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3 Basic Financials Documents a Small Business Must Have & Why Record Keeping is Important

Are you a small business owner struggling to keep your finances in order? Are you curious about the key financial documents that can keep your business in good health? Don't worry; you're not alone.

Many entrepreneurs neglect the importance of financial record-keeping until tax season arrives. But let me tell you a secret, maintaining proper financial records can be the key to your business's success.

As a small business owner, you're used to wearing many hats - from marketing to operations to customer service. However, there's one important aspect that you simply cannot ignore - your finances.

Keeping a close eye on your business's finances is vital to ensure its success in the long run.

But where do you start?

In this article, we'll explore the three basic financial documents that every small business must have.

By maintaining these documents, you'll clearly understand your business's financial standing and be well-equipped to make informed decisions that will benefit your bottom line.

Why is Record Keeping Important?

The benefits of keeping good financial records are numerous and can positively impact your business's success. By maintaining accurate records, you can:

  • Keeping good financial records is not just a tax requirement; it's also a key factor in the success and growth of your business. By maintaining accurate records, you can take advantage of all the tax deductions available to you, ensuring that you don't miss out on any savings.

  • Not only do good records help with taxes, but they also provide valuable insight into the financial health of your business. Without accurate records, you may not know whether your business is profitable or not. You may be making sales, but you could lose money if your expenses exceed your revenue.

  • Maintaining good records also helps you to grow your business. For example, if you want to expand and need to borrow money, lenders will require specific records, such as a profit and loss statement and balance sheet. These documents can easily be generated from your accounting records, making the process much smoother.

  • Additionally, good records help with forecasting, allowing you to plan for the future and create a budget that is realistic and achievable.

Maintaining good financial records is essential for any business looking to succeed and grow. Don't let poor record-keeping hold you back from achieving your goals.

3 Basic Financial Documents

Understanding your finances in business is crucial to your success. It all begins with the Big Three Financial Statements, which provide you with a complete picture of your business's financial health.

Let's take a closer look at each statement.

  1. Balance Sheet

When it comes to assessing the financial health of your business, nothing beats the balance sheet. This two-sided chart provides a comprehensive picture of your business's assets, liabilities, and equity at a specific moment in time.

On one side, you'll find the value of what you own and who owes you, while the other side lists what you owe and any owner equity. It's crucial that both sides add up to the same amount, which accountants live by!

To make sure everything is in order, accountants use a simple equation. For corporations, the formula looks like this:

Assets = Liabilities + Shareholder's Equity

For sole proprietors and partnerships, it looks like this:

Assets = Liabilities + Owner's Equity

If you're serious about running a successful business, it's essential to understand and regularly review your balance sheet.

  1. Profit & Loss Statement

The profit and loss statement, also known as the income statement, is where you'll find a breakdown of your revenue, costs, and expenses over a specific period. This powerful statement is your best tool for evaluating your bottom line, or net income, which lenders and investors use to determine whether your business is profitable.

Net income is also the basis for calculating your business's taxable income yearly. It's important to note that whether you use cash or accrual accounting can impact the figures reported on your P&L.

With cash accounting, revenue is only recognized when money changes hands, while accrual accounting recognizes income and expenses as they're earned in real-time.

Understanding your P&L is crucial for making informed decisions about your business's financial health.

  1. Cash Flow Statement

The cash flow statement is where you'll find a detailed breakdown of all the money flowing in and out of your business over a specific period.

This statement takes your business's net income (from the P&L) and considers any non-cash transactions from operations, investing, or financing activities to give you a clear picture of your business's cash position during that time.

This means that even if your P&L shows a net income loss, your cash flow statement could still show a net increase in cash for that period, depending on your business's activities.

Your cash flow statement provides valuable insights into how your business operates, where it's making money, and where you're spending it.

It accounts for three types of activities:

  1. Operations (including accounts receivable, accounts payable, and inventory)

  2. Investing (long-term changes to equipment, acquiring or selling assets)

  3. Financing (acquiring debts, repaying loans, etc.)

All of which affect the amount of cash in your business's bank account.

It is important to stay informed about your cash flow statements as investors closely monitor them. Therefore, staying up-to-date with your cash flow statements is crucial.

Keeping track of these documents can help you make informed decisions about your business and impress potential investors. So, let's get excited about keeping our finances in check!

How to keep Good Financial Records

Keeping good records for your business is crucial for success. Luckily, with the availability of modern software and accounting solutions, it's now easier and more affordable than ever to maintain complete records.

By recording your income and expenses regularly, you can develop good record-keeping habits and stay on top of your finances.

But accounting records are not the only ones you need to maintain. Here are some other types of records that you should keep:

  • Employee Information: If you have employees, you need to maintain hiring information, rates of pay, salary history, performance reviews, disciplinary actions, and your employee handbook. Time cards, copies of W-2s, and Forms I-9 are also essential.

  • Tax Information: Keep copies of returns and supporting documents for at least three years. This includes receipts, invoices, logs for business driving, and substantiation for charitable contributions. If you engage independent contractors, keep copies of Form 1099-NEC.

  • Business Information: Certain business records should be kept indefinitely, such as DBA certificates, partnership agreements, LLC operating agreements, and minutes of annual board meetings for incorporated businesses.

By maintaining these records, you can take advantage of every tax break you're entitled to, stay compliant with the law, and have a clear understanding of how your business is performing.

With the convenience of cloud storage, you can keep data indefinitely and ensure that you're always prepared for whatever the future holds. Don't let poor record-keeping hold you back from achieving success in your business.

Power of Financial Documents for Business Owners

Have you ever wondered how financially-savvy business owners make smart decisions? The secret lies in understanding these three essential financial statements: the income statement, balance sheet, and cash flow statement.

These reports may seem overwhelming at first, but they provide crucial information about the financial health of your business. By immersing yourself in the accounting of your business and mastering these reports, you can gain valuable insights into how money flows in and out of your business.

This knowledge allows you to ask the right questions and make informed decisions as a primary decision-maker. So, get ready to take charge of your business's financial future by becoming a smarter, data-driven business owner!

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