Tips for keeping records for your small business.
As a small business owner, you probably don’t get excited about tax season. At best, prepping your taxes feels like a hassle, the least fun of all your business activities. At worst, it has you pulling your hair out in a state of distress and confusion. Tax season doesn’t have to be painful. With the following tips, you can take the sting out of tax-related tasks and save you.
If you’re not keeping your business record keeping up to date? You could be seriously damaging the future of your business!
When you’re a small business owner time is scarce. It’s easy to get buried in the responsibilities of looking after customers, staff and providers.
Business record keeping should be a priority every day to help your business stay healthy and agile.
Keep your business record keeping up to date, and you know exactly what your financial situation is at all times. Hence, you are better able to plan ahead and present a genuine picture to external entities when required – including the ATO, Fair Work Australia, The Australian Securities and Investments Commission and, should the need arise, to a potential business buyer. PLUS, you will be in a far better position to build strong relationships with providers and clients because you can conduct business with them efficiently and professionally, which means a solid future for your business!
What is bookkeeping?
Bookkeeping is the process of recording and managing all financial transactions for your business, including sales, purchases, and payments—Bookkeepers track all costs and income to help a company make informed financial decisions.
The goal of bookkeeping is to show you your business’s bigger financial picture, balance your accounts, and improve cash flow management more strategically.
The basics of bookkeeping
In business bookkeeping, an account is a record of all debit and credit entries of a certain type, such as accounts payable or payroll.
There are five basic types of accounts:
- Assets. Resources or things of value owned by a company as the result of its transactions (e.g., inventory, accounts receivable).
- Liabilities. The obligations and debts owed by a company to suppliers, banks, lenders, or other providers of goods and services (e.g., loans, accounts payable).
- Revenues or income. Money earned by the company through sales or providing a service.
- Expenses. Cash that flows out of the company to pay for assets or services (e.g., utilities, salaries).
- Equity., The remaining value of an owner’s interest in a company, after all, liabilities have been subtracted(e.g., stock, retained earnings).
Small business accounting begins with setting up each account so you can record transactions in the appropriate category. This makes up your general ledger. You likely won’t have the same exact bookkeeping processes as the next e-commerce store, but many different accounting methods are common depending on your business needs
Why should you keep records?
If you did not do any record-keeping, come tax time, you could be throwing money down the drain. When tax time comes knocking, having all records of your expenses will help you take advantage of every deduction or tax credit that you are entitled to. Businesses who have not kept any records will either be forced to receive no benefits or may try to make an estimate as to what tax returns they can receive. This is dangerous as they could overestimate and get audited by the ATO.
Audits are another reason to have thorough record-keeping practices in place. If the ATO questions a credit or deduction, you will be able to present documentation to back up your case. If you can’t back it up, you can say goodbye to those extra returns and perhaps be forced to pay more in tax. Record keeping will help stop your business from being caught out by the ATO if it believes you’ve overstepped on your tax returns.
What should you keep?
This is the first hurdle most small business owners stumble at. It’s overwhelming knowing the sheer number of different invoices, receipts and other nitty-gritty documents you receive or send out each day. Some seem obvious to keep, others not so. The trouble is that some of those seemingly unimportant documents could save you if the ATO comes knocking. These are the records you should look at keeping:
Client files are useful beyond tax time. Being able to easily see invoices to a client and any expenses required in completing the job is extremely useful. It can help inform any future assignments with your clients saving you time. Client files are also great for storing other useful information like client preferences for any future projects.
Contracts are a must-have for small businesses. Not only do they spell out what is expected from both your business and the client, but they also make it easier to file a lawsuit should the client not uphold their end of the deal. Keep these on record to save your business any future headaches from difficult clients.
Anything your business purchases should be recorded, preferably by saving the receipts. Come tax time these receipts will be useful in helping improve your tax return. Plus, if anything goes wrong with the product, you have proof of purchase for warranties or returns.
Any communication within the business or to clients should be kept. If any clients or staff cause trouble in the future, these records may come in handy. While not entirely helpful for maximizing your tax returns, these records could save you in a lawsuit if the case requires.
Retaining any applications and contracts surrounding employment is important. Having this information available to call upon is useful if a situation arises, good or bad, with the employee. Payslips should also be stored as this could come in handy come tax time or in any payment disputes.
Accounting and tax records
All other expenses, travel logs, invoices and past tax filings should be kept. This will all be useful come tax time to help determine what deductions, returns and tax credits you are entitled to.
How to keep your books
Maintain and update financial records
Bookkeeping involves working with numbers. Most of the work involves basic math and accounting. The details depend on the type of business you own, but it can include tasks like settling accounts receivable and bank statements, recording financial transactions, invoicing, billing, and tracking payroll.
You’ll also take care of other finance-related matters including:
- Tax bookkeeping for payroll, income, employment, and even small business tax deductions.
- Budget planning to help the company stay on track and grow.
- Getting financial statements (balance sheets, income statement, cash flow, and changes in equity) ready for stakeholders.
Bookkeeping requires careful analysis and a little legal know-how. In the event your business is ever audited, you want to make sure your records are in order and deductions are legitimate.
Keep track of what everyone is doing (and spending)
Financial bookkeeping can take a great deal of time. You have to ensure accuracy for each financial transaction, plus, you have to balance the books each day and track payments in and out from employees.
This means, to master bookkeeping and accounting, you should have excellent communication and organization skills. On any given day, you may need to collect receipts from employees, manage travel expenses, or reimburse people for costs. Creating a system for submissions and reimbursements helps make sure you don’t miss a transaction and that records stay up-to-date and accurate.
