Tax and Bookkeeping Tips

No matter what kind of business you operate, keeping financial records is probably not what you do best. You would probably rather spend your time selling your product or service. However, if you are going to run a successful business, accurate and timely financial information is a must.

Here are some of the reasons why you need a good recordkeeping system.

1 - Monitoring the success or failure of your business: It is hard to know how a business is doing without a clear financial picture. Are they making money? Are sales increasing? Are expenditures increasing faster than sales? Which expenses are too high based on their level of sales? Does some expenditure appear to be “out of control?”

2 - Providing the information you need to make decisions: Evaluating the financial consequences should be a part of every business decision they make. Without accurate records and financial information, it may be hard for them to know the financial impact of a given course of action. Will it pay to hire another salesperson? How much will another production employee cost? Is this particular product line profitable?

3 - Obtaining bank financing: A banker will usually want to see business’s balance sheet, income statement and cash flow budget for the most current and prior years as well as projected statement showing the impact of the requested loan. A banker may even want to see some of their bookkeeping procedures and documents to verify whether they run their business in a sound and professional manner.

4 - Obtaining other sources of capital: If a business has reached the point where they need to take in a partner or if they need capital and are thinking of taking in an outside investor, partner/investor will want to become familiar with business’s financial picture. They will need to produce a list of financial information they need. Even their supplier and other creditors may ask to see certain financial record as well. Such information may be produced by their outside accountant but it is based on their day-to-day bookkeeping.

5 - Budgeting: All businesses should use a budget for planning purposes. A budget will help keep all businesses stay on track by forecasting their cash needs and helping them control their expenditures. In addition, if they are seeking bank financing or other sources of capital, a banker or prospective investor will probably want to see their budget as evidence that their business is well planned and stable. They must have solid financial information to prepare a meaningful budget.

6 - Preparing income tax return: Whether a business is a sole proprietorship, partnership or corporation, they must file an income tax return and pay income taxes. With good records, preparing an accurate tax return will be easier and they are more likely to be able to do it on time. Poor records may result in their underpaying or overpaying their taxes and filing late results in paying penalties. If their accountant prepares income tax return, poor records will certainly result in paying higher accounting fees. If their business is a partnership, not only will they have to prepare a partnership tax return but it also will pass directly to the tax return of each partner.

7 - Complying with federal and state payroll taxes:  If your business has employees, they must be aware of the rules and regulations relating to payroll taxes. Payroll tax deposits must be made according to strict deadlines. Late payment of payroll taxes results in severe and unnecessary penalties. Also, they must file a payroll tax return every quarter which they must reconcile with the payroll deposits made during the quarter. Then at the end of the year, they are required to give their employees and the government W-2 forms which must agree with their quarterly payroll taxes. Sound bookkeeping practices will make compliance with all these payroll rules easy. Poor records will make it impossible.

8 - Submitting sales taxes: If a business collects sales tax from their customers, good records will make it easy for them to compute the tax due and prepare the required payments and reports.

9 - Distributing profits: If a business is a partnership, they will need good records to determine the correct amount of profits to distribute to each partner. If a business is operating as a corporation, they must determine the company profits that they will be paying out as dividends to the shareholders.

To succeed in business, one of your most important tools is financial analysis based on your business records. The importance of good records cannot be stressed enough. Accurate and timely financial records can help you answer some very important questions. How much are you making or losing money? Is your business financially sound or are there any troubles lurking ahead? Bookkeeping is the process in which all valuable financial information is gathered and recorded. Using an outside bookkeeping service may improve your financial records and minimize your expenses at the same time.

To determine how much you spend on your bookkeeping, consider the following questions: How much time have you invested doing your bookkeeping work? How much do you have to pay for accounting software and bookkeeping equipments? Are your financial records accurate and in good order? These questions may be difficult to answer but answering them may help you realize the savings that can be achieved by letting someone else handle your bookkeeping work.

Outside bookkeeping services already have the knowledge and experience to perform bookkeeping work for you. They can be able to do your bookkeeping much cheaper and more quickly than you may think. Selecting an accountant to do your bookkeeping will cost you more because their accounts tend to offer a broader range of services that you may not need. Your total monthly bookkeeping charge depends on the type of services you choose and the financial information you provide to the bookkeeping service. A copy of a neat and orderly check register as opposed to a shoe box full of cancelled checks and receipts will require less work on the part of the bookkeeper and it lowers your costs significantly. All in all, you should be able to get accurate and timely financial information from an outside bookkeeping service at a  reasonable cost.

Using an outside bookkeeping service will also reduce your tax return preparation fees since neat and orderly financial records make preparing a tax return much easier. It also means that your tax return will be completed on time and without missed deductions. Poor financial records will certainly result in your accountant charging you higher return preparation fees.