Record Keeping in a Small Business

INTRODUCTION
An appropriate record-keeping system can determine the survival
or failure of a new business. For those already in business, good
record-keeping systems can increase the chances of staying in
business and the opportunity to earn larger profits. Complete
records will keep you in touch with your business's operations
and obligations and help you see problems before they occur.
This publication explains the characteristics of and procedure
for establishing a good record-keeping system.

THE NEED FOR GOOD RECORDS
Accounting records furnish substantial information about your
volume of business, such as how present and prior volumes
compare, the amount of cash versus credit sales and the level and
status of accounts receivable. In addition, good accounting
records help to accomplish the following tasks.

Monitor Inventory
While a large inventory allows goods to be delivered when they
are ordered, too large an inventory represents an excess
investment. If your inventory does not turn over quickly, your
business may lose profits due to obsolescence, deterioration or
excess investment.

Any items removed from inventory for personal use should be set
aside in a special account for two reasons: first, they need to
be recognized separately for tax purposes and, second, including
these items in business gross profit calculations can be
misleading.

Control Expenses
Accounting records detail the amounts owed to suppliers and other
creditors so that you can plan the availability of cash to meet
your obligations. Such records also provide information regarding
expenditures and allow you to establish controls over them. At
all times, you must be aware of your individual expense
requirements and how they relate to the overall picture.

Fulfill Payroll Requirements
Payroll is one of the largest expenses in a small business.
Adequate payroll records should meet the requirements of the
- Internal Revenue Service.
- State department of revenue.
- Local department of revenue.
- Workers' compensation laws.
- Wage and hour laws.
- Social security requirements.
- Unemployment insurance requirements.

For each of these categories you are required to provide annual
reports and summaries. In addition, you must provide employees
with the W-2 forms needed to file federal and other income tax
returns. In order to provide this detailed information, it is
essential for you to maintain good accounting records.

Determine Profit Margin
Good accounting records will indicate a business's level of
profit, and provide specific information on the profitability of
certain departments or lines of goods within your business. Such
analysis is important to avoid continuing product lines far
beyond their profitability. In most cases, you can avoid losses
if you maintain current records and analyze the information from
your records on an ongoing basis.

Improve Cash Flow
Good accounting records provide detailed reports of cash
availability, both on hand and in the bank, and of cash shortages
or the diversion of cash. Since cash is your most liquid asset,
you must carefully account for it.

Use Supplier Discounts
A cash budget will provide the business owner with a projection
of the availability of cash that may be used to pay invoices as
they become due. Discounts from suppliers for prompt payment can
amount to substantial savings. A 2 percent discount is common if
you pay the bill in full within 10 days; if not, full payment is
due within 30 days. In business, this is commonly referred to as
2/10, n/30 where n = the net sum due. It means you pay 2 percent
less if you pay within 10 days or you pay full price within
30 days. Take into account that this discount is cumulative. If
you make timely payments for each month of the year you will gain
a 24 percent benefit (2 percent 12 months).

Measure Performance
Finally, good business records help you measure your business's
performance by comparing your actual results with the figures in
your budget and those of other similar businesses.

REQUIREMENTS OF A GOOD SYSTEM

The following criteria are essential to a good record-keeping
system:
- Simplicity
- Accuracy
- Timeliness
- Consistency
- Understandability
- Reliability and completeness

There are several copyrighted accounting systems that can be
purchased and adapted to the individual business, or you may find
it is better to use a system specifically designed for your
business and one that meets the above-mentioned criteria.

Commercial Record-Keeping Systems
Record-keeping systems are currently available from various
sources in the marketplace: stationery stores, publishers and
business advisory services. These systems either are specifically
designed for a certain type of business or are general enough to
be used by many different types of businesses. Systems are
available for cash basis recording, accrual basis recording and
for both single and double entry.

Computerized Record Keeping
Consider using a computer for your business operations. Compare
different software systems and make sure that the system you
choose provides accurate and timely information and offers more
than adequate presentation of accounting information for small
businesses.

Low-cost computer programs are available that can handle many of
the book entries that are necessary in a system that is
maintained by hand. Appropriate hardware and a good general
ledger software program can offer you substantial assistance in
recording business transactions and summarizing the information
into appropriate accounting presentations.

Currently available software allows you to enter transactions
individually; these transactions are posted directly to the
general ledger. A printout at the end of a given period shows the
individual account activity, and also includes a balance and
total of the accounts and provides a trial balance presentation.
If the software is designed properly, it will provide
appropriately prepared financial statements (balance sheet,
income statements).

