Home » Why Small Businesses Still Need to Practice Physical Financial Record Keeping
If you are starting and building your own business, there are literally a 1,001 things to do, and you certainly have lots of hats to wear. One of those is often part-time accountant, at least until your business reaches the point when you can afford to employ one of your own (although doing so costs less than you think and is something you should consider early on.)
Keeping good financial records is imperative in business, whether you have an accountant or not. But that does not just mean making sure you keep up with your entries in Quickbooks, but that you take great care of the physical proofs that back up those digital entries in a must as well.
Not only does keeping good physical financial records often make it easier to run your business, it also makes it easier to get taxes done when it’s that time of year. You can’t change things for last year, as tax time has passed, but as a new business tax year is just getting started, it’s a great time to plan to ‘do better’ this coming year.
If your business gets audited – and that is a possibility if you file taxes as a small business owner – good physical record keeping can greatly simplify the process, and may even be the one thing that stands between you and a possible tax penalty.
Getting to the point where you can put your finger on a financial file or receipt at the drop of the hat is something that sounds rather difficult; however, with a few simple tips, you can do just that. Once you get your records organized, it is much easier to keep up with theat organization.
At a minimum, you must keep any records that show how your business made money and how your business spent money. Income statements, receipts from purchases, and bills paid are some of the basic records you need to keep. If you sell goods or services to consumers or other businesses, you must keep a record of your merchandise sales, your shipping expenses any discounts given to customers and customer refunds.
For purchases, keep detailed records for all the products and services purchased less any vendor discounts. You should also keep detailed payroll records, including the pay you have given to yourself.
You will also need to ensure you have documentation that backs up all the expense and/or business deductions you claim at tax time. Whatever business niche you operate in, such things can save you money at tax time, but you have to be able to prove they are legitimate should a CRA auditor require you to do so.
All financial records that you use to do your taxes should be kept for seven years. Of course, there are some exceptions to this time frame, but if you keep everything for seven years, you will be safe.
One example is payroll items. You are required to keep these for four years; however, with the system you will use to keep track of your finances, it will be much easier to just keep these records with the others until they can all be destroyed.
First, don’t just toss the documents into a box and forget about them until it is time to do taxes. Instead, get a banker’s box that can hold hanging files. Label these files with some of the most common expense categories you have. Some examples include contract labour, electric bills, charitable donations and basic operating supplies. Any time you spend money on something in one of these categories, file the receipt in the appropriate file.
If you have a lot of documents for each category, you can subdivide the items into months. If you don’t want to have a bunch of files for each category, take the time at the end of every month to organize the receipts. Tally them up and place them in an envelope that is clearly labeled with the category, month, year and total of the receipts.
You can follow the same system for income. If you are using a ledger to document income, simply start each month on a new page. You can tally up the previous month’s information and document it in an index card paper clipped to the corresponding pages for that month.
Once you become accustomed to good physical record-keeping, you will better able to just file things away where they go and maintaining great physical financial records should become much easier and far more efficient, not to mention the fact you’ll be in great shape both at tax time and should the CRA decide to come knocking to discuss your business taxes!
Keeping all these physical receipts and proofs can seem archaic, and even environmentally unfriendly. Usually the CRA will accept electronic copies of these proofs though, so getting into the habit of scanning in, and saving such copies will keep your records in order, your office free of paper clutter, and even make it easier to share everything with your accountant when you do hire one.
You don’t need to invest on expensive hardware to do so though. There are some excellent apps that you can add to your smartphone/laptop and or desktop computer that can both scan and organize all kinds of receipts.
One of the best? Google Keep. It’s super simple to use, integrates with any Google account and is completely free to use always, which is not true of many of its rivals. You can us it across iOS and Android devices as well as Mac and PC and sharing is as simple as sending a Google Drive link via email.