CHAPTER 7 - HOW TO SAVE TIME ON TAX RECORDKEEPING

Good financial recordkeeping is crucial to the success of your business for many reasons.

Good records provide the financial data that help you operate more efficiently, thus increasing the profitability of your enterprise. Accurate and complete records enable you, or your accountant, to identify all your business assets, liabilities, income, and expenses, which, when compared with appropriate industry averages, help you pinpoint the strong and weak phases of your business operations.

Good records are essential for the preparation of current financial statements, such as the Income Statement (Profit and Loss) and the Cash Flow Projection. These, in turn, are critical for maintaining good relations with your banker. They also will present a complete picture of your total business operation, which will benefit you as well.

Good records are required for preparing complete and accurate tax documents. For example, poor records often lead to the preparation of income tax returns that result in underpayment or overpayment of taxes. In addition, good records are essential in an IRS audit if you hope to answer questions accurately and to the satisfaction of the IRS.

To be successful, your financial records should be able to provide answers to the following questions:

• How much income are you generating now and how much income can you expect to generate in the future?

• How much cash is tied up in accounts receivable (and thus not available to you), and for how long?

• How much do you owe for merchandise? Rent? Equipment?

• What are your expenses, including payroll, payroll taxes, merchandise, and benefit plans for yourself and your employees (such as health insurance, retirement, etc.)?

• How much cash do you have on hand? How much cash is tied up in inventory? What is your actual working capital budget?

• How frequently do you turn over your inventory?

• Which of your product lines, departments, or services are making a profit, which are breaking even, and which are financial drains?

• What is your gross profit? What is your net profit?

• How does all the financial data listed above compare with last year or last quarter? How does it compare with the projections in your business plan?

• How does all of the financial data compare with that of your competitors? With that of the industry?