METHODS OF ACCOUNTING

There are two basic methods of accounting: cash basis and accrual
basis. The method you choose will depend on your type of
business. Cash basis is the simpler method. It is mainly used by
service businesses that do not maintain inventory or startup
businesses that do not offer credit. The accrual method is used
by businesses that provide for credit sales or maintain an
inventory.

Cash Basis Method
In cash basis accounting, you record sales when cash is received
and expenses when they are actually paid. Using the cash basis
method is like maintaining a checkbook. Under this method,
accounts receivable are not recorded as sales until they are
collected. Accounts payable are not recorded as expenses until
the account is paid. Bad debt, accruals and deferrals are not
appropriately recorded under cash basis because they are examples
of outstanding credit (business notes). The cash basis method is
not appropriate for businesses that extend credit.

Accrual Basis Method
In accrual basis accounting, you report income or expenses as
they are earned or incurred rather than when they are collected
or paid. Record credit sales as accounts receivable that have not
yet been collected.

The accrual basis also provides a method for recording
expenditures paid in a single installment but covering more than
one period. For example, interest may be paid semiannually or
annually, but it is recorded on a monthly basis.

The accrual method satisfies the matching concept, i.e., matching
income with related expenditures. Consequently, it can provide a
clear and accurate view of business operations for a given
period.

THE ACCOUNTING CYCLE

The accounting cycle can be described as follows:
1. A business transaction occurs, giving rise to an original
document that is recorded in a book of original entries called a
journal.
2. The totals from the journal are summarized and reported in a
book of accounts, known as a general ledger.
3. The general ledger contains the individual accounts maintained
by the business.
4. The individual accounts are listed in the form of debits and
credits, known as the trial balance of the general ledger.
5. From this trial balance, after making certain adjustments, you
prepare the business's financial statements.

Journals
You derive the information for each journal entry from original
source documents, such as, sales slips, cash register tapes,
check stubs, purchase invoices and other items that record your
business transactions. You may need to create subsidiary journals
for specific, frequently occurring types of transactions, such as
sales and expenses.

General Ledgers
The summary and totals from all journals are entered into the
general ledger. A general ledger is a summary book that records
transactions and balances of individual accounts, and is
organized into five classes of individual accounts, as follows:
1. Assets - A record of all items that the business owns.
2. Liabilities - A record of all debts the business owes.
3. Capital - A record of all ownership or equity.
4. Sales - A record of all income earned for a specific period.
5. Expenses - A record of all expenditures incurred during a given
period.

When the trial balance is prepared, these classifications are
easily recognized.

Trial Balance
At the end of the fiscal year or accounting period, the
individual accounts in the general ledger are totaled and closed.
The balances of the individual accounts are summarized in the
financial statements.

Financial Statements
The main types of financial statements are the balance sheet and
the income statement, also known as the profit and loss
statement. The balance sheet is a report of a business's
financial condition (assets, liabilities and capital) at a
specific moment in time (see Example 1) and the income statement
is a summary of profit and loss for a specific period of time,
generally a month, quarter or year (see Example 2).
Other statements may be prepared. For example, a cash flow
statement identifies the sources and applications of cash.
Statements may also be prepared to indicate manufacturing
expenses or other special areas that are of interest to you.