Use bookkeeping services to improve processes
Good bookkeeping or accounting software should be in your kit of small business accounting tools. With the rise in virtual bookkeeping and other types of online bookkeeping services, small business owners need to keep up with the latest technology.
With good bookkeeping services or software, you can streamline data entry, create detailed financial reports, consolidate data, and automate record-keeping. It’s also an easy way to improve accuracy across your business and eliminate time spent doing repetitive tasks.
How to make record keeping easier?
Keep receipts electronic
Take your receipts out of the shoebox at the top of your cupboard and make them digital. The ATO is completely fine with digital receipts, as long as they are clear copies of the original receipt. Electronic records also hold a lot of clear advantages. You can easily produce invoices, summaries and reports for GST and income tax purposes just by searching through a digital file. If you have an efficient naming scheme, things get even easier to find just by utilizing the search function built into all computers. Taking advantage of cloud storage could also save you if there is a fire or theft, keeping all your records safe in secure servers across the world.
Create a file plan
Creating a file plan will make it incredibly easy to store records in the future and when accessing them down the road. In contrast, it may seem like the most boring thing in the world (filing! Who wants to do that!) it could have a positive effect on your entire record-keeping process. Make sure you have an efficient naming scheme too; this will help when you search through your records later.
Keep personal expenses separate from business expenses
This seems like a no brainer, but the temptation is strong. Buying personal items on your business’ accounts is easy to be tempted into doing, but you must resist. Not only is this a bad habit to get into, but it also becomes a big headache at tax time. Now you need to sort through all your personal expenses too, separating them from your business expenses. This will also slow down your record keeping as you sift through your expenses, separating business from personal. For the sake of keeping things simple, keep your personal and business expenses separate.
Start a new file after each year
A simple tip that can save a whole lot of time, starting a new file each year can make your records incredibly easy to sift through. When you begin a new year, create a new file and put all your records for that year within it. It will also make it easier for you to delete records that you no longer need to keep, such as if the 5 year keep period has expired.
Use accounting software
Using excel spreadsheets is a big step up from pen and paper record keeping but wait until you use good accounting software. These applications allow you to easily automate some of your record-keeping speeding up the whole process. You will be able to automatically tally expenses and income, and provide ready-made reports with all without having to fiddle around with excel formulas. The downsides to these types of software are that it may be too advanced to use out of the box. If you need help, try hiring an accountant. They are experts at accounting software like Xero and can help you understand how to use it.
Record keeping tips for small business owners
The Australian Securities & Investments Commission (ASIC) defines “financial records” as including invoices, receipts, cheques, working papers and other documents needed to explain the methods by which a company’s financial reports are prepared.
ASIC requires companies to keep the above-mentioned financial records for seven years1, which can be easier said than done if you don’t have the systems and processes in place to organize and manage your documents.
Five steps tips you need to know for records management compliance
Know what records you have to keep
As well as financial records, business owners also need to keep legal records, employee records, policy and procedures records, to name a few. Make sure you’re keeping what you have to keep, and throwing away what you don’t.
Understand the lifecycle of records
Every record in a business typically goes through a number of stages: creation, access, classification, modification, archive, back-up, and disposal. Understanding this lifecycle will help you build business processes and policies for best practice records management.
Use free government services
Various government departments, such as the ATO and the Department of Industry, Innovation and Science, offer free online tools to support small business owners on records management compliance. A good place to start is the ATO’s record-keeping evaluation tool.
Keep track of your procedures
Note down the procedures you use for filing your records. This will help formalize your processes and is important because as your business grows, you may need to delegate record-keeping to a third party.
Seek an information management professional
Small business owners don’t have to go it alone on records management. Find an information management expert that can partner with you to take the pain out of records management.
Embrace digital for records management
Many businesses are trading their filing cabinets and manila folders for solutions that allow them to store, access and manage their records in digital format.
Businesses are able to store their records electronically, so long as they are:
- a true and clear copy of the original;
- kept for five years; and
- able to be reviewed by the ATO at any time.
The records must also be on a computer or device that:
- you have access to (including all passwords);
- is backed up in case of computer failure; and
- allows you to control the information that is processed, entered and sent.
How long should your records be kept?
Your tax records should be kept for a minimum of 5 years. This is a legal requirement by the ATO, but it is also useful for your business. It means that any potential disputes with clients about previous work could be resolved with these records. Plus, your business can use those records for future planning, helping generate a data-backed projection of your future.
- Keep tax-related records for 5 years after they are prepared, obtained – or the transaction is completed, whichever occurs latest.
- Keep financial records for 7 years. For example, paperwork for financial statements, these may be needed in case of an audit or the sale of the business.
- Keep employment records for 7 years. To comply with Fair Work regulations, you need to keep payslips, hours worked, employment status, superannuation payments, and leave balances.
- After the disposal of a business property or stock, keep purchase/lease agreements, brokerage statements and sales documents for 7 years.
- Other records should be kept indefinitely, such as
- Receipts for large purchases: Keep these with your insurance documents in case you need proof of purchase in the future. For example: if damage occurs to the item and you need to make an insurance claim.
- Property and investment-related records: Keep all receipts and records of improvements and related expenses incurred if you renovated your business premises as it may affect your capital gains tax.
How to master small business bookkeeping
Understanding and tracking your financial data is an essential part of small business finance. That’s why, when you’re running a business, it’s something you either have to learn from bookkeeping classes or outsource.
Luckily, not only is it possible to learn how to manage your books, there are a few notable benefits to tackling it yourself.
If you’re new to keeping track of your accounts and can’t afford to pay a bookkeeping company or self-employed bookkeeper, you can still learn the basics and manage things on your own. Here’s a look specifically at e-commerce bookkeeping from a daily, monthly, quarterly, and yearly perspective.