Importance Of Record Keeping
Whether large or small it is crucial that any business establish and maintain a consistent method of accounting and bookkeeping. Consistent and accurate records allow the owner, investors, lenders, or consultants to quickly analyze the health and progress of a business and gives them the information necessary to make proper business decisions.
Objective Business Monitoring. Proper records objectively identify sources of profit and high margin activities as well as help show areas of a business that need improvement, are draining capital, or are creating losses. Proper records can also form the foundation for determining which portions of a business to expand and which ones are not as critical. Even though most business managers and owners feel they "know" what is creating profits and causing losses, it is only with proper record keeping that their instinct can be objectively confirmed. Many businesses have failed because what was thought to be profitable, was not. Whereas many have succeeded using proper "books" to identify and expand profitable activities and discontinue those that were responsible for losses.
Acquiring Capital. Many businesses, no matter how successful, have times when they need additional operating or investment capital. Without proper accounting and bookkeeping, finding that capital will be impossible. No bank, angel investor, or venture capitalist will lend to a business that does not have proper, consistent, and accurate bookkeeping. These proper records not only quantify the need for capital, they also allow the lender to understand the business and feel confident that with their capital the business will produce enough income for repayment.
Taxes. The final reason for having an established method of accounting is that the IRS requires it. The IRS requires all income, expenses, and deductions to be accurately tracked, recorded, and documented before they can be included on a tax return. Without a proper bookkeeping system a business cannot justify any of the numbers they place on a tax return and therefore cannot know if their return is accurate or simply a "best guess". With proper records most businesses will pay less in taxes because they will be able to use documented deductions and tax credits that they would not be able to include on a return without proper records.
Proper record keeping for any business is critical to ongoing successful operations. Whether as a way to make informed business decisions, to raise capital, or save on taxes and avoid IRS audits, every business should have and established method of bookkeeping and system of accounting.
This article is for general information only. In accordance with IRS Circular 230 the above are not considered tax opinions for purposes of relying on such statements in any challenge of the reporting of the above transaction by the IRS. If a full tax opinion is required certain procedures must be met . Also there is a significant cost for a full tax opinion to meet the requirements of Circular 230.
12/15/2011