Percentages
Percentages are used in financial statements to show the part of
each sales dollar used by the various expenses. Percentages are
especially helpful for comparing current year financial
statements with those of prior years to determine business
trends. Percentages are also helpful for comparing your figures
with those of other firms in the same line of business (see
Example 3).
-------------------------------------------------------------------------
Example 3 Appliance Repair Company
Income Statement Showing Expenses as Percentage of Sales
Total Parts Service
--------------- ------------------------
Amount Percent Amount Percent Amount Percent
-------------------------------------------------------------------------
Gross Sales $70,000 100.00 $25,000 100.00 $45,000 100.00
-------------------------------------------------------------------------
Cost of sales
Opening inventory 13,000 13,000
Purchases 25,000 25,000
Total 38,000 38,000
Ending inventory 14,000 14,000
Total cost of sales 24,000 34.29 24,000 96.00
Gross Profit 46,000 65.71 1,000 4.00
Operating expenses
Payroll 26,000 37.14 26,000 57.78
Rent 3,000 4.29 1,500 6.00 1,500 3.33
Payroll taxes 1,500 2.14 1,500 3.33
Interest 600 .86 300 1.20 300 .67
Depreciation 1,400 2.00 1,400 3.11
Truck expense 5,500 7.86 5,500 12.22
Telephone 2,400 3.43 1,200 4.80 1,200 2.67
Insurance 1,000 1.43 400 1.60 600 1.33
Miscellaneous 1,000 1.43 500 2.00 500 1.11
-------------------------------------------------------------------------
Total Expenses 42,400 60.58 3,900 15.60 38,500 85.55
-------------------------------------------------------------------------
Net Profit (Loss)
(Exclusive of owner's salary)
3,600 5.14 (2,900) (11.60) 6,500 14.44
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Example 1
ABC SALES CO.
BALANCE SHEET
December 31,199-
Assets
Current assets
Cash.................................. $23,590
Notes receivable........................ 10,000
Accounts receivable..................... 20,880
Merchandise receivable.................. 62,150
Store supplies.......................... 960
Office supplies......................... 480
Prepaid insurance....................... 1,650
------
Total Current Assets................ $119,710
Plant assets
Land.................................. $20,000
Building.............................. $140,000
Less accumulated depreciation....... 33,900 106,100
Office equipment...................... 15,570
Less accumulated depreciation....... 8,720 6,850
Store equipment....................... 27,100
Less accumulated depreciation....... 15,700 11,400
Total plant assets.................. 144,350
-------
Total assets............................ $264,060
Liabilities
Current liabilities
Accounts Payable...................... $22,420
Mortgage note payable (current portion) 5,000
Salaries payable...................... 1,152
-------
Total current liabilities $28,572
Long-term liabilities
Mortgage note payable 20,000
-------
Total liabilities $48,572
Stockholders' Equity
Capital Stock........................... $100,000
Retained earnings....................... 115,488
--------
Total stockholders' equity............ $215,488
--------
Total liabilities and stockholders' equity $264,060
----------------------------------------------------------------------------
---------------------------------------------------------------------------
Example 2
ABC SALES CO.
INCOME STATEMENT
December 31,199-
Revenue from Sales
Sales $732,163
Less: Sales returns and allowances... $6,140
Less: Sales discount................. 5,822 11,962
------ -------
Net sales............................ 720,201
Cost of merchandise
Merchandise inventory Jan. 1 purchases 530,280
Less purchases discount............ 2,525
-------
Net purchases........................ 527,755
-------
Merchandise available for sale....... 587,455
Less merchandise inventory Dec. 31. 62,150
Cost of merchandise sold............. 525,305
-------
Gross Profit........................... 194,896
Operating Expenses
Selling expenses
Sales salaries....................... $60,044
Advertising.......................... 10,460
Depreciation-store equipment......... 3,100
Insurance-selling.................... 2,080
Store supplies....................... 2,010
Miscellaneous (selling).............. 630
-------
Total selling expenses............. 78,324
General expenses
Office salaries...................... 21,032
Heating and lighting................. 8,100
Taxes................................ 6,810
Depreciation-building................ 4,500
Depreciation-office equipment........ 1,490
Insurance-general.................... 830
Office supplies...................... 610
Miscellaneous........................ 760
-------
Total general expenses............. 44,132
-------
Total operating expenses........... 122,456
-------
Net income from operations......... 72,440
Other Income-interest income....... 3,600
Other expense-interest expense..... 2,440 1,160
------- -------
Net Income........................... 73,600
---------------------------------------------------------------------------
HOW TO ANALYZE YOUR RECORDS
To chart the progress of your business, you should become
familiar with various forms of financial statements analysis and
measurement.

Financial statements indicate which items need more attention.
For example, profits may be too low or rent unnecessarily high.
Perhaps there is a way to use the business vehicles more
efficiently, to increase inventory turnover or to reduce long
distance telephone bills.

In analyzing financial statements, carefully examine all items
that do not seem realistic. Answer the following questions:
- Why are certain expenses at a particular level?
- Are there any ways to reduce or avoid certain expenses?
- Should you incur all of your expenses?
- Does the level of profit justify your investment, time and
effort?

Financially significant items should be analyzed regularly. For
example, examine payroll as a percentage of total administrative
expenses. Keep in mind that, if your business is a
proprietorship, your salary is not a payroll expense; however, if
your business is a corporation, your salary should be a payroll
expense.

