How to Organize Your Business Financial Records

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As a small business owner, you find it necessary to maintain organization in every aspect of your business. You need to create a system that helps you clear out the nonessential to stay on top of things. This allows you to see how your business is performing and know when to take action.

Organizing your business financial records helps you assess your small business’ health and free yourself from last-minute scrambles to find them later. Crucially, it also makes or breaks the long-term wellbeing of your business operations.

The Purpose of Keeping Tax Records

The most important reason for keeping financial records is for tax time. When you have well-organized finances, you make tax preparation easier. Not having to hunt down every stray, crumpled receipt in your car glove box really does wonders for your peace of mind come January.

Tax records have a bigger impact than that, though. They also help prove the expenses if the IRS audits your business. Keep in mind, the IRS has up to three years to file an audit on your taxes. So, you should file away your financial records for that amount of time.

Ready to get started? Here is how to organize your small business’s financial records in five simple steps.

1. Account for All of Your Information

Getting into the habit of tracking your finances in your business is a must. After a while, it will become less of a conscious step and more of an automatic process.

“Collecting” is the most important part of the process. You can keep track of every dollar you spend and make in your business. From there, the best way to maintain organization is by keeping your business and personal expenditures separate – even if you plan to pay back your business through personal expenses. It’s best to have two different accounts since mixing them up is easy.

At this point, you don’t have to think about doing anything with your finances just yet. Start with getting into the habit first, and be sure you have everything, including:

The description of the item
The amount of money spent/made
The date

2. Make Assessments to Ensure the Information Is Complete

At a set time — may be biweekly or monthly — you should go through all the information you’ve captured to make sure it is updated for recording. It’s best to log enough details on what the expenses were for so you can record them accurately.

For example, if you buy lunch to meet up with a client, be sure to note, “Lunch, $55.45, to consult with [client name] about services at [name of the restaurant].”

It’s essential to note the details to understand where you’ll need to record expenses. Trying to place that one restaurant bill months down the line will be much harder, and that can impact your ability to assess tax records.

3. Record Your Finances for Saving

If you’ve been following this process by hand, you’ll need to systemize it in some way. Now it’s time to finally put your financial information on record into a form. You can turn in everything you’ve kept over to a small business bookkeeper or to yourself for recording.

Most small businesses are moving towards digitizing their finances instead of relying on the old filing cabinet for safekeeping. Small business owners can save up to 80 hours annually by digitizing all receipts and expenses. Instead of going the manual route, take the opportunity to see which tools save you time and money.

You can keep accurate recordings by entering the information onto a spreadsheet or accounting software. You might find that online software is best for keeping track of your financial status and easy recordings.

4. Gather Your Information to Consolidate and Review

After you record your financial information each month, your next step is to print four types of reports. This will include:

Balance sheet
Income statement
Accounts receivable
Accounts payable

Each report helps you compare information from last month. For instance, you can pay attention to specific details on your cash flow and profits or losses.

5. Tackle Financial Decisions

Now that you have reports that provide financial health information about your business, you can make decisions based on what you know. So, if you see a financial expense that keeps increasing, it’s important to ask yourself why.

This also gives you a good idea of your business’ liquidity and helps you assess the financial support you may need, whether that’s securing a small business loan to grow your operations or it’s cost-cutting on ballooning expenses.

5 Steps to Organize Your Business Financial Records

Set the stage for your financial records with this easy-to-use system. Once you set it in motion, it only takes minimal effort. However, the first step is getting into the habit of collecting all your information. Then, you’ll find the rest of the work will easily fall into your lap.

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Author

Evelyn Long is a writer and editor focused on home building and construction. She is the co-founder of Renovated, a web magazine for the home industry.