if
possible, store them off site. This can be done on diskettes, compact discs,
zip disks or DVD-Rs.
What should you collect for safekeeping?
-
Bank account records
- Marriage certificates or divorce decrees
- Identification
records
- Titles, deeds, registrations for property and vehicles owned
- Mortgage
and other loan information
- Insurance policies
- Investment records
- Credit
card statements
- Employer benefit statements
- Income tax information
- Report
of earnings from Social Security
- Social Security card
- Trusts
- Wills
- Birth
certificates
Maintain contact information for:
-
Banks and other financial institutions
- Clients
- Employers
- Employees
- Insurance
agents
- Power, light, gas and other utility companies
Which Type of System Is Right for Your Business?
Most small businesses or home offices maintain their own records. It’s less
expensive and gives the business owner a better grasp of what’s going on with
the business. In some cases, it might be more efficient to have an outside firm
maintain your business records, especially for bookkeeping. But remember, even
if you hire out your record keeping, all applicable tax laws are still your
responsibility. If there’s a problem, it is yours to solve.
In general, there are two basic ways to maintain records:
-
Computerized record keeping.
Consider acquiring a simple-to-use home accounting program. There are many
popular ones on the market. The program eliminates the need for a handwritten
set of books. Most programs resemble a checkbook register and categorize each
item as a type of expense or income using either a number or name that you
specify. In most cases, you can add "cash" or "credit card" payments in the
same way. You can save a lot of time with the computer’s ability to quickly
print out the records you need, and the program eliminates easy-to-make, but
hard-to-find math errors.
- Manual record keeping. Eventually you may
outgrow a manual record keeping system, but most small businesses or home
offices start with a manual system. Manual records will satisfy the tax codes
as long as they are accurate and easy to understand. You can use inexpensive,
pre-formatted record books found at any office supply store. You can also use a
pad of ledger sheets. Your records might use broad categories (i.e.
advertising, utilities, supplies) across the top of the ledger sheet and list
each transaction for the category going down the page. Be sure to include
whether a payment was "cash" or "credit card." At the end of the month, total
up each column, and you will have an accurate record of payments. This is
called a "single entry" system," meaning you enter each transaction only once.
No matter which system you decide to use, you will still need to keep "source"
documents in folders or boxes by type of document: receipts, bank statements,
purchase invoices and so on. These will substantiate the numbers in your
record-keeping system.
Setting Up Financial and Record-Keeping Systems for Your Small
Business
A basic record-keeping system should be easy to use, understandable, reliable,
accurate and timely. You’ll need some type of business journal to record
transactions and a well-organized filing system. You should also be generating
monthly financial statements that include cash flow, accounts receivable,
accounts payable, payroll, overall income statement and balance statement.
Set up a baseline set of information for your business. Remember, the
usual rule of thumb is that you should have enough money on hand to operate
your business for one year.
Include these operating expenses:
-
Down payments on property, rent, equipment
- Equipment
- Legal/accounting
services
- Licenses/permits
- Marketing
- Office space
- Professional fees
- Remodeling/installation
of equipment
- Salaries (including your own)
- Supplies
- Utilities
A financial management system can be created or maintained by you or your
accountant and should include the following elements:
-
Income statement showing income and expenses for a given time period (month,
quarter, year)
- Balance sheet comparing your assets and liabilities
- Operating
budget showing your estimate for flow of cash over each month of the year
- Cash
flow statement, one of the most critical documents you can prepare. A cash flow
statement can answer these questions:
-
Are the operating activities generating cash?
- Which working capital
components have large uses of cash?
- How much cash is provided for investing in
activities?
A basic financial record-keeping system should include information on
banking relationships, bill payments, money collection, purchases, sales,
professional relationships (accountant, bookkeeper, suppliers) and information
gathering and reporting.
Set up a separate checking account for your business. Set up a ledger to record
all transactions (either computer or handwritten). Store receipts in the same
order as they are in the ledger. Check your bank statements and credit
statements monthly. Keep basic information for each customer and employee. Each
piece of equipment needs it receipt and service schedule.
This may sound daunting, but there are some basic elements of a good system that
will help you get started in your organizational activities:
-
Use a calendar devoted only to deadlines and other events that are important to
your business.
- Create a filing system in either alphabetical or chronological
order. Decide what records need to be kept permanently and which ones can be
discarded after a certain amount of time. (See
Business Records: What to Keep and What to Toss for guidelines.) Don’t
worry about setting up your filing system perfectly at first. Make it
adaptable, so you can change it as you gain experience or your business
changes.
Creating and Maintaining a Personal Record System
Personal records are just as important as your business records, but often they
are not kept in a logical or secure manner. You need accurate records for
income tax purposes; for use in the event of death, fire or theft; for
important transactions (mortgages, car purchases, etc.); to shorten the time it
takes to collect insurance, veteran’s benefits or income tax refunds; and for
future financial planning for the family.
A personal record-keeping system might be set up in a home office or it could be
as simple as a drawer in the kitchen or a filing cabinet in the family room.
Whatever you use, make sure one person in the family is in charge of the system
and that it is updated on a regular schedule.
Some records, such as identification, credit cards, organization and member
cards, insurance information and important medical information (insurance
cards, blood type, allergies) should be carried with you. Other records can be
kept in a filing system at home, and still others should be housed in a
fireproof box or safety deposit box.
Divide your files into the following major categories:
-
Current financial records,
including employment records, credit card information, insurance policies,
health records, warranties and guarantees, education records, bank statements,
household inventory, tax records and cancelled checks
- Inactive financial records,
for items included in the current files but that are at least three years old
- Permanent
records and very important papers that should be saved in a safety
deposit box or home fireproof boxes. (See the section above on safe
record keeping for what records you should include here.)
It wasn’t the most interesting weekend in his life, but Fred Stenstrom spent the
last two days organizing his business office. He set up a new filing system and
learned how to use a new software program to balance his books.
"I missed out on some football games I wanted to see, but otherwise I’ll
survive," he says. "I’m going to make up the time by taking a vacation to play
golf in April instead of wasting every waking hour pulling my files together
for the accountant. And I’m backing up all my financial and client information
every night. It all fits on one DVD." Fred grins. "I’ve got the backup copy at
home."
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