Analyzing Payroll Expenses
In justifying payroll and other expenses, answer the following
questions:
- Are accurate records maintained for time spent on various jobs
and functions?
- Is the eight-hour day of each employee accounted for
appropriately?
- When employees are paid overtime, is the additional expense
reflected in charges to the customer?
- Is the level of payroll expense appropriate for your type of
business?
- Are you billing on a guaranteed price basis or on an hourly
basis?
- When using guaranteed price basis for billing, does actual time
spent exceed time estimated for the job?
- Do employees work with a minimum of wasted effort and time?
- Are you operating at maximum efficiency? What strategies can be
implemented to maximize efficiency?
Ratios
Accountants use various ratios to evaluate financial statements,
such as ratios that assess liquidity, solvency and profitability.

Liquidity
These ratios indicate the availability of cash and the firm's
ability to pay liabilities.
Current ratio: Current assets
-------------------
Current liabilities
Acid test Cash, cash equivalents
(liquidity ratio): and receivables
----------------------
Current liabilites
Day's sales Accounts receivable
in receivables: ---------------------------
Credit sales divided by 360
Inventory Cost of sales
turnover: -------------
Average inventory
Capital and Long-term Solvency
These ratios indicate the firm's ability to meet debts when due.
Equity/debt Total equity
ratio: ------------
Total debt
Total equity to Total equity
fixed assets ------------
Net fixed assets
Profitability
These ratios indicate your firm's performance.
Gross profit Gross profit
margin ------------
Sales
Net income Net income
to sales ----------
Sales
Operating Income before income taxes
income to sales --------------------------
Total assets
Return on Net income and interest expenses
total assets --------------------------------
Total assets
Return on total Net income
------------
Total equity

OTHER IMPORTANT RECORDS

In addition to accounting records, you will need to keep separate
records for accounts receivable, payroll and taxes, petty cash,
insurance, business equipment and perhaps other items.

Accounts Receivable
A good record-keeping system should provide you with a detailed
report of accounts receivable, including current information on
customers and a running balance of their accounts. To maintain a
good accounts receivable system, record credit charges on a
regular basis. It is essential that you follow up on all late
paying and delinquent customers.

Accounts receivable should be aged at the end of each month. This
means organizing the accounts into those that are current; 30-,
60-, and 90-days old and older. This arrangement helps you to
take appropriate, timely actions.

One example of a timely action is to transfer delinquent accounts
to a notes receivable account. Notes receivable are loans the
business makes to others, either inside or outside the business.
Each note receivable should contain specific terms of credit and
interest and should be signed by the customer. An additional
timely action to decrease the number of bad accounts and avoid
the effort of collecting payments from slow-paying customers is
to issue a formal complaint with your local credit bureau.

Payroll and Taxes
Current Internal Revenue Service (IRS) regulations require that
you withhold federal income tax and social security (FICA) from
each employee. You must remit the amount for taxes to the IRS on
a quarterly, monthly or more frequent basis. A detailed reporting
system for payroll will help you make timely tax payments.
Gather specific information about each employee on individual
employee record cards. All employees should fill out federal Form
W-4, which indicates their filing status and the number of
exemptions they claim. Use this information to compute the
federal withholding and social security (FICA) deductions for
each payroll check.

Prepare Employees Quarterly Federal Tax Return (Form 941) by
totaling each employee's withholding for federal taxes and social
security. File Form 941 with the IRS.

Each payroll period, total the accumulated withholdings of both
federal taxes and social security for all employees. If this
total exceeds $500 for any month, you must deposit this amount by
the 15th day of the following month in a depository bank (an
authorized financial institution or a federal reserve bank).
Generally, when the total exceeds $3,000, you must deposit this
amount within three business days. Any overpayment in taxes is
paid back to you quarterly.

At the year's end, you are required to prepare not only the
information normally required for that quarter, but also
summaries of each employee's total earnings and withholdings for
the year (Form W-2). Provide this form to each employee and the
IRS.

A Word of Caution
It is very easy to fall behind in making tax payments. If you
find yourself short of cash, do not be tempted to delay payment
of taxes. The IRS will not bill your business for taxes due nor
will it notify you of late payments. Delayed payments can easily
add up to a large sum; the debt may impede the growth of your
business and may even force you to close your business, to say
nothing of the federal penalties incurred for late payments.
With a good record-keeping system, you can simplify the process
of filing taxes to the point where the information needed to
complete the forms is automatically generated. Setting up such a
system is a rather technical task and you may need to seek
guidance.

