What do you do with all those electronic files, papers, documents, etc. related to your business activities? You know they are important for accurate record keeping. Which ones should you keep and for how long? What information should you keep for the IRS, the state, the municipality, the financial institutions, the FDA and other government entities?

Accurate records concerning business activities include financial activity, employee information, manufacturing data, and more.  A good record keeping system will show if a business is making a profit or losing money. It provides information that is valuable to determine if more cash is needed for the business, if the business can make investments or if more employees are needed to grow sales.

The first item needed after a business is established is a bank account – one that is separate from any other.  Do NOT pay for personal items from the business account.  And where possible, do not pay for business items from a personal account.  Keep personal separate from the business.  Sometimes items are co-mingled, so it may be unavoidable, however, this should be kept to a minimum.

Develop a system for keeping financial records, whether it’s a handwritten checkbook or a sophisticated accounting software system.  The importance of a system is to record the data accurately and timely.  When writing a check, be sure to write clearly and legibly, so it is readable.  And use the memo field to identify the purpose of the check.

Use cash sparingly in your business, as it is easy to forget that cash was paid for something, so these expenses are often not recorded. Use the business debit card or a business credit card as the detail of the expense is provided on the bank statement or credit card statement.  Be very careful, however, not to overdraw on the bank account and be sure to pay the entire balance of the credit card each month, as the fees charged with a credit card are a very costly.

Record all sales in the system with enough detail that analysis can be prepared.  For example, identify the product and the customer, the unit price and the units sold.  If there are different locations, note this as well.  The detailed data is important for providing analysis on the products or service that were high sellers versus slow movers and where the sales were completed.

Deposit receipts often and properly.  Cash and checks should be deposited frequently so the money is available to the business.

Reconcile the bank account and the credit card account at least every month which includes recording the transactions, to ensure all spending was authorized and categorized properly.

Count all items in inventory periodically to ensure the records are properly reflected.  A full inventory count should be performed at least once a year and the records adjusted as necessary.

All records should be kept physically or electronically.  This can be done through an envelope, a box of receipts or a systematized process.  The important reason is that the receipt is able to substantiate all income, expenses and capital improvements, payments from customers, bank loans, etc.  For a business that is filed through a personal tax return, keep all records 3 years after the filing of the tax return.  For a business that is filed with a business return, those records must be kept 7 years).

Once a system is created and followed, even if it needs adjustments from time to time, it will make tax time easier and help the business owner make smarter business decisions.