Why do you have to keep records?:
Taxes - the most obvious reason is to prepare your tax returns. For more information about taxes I would go to the Internal Revenue Service website (irs.gov) and check three items under "Business" - "Starting a Business" - "A-Z Index For Businesses" - and, "Small Business Forms and Publications."
To monitor progress and prepare financial statements - good records help you monitor the progress of your business. What products or services are selling and returning the most profit? Did you realize positive results from your last marketing campaign? Which sales letters or landing pages are making the best conversions? Are you really making any money? We could go on and fill this page with questions, but the bottom line is that without accurate and adequate records you don't have a clue.
Customer service - there will be numerous times you will have to go back to your records to resolve a customer inquiry or provide information.
Managing cash flow - even a small home business can benefit from managing cash flow. Cash coming into the business never equals outflow. Good records let you anticipate these differences and prepare for them by making wise purchases to minimize outflow, or offering sales or new promotions to increase inflow when it is needed most.
Marketing - anyone who has been in business (any kind of business) for any length of time has heard "the money is in the list (of customers, prospects, leads)" and "test everything to see what works and what doesn't." That is excellent advice, but can't be done without keeping records.
What Records do you have to keep?
The very simple answer is all records having to do with money flow into and out of your business. A far more precise answer (having to do with tax records) will be found in the Internal Revenue Service website (irs.gov) under "Small Business" - "Starting A Business" - Record Keeping." There are, as we've seen, reasons other than taxes to keep records, so let's get back to the statement "all records having to do with money flow into and out of your business.
Money flowing into your business might be:
Money from selling your own goods or services
Commissions from selling goods or services for others
Bonuses for recruiting or special sales (Network / Internet Marketing)
Money you (or a partner) contribute into the business
Money from other sources such as borrowed from a lender or investor
Money you make from sale of all, or part of, your business
Money flowing out of your business might be:
Home expenses for that portion of your home used as an office
Payments for product to be re-sold
Payments for all services and expenses, such as marketing, advertising, supplies, accounting, education, etc. required to run your business
Payments to buy or replace business assets, such as computers etc.
Payments to yourself (or partners) in the form of a draw against equity
What is the best way to keep these records?
My experience in small business leads me to say - without hesitation - QuickBooks. I don't have space in this Article to tell you all the reasons why, but QuickBooks is a good system that eliminates repetitive record entry, is accepted by all Accountants, and is quick and so easy that even I can do the books.
One thing I can tell you about small business record keeping is this - if you don't organize your records from the start, and stay on top of your record keeping chores daily, I can almost guarantee that you will come to grief - probably sooner than later.
I'd like to leave you with eight tips CRITICAL to business record keeping success and sanity:
Never mix business and personal paperwork. For instance, by using one checkbook or credit card for business and personal use.
Make sure your records can be understood by anyone, not just yourself. I strongly suggest you use one of the widely accepted automated software record keeping systems. My personal recommendation is QuickBooks Pro.
Always use the memo section of your checks to record the specifics of the expense.
Record transactions as they occur, or at least on a daily basis. Reconcile bank statements the day you receive them. Retain all bank statements.
Get help before things get out of control. Your Accountant, or Business Counselor should be able to help, or at least point you in the right direction when help is needed.
Develop and maintain a good back up system. If you are using computer software back up daily onto disk or jump drive (my preference) and store the disk or drive in a fire resistant cabinet or other safe place. All permanent records of the business like licenses, contracts, organization filing papers, etc. which are paper documents, should be copied or scanned electronically, and stored the same way.
Unless you have a tax accounting background, plan to have your taxes prepared by an Accountant (at least the first year). Check with the Accountant to make sure you understand what records will be required, and that you will be able to supply them.
Prepare and carefully review a Profit and Loss Statement and a Balance Sheet monthly. Flaws in your record keeping system (or mistakes) will show up there, and can be corrected in a timely manner before they get overwhelming.