Petty Cash
Sometimes a petty cash fund is needed to purchase small items
required on a day-to-day basis. If this is necessary, draw a
check to petty cash for a nominal amount.

Problems often arise when cash is easily available; therefore, if
possible, avoid a petty cash fund. However, very often the
convenience of having a small amount of cash available will
facilitate the smooth operation of your business. Be sure to
balance this fund monthly, based on the cash balance plus
receipts for all expenditures.

Insurance
Most businesses have several types of insurance. For each policy,
you should have the following information:
- Clear statement of the type of coverage.
- Names of individuals covered.
- Effective dates and expiration date.
- Annual premium.

Review your insurance policies on a regular basis. In addition,
annually consult an insurance specialist, who will review the
total insurance package to determine what coverage is appropriate
and ensure that premiums remain in line with prior quotations.

Business Equipment
Keep an accurate list of permanent business equipment used on
both a regular and stand-by basis. The list should describe the
equipment and provide serial numbers, date of purchase and
original cost. Keep the list available for insurance or other
purposes. You will also need this information to prepare accurate
depreciation schedules.

ACCOUNTING SERVICES

You have several choices in who should maintain your accounting
system. You can
- Maintain the books yourself.
- Hire a bookkeeper on a full-time or part-time basis.
- Hire the accountant who set up your books.
- Set up a hybrid system in which you maintain the day-to-day
reports, while an accountant does the period-end record
preparation, summaries and reconciliations and the returns for
sales tax, excise tax and payroll taxes.

In making the choice, you must decide whether you have the
ability and time to set up and maintain good records or if you
should engage an outside accounting service. It is usually
suggested that you hire an accountant to do the final year-end
preparations and to advise you. No matter what you choose, you
should remain familiar with your books and participate in the
record-keeping process. This will maximize the services provided
by the accountant and allow you to keep track of your business

Selecting the Accounting Service
If you decide to hire an outside service, find an accounting firm
that will work closely with your business and provide you with
the information necessary to develop a successful operation.
Interview several accounting professionals and compare their
level of accounting knowledge, computer literacy, knowledge of
and experience with small business accounting and any specialized
knowledge required in your business.

There are many types of professionals you may consider, such as a
certified public accountant, an enrolled agent or an accredited
accountant.

- Certified Public Accountant (CPA)A person who has passed the
American Institute of CPAs' national examination, which tests an
individual's ability in accounting, auditing, law and related
areas.
- Enrolled Agent (EA)An individual who has passed a two-day exam
prepared by the IRS, covering many areas of federal taxation.
This person is generally considered a tax specialist.
- Accredited AccountantAn individual who has passed a rigorous
examination prepared by the Accreditation Council of Accountancy
and Taxation, a national accounting accreditation board
affiliated with the National Society of Public Accountants and
the College for Financial Planning in Denver, Colorado.
Accredited accountants specialize in small business accounting.
Other accountants in public practice perform various levels of
accounting and write-up services.

When selecting an accountant, the cost of the accountant's fees
must be weighed against the benefits received. Frequently, the
accountant's professional advice can increase profits to more
than cover the expense. Monthly services by an accounting firm
will provide you with complete and timely information and also
will allow the accountant to develop knowledge of your business
and be in a more comfortable position to render professional
advice as the business grows.

Advice and Assistance
In addition to bookkeeping, an accountant can advise you on
financial management. He or she can assist with cash flow
requirements and budget forecasts, business borrowing, choosing a
legal structure for your business and preparation and advice on
tax matters.

Cash Flow Requirements
An accountant can help you work out the amount of cash needed to
operate the business during a certain periodfor example, a
three-month, six-month or one-year projection. The accountant
considers how much cash you will need to carry your accounts
receivable, to increase inventory, to cover current invoices, to
acquire needed equipment and to retire outstanding debts.

Additionally, the accountant can determine how much cash will
come from collection of accounts receivable and how much will
have to be borrowed or provided from other sources.

In determining cash requirements, the accountant may notice and
call attention to danger spots, such as accounts that are in
arrears or delinquent areas or areas of excess expenditure.

