You are really busy! You spend so much time working on your business that you don’t really have time to keep track of your finances. Why do you even need to bother with this every month? Can’t you just wait until the end of the year and throw a shoe box full of receipts and paper at your accountant and let them just put together the tax return?
There are some advantages to keeping records and using those records to keep track of your finances. Let’s take a look at a few of them.
The first reason is to track revenue. You want to know where your money is coming from. Who are your best clients? What is your best selling product or service? By keeping track of your revenue, you can determine which clients are bringing in the most money, and what offerings are the most popular. With this information, you can determine if a client is worth keeping (by comparing what they pay you to the headaches they may cause you), or if you want to focus on a certain product or service that is bringing in more money.
Second, as you track the money coming in, you also want to be aware of the money going out. By knowing where the money is going, you can analyze your spending and see if what you are spending the money on is bringing in the business you had hoped. Is that new ad campaign bringing in the customers? Is that new transcription service really saving you that much time? Once you look at it in this light, you can determine where your spending habits need to change.
An additional benefit to tracking your expenses is that it will show you if there is someone in your organization who is spending too much, or for things they should have spent money on. Is that new sales rep spending too much money taking potential clients out to expensive dinners? Is your assistant stockpiling office supplies for the zombie revolution? Keeping an eye on what gets spent will make sure you keep more of the money you have earned.
Third, record keeping will allow you to prepare financial statements and tax returns. Preparing financial statements give you an accurate view of your business and how it is doing. Additionally, you may need to have a set of financial statements available to give to your bank, creditors, or even potential customers. Customers may want to look at your financials to make sure you will be in business to fulfill a long-term contract. In addition, by having financial statements, you can readily see if things are getting better or worse for your business, and what changes need to be made.
Keeping good records helps in preparing tax returns in that you will be able to prepare an accurate return to send to the government. In addition, you will have support for the amounts you claimed on the return in case your return is selected for an audit. It makes things much easier if you are able to provide support for an amount on your return.
If you have any questions, shoot them to me at email@example.com, and I would be happy to answer them. If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.
Circular 230 Disclosure: To ensure compliance with requirements imposed by the United States Treasury Department, you are hereby informed that the tax advice contained in this blog post is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local law provisions, or (ii) promoting, marketing, or recommending to another person any transaction or matter addressed in this communication.