Record keeping is a tedious element to owning your own business that is so important but a pain to do. However, it must be done. Whether it be for taxation or legal purposes, not having your records stored could lead you into deep trouble. Fortunately, there are some great methods that make the whole process simpler, and once utilised will speed up the whole process.
Some small business may have not begun proper record keeping and see little point in it at this stage. But there are quite a few reasons any business should start record keeping as soon as possible.
Why you should keep records?
If you did not do any record keeping, come tax time, you could be throwing money down the drain. When tax time comes knocking having all records of your expenses will help you take advantage of every deduction or tax credit that you are entitled to. Businesses who have not kept any records will either be forced to receive no benefits or may try to make an estimate as to what tax returns they can receive. This is dangerous as they could overestimate and get audited by the ATO.
Audits are another reason to have thorough record keeping practices in place. If the ATO questions a credit or deduction you will be able to present documentation to back up your case. If you can’t back it up, you can say goodbye to those extra returns and perhaps be forced to pay more in tax. Record keeping will help stop your business from being caught out by the ATO if it believes you’ve overstepped on your tax returns.
What should you keep?
This is the first hurdle most small business owners stumble at. It’s overwhelming knowing the sheer number of different invoices, receipts and other nitty gritty documents you receive or send out each day. Some seem obvious to keep, others not so. The trouble is that some of those seemingly unimportant documents could save you if the ATO comes knocking. These are the records you should look at keeping:
1. Client files – Client files are useful beyond tax time. Obviously being able to easily see invoices to a client and any expenses required in completing the job is extremely useful. It can help inform any future assignments with your clients saving you time. Client files are also great for storing other useful information like client preferences for any future projects.
2. Contracts – Contracts are a must have for small businesses. Not only do they spell out what is expected from both your business and the client they make it easier to file a lawsuit should the client not uphold their end of the deal. Keep these on record to save your business any future headaches from difficult clients.
3. Purchase orders – Anything your business purchases should be recorded, preferably by saving the receipts. Come tax time these receipts will be useful in helping improve your tax return. Plus, if anything goes wrong with the product you have proof of purchase for warranties or returns.
4. Emails – Any communication within the business or to clients should be kept. If any clients or staff cause trouble in the future these records may come in handy. While not entirely helpful for maximising your tax returns, these records could save you in a lawsuit if the case requires.
5. Employment applications – Retaining any applications and contracts surrounding employment is important. Having this information available to call upon is useful if a situation arises, good or bad, with the employee. Payslips should also be stored as this could come in handy come tax time or in any pay disputes.
6. Accounting and tax records – All other expenses, travel logs, invoices and past tax filings should be kept. This will all be useful come tax time to help determine what deductions, returns and tax credits you are entitled to.
How long should your records be kept?
Your tax records should be kept for a minimum of 5 years. This is a legal requirement by the ATO, but it is also useful for your business. It means that any potential disputes with clients about previous work could be resolved with these records. Plus, your business can use those records for future planning, helping generate a data backed projection of your future.
How to make record keeping easier?
1. Keep receipts electronic
Take your receipts out of the shoebox at the top of your cupboard and make them digital. The ATO is completely fine with digital receipts, as long as they are clear copies of the original receipt. Electronic records also hold a lot of clear advantages. You can easily produce invoices, summaries and reports for GST and income tax purposes just by searching through a digital file. If you have an efficient naming scheme, things get even easier to find just by utilising the search function built into all computers. Taking advantage of cloud storage could also save you if there is a fire or theft, keeping all your records safe in secure servers across the world.
2. Create a file plan
Creating a file plan will make it incredibly easy to store records in the future and when accessing them down the road. While it may seem like the most boring thing in the world (filing! Who wants to do that!) it could have a positive effect on your entire record keeping process. Make sure you have an efficient naming scheme too; this will help when you search through your records later.
3. Keep personal expenses separate from business expenses
This seems like a no brainer, but temptation is strong. Buying personal items on your business’ accounts is easy to be tempted into doing, but you must resist. Not only is this a bad habit to get into, it becomes a big headache at tax time. Now you need to sort through all your personal expenses too, separating them from your business expenses. This will also slow down your record keeping as you sift through your expenses, separating business from personal. For the sake of keeping things simple just keep your personal and business expenses separate.
4. Start a new file after each year
A simple tip that can save a whole lot of time, starting a new file each year can make your records incredibly easy to sift through. When you begin a new year create a new file and put all your records for that year within it. It will also make it easier for you to delete records that you no longer need to keep, such as if the 5 year keep period has expired.
5. Use accounting software
Using excel spreadsheets is a big step up from pen and paper record keeping but just wait until you use a good accounting software. These applications allow you to easily automate some of your record keeping speeding up the whole process. You will be able to automatically tally expenses and income, and provide ready-made reports all without having to fiddle around with excel formulas. The downsides to these types of software is that it may be too advanced to use out of the box. If you need help, try hiring an accountant. They are experts at accounting software like Xero and can help you understand how to use it.
Record keeping does not have to be something you dread doing. It is incredibly important to your business both from a legal standpoint and management stand point. The benefits of a solid record keeping plan outweigh the costs, especially because those costs could cripple your business. Fortunately, there are some great tips to help you keep your records easily and efficiently. If you need any more advice on record keeping contact an accountant. What other record keeping tips do you have?
Contact Link Advisors today if you need any record keeping assistance!