Business Borrowing
An accountant can assist you in compiling the information
necessary to secure a loan: the assets the business will offer
for collateral, the present debt obligations, a summary of how
the money will be used and repayment schedules. Such data show
the lender the financial condition of the business and your
ability to repay the loan. Remember, lenders have two very
definite requirements: (1) that the business have adequate
collateral to secure the loan and (2) that the business will be
able to repay the loan. An accountant can advise on whether you
need a short- or long-term loan. In addition, your accountant may
introduce you to a banker who knows and respects his or her
financial judgment.

Legal Structure
It is wise to discuss the type of business organization that best
fits your needs with an accountant and an attorney. They can
point out the advantages and disadvantages of the various forms
of business organization, such as a
- Proprietorship - An extension of individual ownership.
- Partnership - Multiple proprietors.
- Corporation - A completely separate legal entity.
In addition, they can advise you on immediate plans regarding
management, financing, long-range plans to bring others into the
business and estate planning, all of which affect the type of
business you choose.

Tax Considerations
This is an area in which an accountant can provide much advice
and assistance. Your accountant can suggest methods to record and
document the various types of information necessary for taxes.

APPENDIX A: FINANCIAL STATUS CHECKLIST

What You Should Know

Daily
- 1. The balance of cash on hand.
- 2. The bank balance.
- 3. Daily summaries of sales and cash receipts.
- 4. Any errors or problems that have occurred in collections.
- 5. A record of monies paid out, both by cash and by check.

Weekly
- 1. Accounts receivable (particularly those accounts that appear to
be slow paying).
- 2. Accounts payable (be aware of the discount period mentioned
above).
- 3. Payroll (be aware of the accumulation of hours and the
development of the payroll liability).
- 4. Taxes (be aware of any tax items that are due and reports that
might be required by government agencies).

Monthly
- 1. If you engage an outside accounting service, provide records of
receipts, disbursements, bank accounts and journals to the
accounting firm. This will allow the firm to maintain good
records and present them to you for review, consideration and
support in decision making.
- 2. Make sure that income statements are available on a monthly
basis, and certainly within 15 days of the close of the month.
- 3. Review a balance sheet that indicates the balance of business
assets and the total current liability.
- 4. Reconcile your bank account each month so that any variations
are recognized and necessary adjustments made.
- 5. Balance the petty cash account on a monthly basis. If you allow
this account to extend for a longer period, it may create
substantial problems.
- 6. Review federal tax requirements and make deposits.
- 7. Review and age accounts receivable so that slow and bad
accounts are recognized and handled.

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The Importance of Good Record Keeping

You arrive at work this morning and look around with a sense of
accomplishment. This business is yours! From the start, you've
done everything right.

- You conducted meaningful market research.
- Your product is in demand.
- You understand the competition and have identified your
competitive advantage (i.e., cost, service, and/or quality).
- You've established the optimum price.
- Business flows steadily through the doors.

Yet, this bright sense of accomplishment begins to fade slowly as you
acknowledge those little nagging questions that ever seem to disturb
your great dream.

"Why is my cash flow always a problem? How much real profit is in my
business, anyway? I'll deposit the payroll taxes well enough . . .
but, why is it going to be tight again this quarter?"

What's really happening in your business? If you're not exactly sure,
then it's time to return to the basics -- the basics of good record
keeping.

Why?

Bluntly, a small business that fails to keep complete and accurate
financial records places its long term success and continuance in
grave, grave doubt.

The following three points discuss some of the major reasons that
good (i.e. complete and accurate) financial record keeping is
crucial to the success of your business.

1. Good records provide the financial data that help you operate
more efficiently, thus increasing the profitability of your
enterprise.
This is because accurate and complete records enable you, or
your accountant, to identify all your business assets,
liabilities, income, and expenses, which, when compared to
appropriate industry averages help you pinpoint the strong and
weak phases of your business operations.

2. Good records are essential for the preparation of current
financial statements, such as the Income Statement
(Profit and Loss) and the Cash Flow Projection.
These, in turn, are critical for maintaining good relations
with your banker. They also will present a complete picture
of your total business operation which will benefit you as
well.

3. Good records are required for the preparation of complete and
accurate tax documents. For example, poor records often lead
to the preparation of income tax returns that result in
underpayment or overpayment of taxes. In addition, good records
are essential in an IRS audit situation, if you hope to answer
questions accurately and to the satisfaction of the IRS.

