The Importance of Correct Record Keeping

When you hire a bookkeeper, one of the very first things that they will do is to ensure that you have the correct paperwork and documentation in place. Because they are dealing with the ATO and other entities on a regular basis having the correct paper trails is important.

Why bother keeping records?

Keeping accurate and up-to-date records is necessary to the success of any business. This is true for a one-man band through to an international business. A business- owner must understand that records kept will be one of the most important management tools. It should be taken seriously, even if you are doing your own books!

Some business owners invest a lot of time and effort into the running of their business. They do this but then fail to realise the importance of maintaining accurate documentation. All business owners are looking for the best return on their investment. The maintenance of good records is part of that equation. For the business to achieve success and increase profits, it is necessary for the ‘scores’ to be kept. There are business owners that do not know the “current score”. These are the ones who have failed to understand the relevance of keeping good records. The records that you use should be accurate, reliable, easy to follow, consistent, and be simple.

Good documentation is vital in meeting the financial commitments of the business. It provides information on which decisions for the future of the business are based. Generally, the business maintains records to monitor and record its normal activities. It is also necessary because of obligations under the taxation laws.

How will it help you?

Keeping clear and accurate records will contribute to the success of your business by:

  • Assisting you to prepare your financial statements quickly and accurately.
  • Provides information to allow the control of cash in the business.
  • Provides management information to base business decisions on.
  • Contributes promptly to determine the financial situation of the business at any time.
  • Saves time and effort getting figures together.
  • Keeps a good track of the costs of staff and their performance.
  • Measures the business performance. You can then compare actual success against projected success.
  • Quickly highlights areas where potential problems could arise.
  • Allows remedies to be put in place and for you to be proactive.
  • Fulfills your legal obligations for taxation law.
  • Assists you in calculating how much tax you have to pay.
  • Assists in providing information required by your bankers.
  • Provides valuable information and details for the future sale of your business.
  • Increases the chances of the business operating and achieving success.

What will your records tell you?

The following checklist will give you a list of some of the things that your records will be able to reveal:

  • The income you are generating now and how much income you can expect to generate in the future.
  • How much you owe for goods or rent or other expenses.
  • What cash you have on hand and how much cash is tied up in other things such as stock.
  • How often you reple006Eish your stock.
  • Your gross profit and your net profit.
  • How your financial situation compares with last year or with your budgets.
  • How much cash is owing to you and how long has it been outstanding.
  • What your actual expenses and overheads are in comparison to your projections?
  • Which of your products are making a profit and which are running at a loss
  • Good records will keep you on your toes and enable you to monitor every situation.

It will serve no purpose to discover in six months’ time that a particular product has been selling at a loss. Worse still that your sales are 50% less than what was in your target, or that you are owed $50,000.00 more than you thought.

After you have put together your system for recording your information, make sure you use it to help you in the business. Monitor it and protect it. Your legal responsibility under tax law is that anyone carrying on a business must keep full records to explain all transactions. These records must be kept in the English language. They must be detailed enough to allow the Tax Office to decide the correct taxable income of the company.

These records must be kept for at least five years from the date of lodgement and in a manner and place that they can be easily accessed.

If you make a claim to the Tax Office then it will be necessary to also keep receipts that show the payments and deductions made. These must show the date of receipt, name of the supplier, the amount involved, and a description of what has been bought.

For smaller expenses, of course, receipts are not necessary as long as a record is kept in the form of a diary showing the date, amount, and purpose.

All invoices generated and received must state the words “Tax Invoice” and detail the relevant ABN.

The really great news is that having an accounting package such as Xero can really help with maintaining these records. It is a piece of cloud-based software that has the user’s needs at the heart of its design.

If you would like more information about Xero and how it can benefit your business, Liz Peacock and the team at Keeping Numbers are here to help. You can contact Liz by calling 0405 801 119 or you can email her here.

Other blogs you might enjoy...