Your Business’ Books and Records
“ You got the idea and your business plan is in motion. You started your business. You are moving at the speed of light. Probably this isn’t as exciting but as important when starting a business, taking the time to set up your recordkeeping system properly, right from the beginning, will save you time and money down the road — and could make the difference between success and failure.
Certified public accountants (CPAs) are experts in small business finance, including taxes, financial reporting, business advisory, personal financial planning as well as bookkeeping, payroll processing and management accounting.
In my experience, good recordkeeping preparation and planning can:
Make tax preparation easier. Back-up documentation may save you taxes, interest charges and penalties if the Internal Revenue Service (IRS) ever questions your return.
Allow you to comply with multi-state taxes, such as sales taxes (including ecommerce/ internet sales) and payroll taxes.
Give you a better handle on your overall financial position, how your business is performing and help your CPA identify financial and tax planning opportunities.
Create efficiencies throughout the business by spending less time locating documents and information.
Provide your successor with a roadmap to your financial affairs if you part way with the business unexpectedly.
During your planning you’ll need to consider if you will leverage the benefits of technology available in today’s world. I say, there’s no question about that- do it. Based on the size and activities of your business deciding on the right software from the get-go is imperative. You should carefully consider the pros and cons of each type of system considering your business needs and resources.
I am surprised to see clients that collect their receipts in a shoe box. I hope you are not one of them. Is important to build a system that is convenient. Electronic records are very easy to transport. You can move the equivalent of boxes of paper documents with the click of a mouse via encrypted email or a secure portal. When stored in the Cloud or a secure portal, you can work on them from home, the airport or the beach. CPAs work with both electronic and physical records, but your CPA will have specific recommendations due to the requirements for business recordkeeping in your state and/or within your industry. Be sure to consult with your CPA to find the recordkeeping system that best suits your needs.
Paper files are extremely reliable, provided you follow documented protocols for setting up and maintaining them. They are not susceptible to server failures or power outages. Nor are they dependent on the ongoing support of a systems vendor. Paper files, however, are susceptible to floods, fires and other natural disasters. It’s difficult and costly to maintain redundant backups of paper records. Although electronic media can also be easily damaged or destroyed, redundant backups are generally easily made and recovered.
Identity theft, fraud, privacy law violations and numerous other crimes have been enabled by electronic recordkeeping systems. Even some of the most sophisticated electronic security systems have been compromised. As a business owner you have a responsibility under multiple laws and regulatory bodies to protect the confidentiality and security of your customer’s records. Electronic records can be kept secure when proper measures are taken to protect privacy, but this is an entirely different process from keeping filing cabinets locked and installing an office security system. Because you are legally responsible for your data, you should NOT depend solely on your electronic recordkeeping systems vendor to ensure the security of your electronic records.
When it comes to storage, electronic files clearly have the advantage. The longer you’re in business and the more you grow, the more burdensome the space requirements for paper records. Many businesses resort to offsite records storage both to save space and to mitigate the risk of records being destroyed. At some point, paper records typically need to be shredded, which is labor intensive and costly.
The cost of electronic record storage has become highly affordable compared to traditional paper-based systems. Some original documents should still be kept in paper copies, but the vast majority can be digitized.
Although your filing system will need to be tailored to meet the needs of your specific business, the following elements can help you avoid common pitfalls: standard protocol, central location, limited access, safe deposit box.
With your recordkeeping system in place, prepare a procedures manual explaining it for employee training purposes and in case someone outside the business needs access due to a long-term absence or other emergency. Be sure to include the location of important documents (permanent files) as well as insurance policy information. Give a copy of this manual to your attorney, CPA, and trustees, if any.
Early on it may be tempting to keep everything. But over time the cost and liability of storing old documents — either in paper copies or electronically — can become significant. Rather than waiting until you run out of room or are frustrated by storage bills, you should implement a document retention policy. Your CPA can offer his/ her own experience as well, based on knowledge of your industry and/or state, and can advise you with specific recommendations for records retention.
Okay now you have the list with the important things to consider and are ready to just go do it, just getting it done. I recommend slowing down. Your instinct may be to just set up bookkeeping system “from a box” of purchased software or from the Cloud. However, before you set up your system, you’ll want to talk to your CPA about purchasing software that is right for your type of business and easy to use.
Your CPA can help you design the proper chart of accounts that will give you key information on your business and will save you time in the long run. If you plan to manage your books in-house, making the investment in a system that works with that of your CPA could prove to be more strategic when seeking advice and easier when it comes to closing the year end, generating financial reports, and filing income tax returns. But more importantly the approach I recommend is for you to invest in an accounting system that will support the growth and changes your business will encounter in the future. “
(adapted from © 2017 American Institute of CPAs. All rights reserved. 15610-312)