The Key to Success is Information
Think back to the steps you went through to open your business.
First, you invested a tremendous amount of time in gathering
information . . . about your abilities, finances, market, customers
and competitors.
You understood why you wanted to go into business . . . the
opportunity to be your own boss, a desire for financial
independence, the freedom to set your own course.
Then you chose the business "right" for you. And, more importantly,
your market research showed that your particular "business dream"
was in demand.
You then took all this information and developed a business plan
-- the same business plan that helped you get the loan you needed
to open the doors.
You demonstrated your business skills to the bank when you stated
precisely how much money you needed, why you needed it, and how
you were going to pay it back.

What Went Wrong?

While it's true that success often begets success, it's equally true
that success often breeds failure -- in a small business as well.
That's because as a business begins to grow rapidly, the owners often
work frantically to simply meet demand, minimizing the time they devote
to keeping good records.
If one of your reasons for starting a business was to get away from
paperwork, it is critical that you hire someone to perform the
necessary task of keeping your financial records.
Although you must pay for the services of a public accountant,
bear in mind that their professional advice frequently can increase
your profits, more than covering the professional fees.

What Exactly Will The Records Tell You?

The following checklist highlights the type of information your
financial records should provide in assuring your success:

- How much income are you generating now and how much income can
expect to generate in the future?
- How much cash is tied up in accounts receivable (and thus not
available)
- How much do you owe for merchandise? Rent? Equipment?
- What are your expenses, including payroll, payroll taxes,
merchandise and benefit plans for yourself and employees
(such as health insurance, retirement, etc.)?
- How much cash do you have on hand? How much cash is tied up in
inventory? What is your actual working capital budget?
- How frequently do you turn over your inventory?
- Which of your product lines, departments or services are making a
profit, which are breaking even, and which are financial drains?
- What is your gross profit? What is your net profit?
- How does all of the financial data listed above compare with last
year -- or last quarter? How does it compare with the projections
in your business plan?
- How does all of the financial data compare with that of your
competitors? With that of the industry?

While your review of this checklist may have uncovered some glaring
deficiencies, it's never too late to correct problems related to poor
record-keeping habits.
It may take you a bit of time and effort to analyze the company
checkbook, take inventory, review bank statements and, in general,
just catch up on your paperwork.
It is essential that you make the effort to determine the precise
financial condition of your business at present. It is just as
critical as maintaining good customer relations.

What to Look for in an Accountant

How do you find an accountant who is knowledgeable, capable and
discreet?
You will be seeking an individual with high ethical standards who will
be a respected member of the community. Due to the ever-changing
complexities of the tax laws and development in the methods and
practices of accounting, the accountant must be alert to the value
of continuing professional education. Look for an accountant who takes
advantage of educational seminars, professional publications and other
study opportunities.
You will probably want your accountant to assist you in many ways,
as a consultant, financial advisor, counselor, etc., who understands
your business affairs as well as you. So, seek out broad experience,
as well as education, in selecting your accountant.
Professional accountants have year-around offices and are listed in
telephone directories under accountants, public accountants,
bookkeepers and tax preparers.
Look for references or recommendations from local business associates,
your banker or attorney. Look for memberships in state and national
professional accounting societies. This generally proves a commitment
to continuing professional education and the profession. Additionally,
in most all cases, membership requires adherence to a strict code of
ethics and high standards for professional performance.

The Basic System

A basic record keeping system should be simple to use, easy to
understand, reliable, accurate, consistent and designed to provide
information on a timely basis. It needs:

- A basic journal to record transactions (receipts, disbursements,
sales, purchases, etc.)
- Accounts receivable
- Accounts payable
- Payroll records
- Petty Cash records
- Inventory: Equipment & Goods

Without knowing where your business is financially, you may be forced
to close or sell, despite an excellent customer base. You could find
yourself in this trap . . .
- if your cash flow is desperate, or
- if you are unable to pay creditors, or
- if too much of your cash is tied up in old inventory and
accounts receivable.

Make a vow now to maintain your records and assure your success!
If yours is a small firm just starting out in the exciting world of
business, resolve now that you will not fall into the trap of letting
the books wait until . . .
-- you are less busy
-- you are more rested
-- you have more time available to start and finish the job
all in one sitting
-- or whatever excuse you use at the time.

Remember, too, there are experts available to help you in all aspects
of your new business. There are people who can assist you with market
research and advertising/promotion, there are those who can help you
with your real estate needs, transportation and shipping, tele-
communications needs and more.
But most important of all, there are professionals available to help
you maintain and manage your financial records. They are public
accountants, and they are ready to serve you and your business.

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