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Guide to Small Business Record keeping

When starting a small business, taking the time to set up your record keeping system properly, right from the beginning, will save you time and money down the road — and could make the difference between success and failure.

Certified public accountants (CPAs) are experts in small business finance including taxes, financial reporting, business advisory, personal financial planning as well as bookkeeping and payroll processing.

According to CPAs, good recordkeeping preparation and planning can:

  • Make tax preparation easier. Back-up documentation may save you taxes, interest charges and penalties if the Internal Revenue Service (IRS) ever questions your return.
  • Allow you to comply with multi-state taxes, such as sales taxes (including internet sales) and payroll taxes.
  • Give you a better handle on your overall financial position, how your business is performing and help your CPA identify financial and tax planning opportunities.
  • Create efficiencies throughout the business by spending less time locating documents and information.
  • Provide your successor with a road map to your financial affairs if you die or become incapacitated.

One of the first things you will need to determine is whether to use a traditional paper filing system, an electronic filing system or a combination of the two. You should carefully consider the pros
and cons of each type of system in light of your business needs and resources.

To keep up with your record keeping, it’s important to build a system that is convenient. Electronic records are very easy to transport. You can move the equivalent of boxes of paper documents with the click of a mouse via encrypted email or a secure portal. When stored in the Cloud or a secure portal, you can work on them from home, the airport or the beach. CPAs work with both electronic and physical records, but your CPA will have specific recommendations due to the requirements for business record keeping in your state and/or within your industry. Be sure to consult with your CPA to find the record keeping system that best suits your needs.

Paper files are extremely reliable, provided you follow documented protocols for setting up and maintaining them. They are not susceptible to server failures or power outages. Nor are they dependent on the ongoing support of a systems vendor. Paper files, however, are susceptible to floods, fires and other natural disasters. It’s difficult and costly to maintain redundant backups of paper records. Although electronic media can also be easily damaged or destroyed, redundant backups are generally easily made and recovered.

Identity theft, fraud, privacy law violations and numerous other crimes have been enabled by electronic record keeping systems. Even some of the most sophisticated electronic security systems have been compromised.  As a business owner you have a responsibility under multiple laws and regulatory bodies to protect the confidentiality and security of your customer’s records. Electronic records can be kept secure when proper measures are taken to protect privacy, but this is an entirely different process from keeping filing cabinets locked and installing an office security system. Because you are legally responsible for your data, you should NOT depend solely on your electronic record keeping systems vendor to ensure the security of your electronic records.

When it comes to storage, electronic files clearly have the advantage. The longer you’re in business and the more you grow, the more burdensome the space requirements for paper records. Many businesses resort to offsite records storage both to save space and to mitigate the risk of records being destroyed. At some point, paper records typically need to be shredded, which is labor intensive and costly.

The cost of electronic record storage has become highly affordable compared to traditional paper-based systems. Some original documents should still be kept in paper copies, but the vast majority can be digitized.

Although your filing system will need to be tailored to meet the needs of your specific business, the following elements can help you avoid common pitfalls.

When it comes to filing, almost everyone has his or her own ideas about how they’d like to see the files organized. If left unchecked, one person’s innovation soon becomes another’s frustration. Set a standard protocol for every type of file, then teach, monitor and enforce it.

For security and emergency purposes, keep all files in one central location that can easily be accessed without being dependent on a single person. The same principle applies to electronic files, which should be kept on a shared server or Cloud provider’s system rather than on an individual’s PC workstation.

Access to files should be limited to only those who have a specific business purpose for doing so and security protocols should be set up accordingly. An advantage to most electronic record keeping systems is that a date and time stamp log is automatically generated each time a user accesses a file. If you implement an electronic system, you should periodically review access logs and follow-up on any unusual activity.

Documents that are difficult or costly to replace should be kept in a safe deposit box. Your safe deposit box should hold any records of ownership such as deeds and titles and original business documents such as articles of incorporation, corporate resolutions, bylaws, partnership agreement, minutes from annual meetings, loan documents and so on. Because access to your safe deposit box could be delayed in emergency situations, keep copies in a clearly marked paper or electronic file. Additional copies should be held by your attorney.

With your record keeping system in place, prepare a procedures manual explaining it for employee training purposes and in case someone outside the business needs access due to a long-term illness or other emergency. Be sure to include the location of important documents as well as insurance policy information. You should also list bank and investment accounts, as well as all credit accounts with account numbers. Also, you should list information on other debts, including mortgages and loan documents. Give a copy of this manual to trusted family members, your attorney, CPA and trustees, if any.

Early on it may be tempting to keep everything. But over time the cost and liability of storing old documents — either in paper copies or electronically — can become significant. Rather than waiting until you run out of room or are frustrated by storage bills, you should implement a document retention policy. Your CPA can offer his her own experience as well, based on knowledge of your industry and/or state, and can advise you with specific recommendations for records retention.  While your record keeping system will be unique to your business, certain subjects are universal. For most small businesses, the categories that follow make up much of their financial paperwork. Since incomplete or sloppy records in these areas can cause you major trouble and expense, getting them under control is a good place to begin.   Download the simple Records Retention Guide.

Small Business Records Retention Chart (125 downloads)

Your instinct may be to just set up bookkeeping system “from a box” of purchased software or from the Cloud. However, before you set up your system, you’ll want to talk to your CPA about purchasing software that is right for your type of business and easy to use.  Your CPA can help you design the proper chart of accounts that will give you key information on your business and will save you time in the long run. If you plan to manage your books in-house, making the investment in a system that works with that of your CPA could prove to be more strategic when seeking advice and easier when it comes to closing the year end, generating financial reports and filing income tax returns.


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