How to Keep Great Business Records - The Easy Way
May 25, 2015
You have started a business and someone (probably your banker) said, "Are you keeping good business records?" If there is a blank look on your face, you might need a little help figuring out the business record keeping process. If you have questions, here are the answers:
Why do I need to keep good business records?
Keeping records for business purposes is a responsibility, not just something extra you do when you have extra time.
As a business owner, you must keep good records of your business activities:
- In case of a lawsuit, to back up your position
- At tax time, to prepare an accurate business tax return
- In case you get audited by a government agency
- So you know how much money you have (so you aren't overdrawn at the bank)
- To answer questions from customers and vendors.
And those are just just the main purposes. You want to keep good records so you know whether your business is making money.
What records do I need to keep?
The easy answer to this is "everything." You need to keep records on:
- Customers or clients. Everything relating to the transactions you had with customers or clients should be kept, in case of questions. They gave you money, and you have a responsibility to show where it went. Keep details on bills, accounts receivable, and payments.
- Vendors. Keeping records is also important in your dealings with vendors (those people you pay for services and products.) Keep your purchase orders and proof of payment.
- Employees. Your business is required by law to keep excellent employee records.
- Financial. Fortax purposesand in case of an audit, you need records of all business transactions, loans, asset purchases, and more. In particular, keep records of business expenses, including business travel, mileage, meals, and entertainment.
- Contracts and legal documents, including those related to the formation of your business, any contract you have entered into. This includes permits and licenses, registrations of trademarks, patents, or copyrights, and any loans or lines of credit.
- Emails and other business communications. There are pros and cons on this; see Susan Heathfield's article on internet and email policies.
How and where should I keep these records?
You can keep all of your records in a physical location, in record books or a filing system. You may also want to keep records on your computer or "in the cloud," with appropriate backup, of course. It doesn't matter where you keep those records, as long as they can be accessed quickly and completely when they are needed.
How long do I need to keep these business records?
How long you must keep records depends on the type of records. It's always safe to keep everything forever, but that gets a little overwhelming.
Keep tax records until you are assured that those records won't be audited. William Perez at Tax Planning has the details on keeping tax records. Keep all records you used to prepare your business tax return, in addition to the return.
Employee records should be kept as long as there is the chance that you might need them.
This depends on the type of record and the type of action that might be taken against your business. Some employee record retention information must be kept by law. (Yes, it's complex.) You should also keep employment applications for at least a year.
The IRS has an article on how long to keep business records, for tax purposes and other business purposes.
How do I make this record keeping task simpler?
1. Find good business accounting software and use it. Find software that allows you to automate bill paying and that gives you
2. Create a system to collect information, then check to make sure it's accurate, record it in the appropriate place, review it periodically, and act on it when necessary.
3. Make it a habit. The most important thing you can do to make business record keeping easy is to create the habit of recording what you are doing in your business as you do it.
This relates to financial records, but any kind of business transaction or dealing with other parties. Put it in writing and keep what you've written.