How Good Recordkeeping Can Take Your Business from Chaos to Clarity
Recordkeeping involves documenting and organizing important information, such as financial transactions, employee data, and customer interactions. Proper recordkeeping can help businesses comply with legal requirements, manage risks, and make informed decisions based on accurate data. Recordkeeping can be a daunting task, especially when responsibilities are spread amongst different people in an organization. Let’s explore the main types of records all businesses should maintain:
· Correspondence records – these could be letters from the IRS, correspondence from banks, and notifications from vendors or customers.
· Legal records – these are contracts involving the business, business formation documents, etc.
· Accounting records – cash receipts, sales records, financial statements, bank statements, etc.
· Personnel records – employee documents, salaries, benefits, etc.
Depending on the size of the business, there may be tens or hundreds of transactions happening daily that require proper recordkeeping. Maintaining all these records could become very tedious for business owners, which can cause them to procrastinate. In some cases, not maintaining proper records could be a costly mistake:
· IRS audit - when the IRS audits your business, they are investigating claims that were made on your tax return which they believe to be incorrect. Either because they received contradicting information from another source or because the claims trigger a red flag. In any case, the IRS is simply looking to obtain some evidence or documentation that supports your tax return claims. If a proper system is implemented, requests from the IRS should be simple to fulfill, and it will decrease the likelihood of the audit being extended or ending in a negative outcome for your business.
· Fraud or theft - depending on the size of your business, you may have different people originating transactions on behalf of the business. This opens the door to possible fraud or theft. Unfortunately, employees who are responsible for making payments on behalf of the business, sometimes find ways to steal money by making payments to fake vendors or fake employees. These types of fraud can be avoided by having proper documentation on every vendor the business works with, and every employee hired by the business. Also, employees will be discouraged from trying these tactics if they are subject to a strict and organized recordkeeping process.
Now that we’ve discussed the types of records a business might keep, and the importance of it, let’s go over a few tips to help you and your business maintain proper records:
· Separate personal and business matters – some business owners might be using the same bank accounts, credit cards, and email address for their business and personal transactions, especially when starting off. If these two are kept separate, your tax accountant will easily be able to identify a business deduction without questioning whether it was a business or personal expense. Also, you won’t have to worry about your personal transactions being reflected on your financial statements by mistake.
· Use bookkeeping software – implementing and utilizing bookkeeping software is a great way to keep records. If used properly, bookkeeping software can automate the process of creating and storing customer invoices/receipts and vendor bills. This software also allows you to store vendor and customer information such as contact information and payment terms.
· Go paperless – keeping your records in a safe computer file or the cloud can make it easier to organize and find quickly when needed.
· Implement a process and train employees – since recordkeeping tasks can sometimes be tedious, giving your employees clear steps that they can follow to maintain proper records makes it more likely that they’ll cooperate. Also, by maintaining a policy which all employees are clear on, you empower them to speak up if they see fraud or theft.
· Make responsibilities clear – when employees aren’t sure which tasks are their responsibility, they might think that it’s someone else’s job. By giving specific responsibilities to each employee, you can save yourself and your business a lot of headaches. An example would be to appoint one person to receive and open all correspondence and appoint another to scan those documents and store them efficiently in a computer or the cloud. Finally, appoint someone to do regular security checks to ensure the policies are being followed.
As businesses get bigger, the task of maintaining proper records will become harder, but also more important. Implementing a proper recordkeeping process early on will give you time to adjust and improve.
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