For a small business, complete and accurate recordkeeping carries weight at the bank
Janet A. Harte
Guest Columnist
Q: I just tried to get a bank loan and was turned down because of my lack of records. Why shouldn’t my checking account be all I need?
A: In a nutshell, complete and accurate records can help you gain more profits. While a checking account is the most basic way to keep track of deposits and disbursements, it is only a component of a recordkeeping system. Accounting records help you compare performance, manage cash, track receivables and payables and set goals. If you have a complete understanding of your financial health, you can make decisions that reduce risk and result in higher profitability.
A: In a nutshell, complete and accurate records can help you gain more profits. While a checking account is the most basic way to keep track of deposits and disbursements, it is only a component of a recordkeeping system. Accounting records help you compare performance, manage cash, track receivables and payables and set goals. If you have a complete understanding of your financial health, you can make decisions that reduce risk and result in higher profitability.
Q: What are some elements of a good recordkeeping system?
A: Whatever system you choose should be based on your type of business. One "size" definitely does not fit all! Consult with your Certified Public Accountant to set up a chart of accounts appropriate for your business. Most businesses need a checking account, record of sales, record of cash received, and a cash disbursements journal for recording expenses. If you have employees, you will need to track their time worked, deductions and withholding and all taxes. You will still need to reconcile your checkbook!
Q: It looks like the main thing I need to do is track expenses and manage the money coming in. Anything else?
A: Yes, tracking revenue and expenses is important but so is tracking your financial position. There are five parts to an accounting system: revenue, expenses, assets, liabilities and owner’s equity. Your cash account lets you know how much money you have to pay bills immediately. If you buy or pay on credit, accounts receivable and accounts payable journals track what is owed. Inventory is an asset that is reduced when items are sold. It is a critical component of any retail operation and should be controlled carefully. Other assets, like equipment and vehicles, should be recorded at cost and their value reduced by depreciation – a non-cash expense. At any given time, you will probably owe somebody money. You should have accurate records of your creditors so you can pay bills on time and control the amount of debt you incur. The difference between your investment in assets and your liabilities is owner’s equity. This amount represents that portion of the business that you truly own. The profit that results from revenue, less expenses, flows to you so you can choose to add or change assets, reduce liabilities, or disburse the profits to owners.
Q: What method of recordkeeping should I use?
A: Your CPA will also have recommendations on the method of recording entries. These days, most recordkeeping is performed with accounting software. Depending on your business, the CPA will recommend programs that are most accommodating and user friendly. It helps when your CPA has specialized expertise in the method you plan to use. Special purpose recordkeeping, like point of sale systems, are often recommended for the scope and depth of information they provide.
Janet Harte is the Washington State University/SBDC business development specialist for Southwest Washington. The SBDC offers free confidential business management counseling to small and mid-sized businesses. Call 360-260-6372 if you have questions or wish to make an appointment, or e-mail harte@vancouver.wsu.edu.
