According to Dictionary.com, record-keeping is the maintenance of a history of one’s activities by entering data in ledgers or journals and putting documents in files. “Taking time to organize a good system can be tedious and time consuming, but it only takes one visit by a tax auditor or a turndown for a loan by a bank to convince any business owner that an organized system would be useful.” (http://www.smallbusinessnotes.com/operating/finmgmt/recordkeeping.html) Successful business is based on sound record keeping practices. An appropriate record-keeping system can determine the survival or failure of a new business, and for those already in business good recordkeeping systems can increase the chances of staying in business and the opportunity to earn larger profits. Without good records it is impossible to determine the financial condition or profitability of a business. Even though record-keeping is important to the success of a business, new and existing businesses often neglect to keep accurate and up-to-date records. This is often due to ignorance of record-keeping procedures and the lack of resources to employ the services of a professional who can carry out these duties. The necessity of record-keeping will be highlighted as well as the specific problems associated with lax record-keeping procedures and their implications. Solutions will also be offered for these problems.
WHY RECORD-KEEPING IS IMPORTANT
Complete and accurate record-keeping is crucial to the business success for a number of reasons: * Good records provide the financial data that helps the business to operate more efficiently, thus increasing its profitability. * They provide you the basis for all the reports a business needs to make to governmental agencies, banks, and potential funders, plus they provide you with an overall picture of how your business is doing and where it is headed. Financial statements are a way to track your progress towards your goals and provide you with the information needed to make decisions as you go along. * “Accurate and complete and complete record enable the business owner, and his/her accountant, to identify all the business’s assets, liabilities, income and expenses. That information, when compared to industry averages, helps to pinpoint both the strong and weak phases of the business”. (seniormag.com)
* Good records are essential for the preparation of current financial statements, such as the income statement and cash-flow projection. These statements are critical for maintaining good relations with the business banker and presents a complete picture of the business operations.
* Good records are critical at tax time, as they prevent the business from under-paying or over-paying its taxes.
* “Accounting records furnish substantial information about the volume of a business, such as how present and prior volumes compare, the amount cash versus credit sales and the level and status of accounts receivable”.
SPECIFIC PROBLEMS WITH RECORD-KEEPING
IMPROPER MANAGEMENT OF INVENTORY
Poor record-keeping can result in the improper management of inventory. Accounting records help the business to monitor inventory as discrepancies in the inventory level can be harmful to the business. While a large inventory allows goods to be delivered when they are ordered, too large an inventory represents an excess investment. This is because resources, including storage space and electricity, have to be utilized to store these items. If the inventory does not turn over quickly, the business may lose profits due to obsolescence, deterioration or excess investment. If accurate records are not kept these inventory levels cannot be monitored and the business will be at a severe disadvantage. LACK OF CONTROL OF EXPENSES
Expenses are the costs that the business shoulders to keep the business working. This involves rent, supplies, travel...