Use Accounting Records to Track Fixed and Variable Costs
Now you are ready to set up your financial records. Keeping accurate records of the money flowing in and out of your business will be critical to success. The systematic recording, reporting, and analysis of the financial transactions of a business are called accounting. It is the primary language businesspeople use to communicate. When you talk to an investor or a supplier about your business, you will need to use accounting terms. He or she will want to see the financial statements for your business in standardized formats that describe its performance at a glance.
Before you can create financial statements, however, you must be able to keep track of your daily business transactions. If you develop record keeping into a habit, you will be well ahead of many business people who get careless when it comes to keeping good records consistently.
Three Reasons to Keep Good Records Every Day: Accurate financial records will:
1. Show you how to make the business more profitable: Perhaps your profits are down this month over last. Did your expenses go up? Maybe you need to try lowering your costs. Did your sales drop? Maybe you are not spending enough on advertising. Use accurate records as a base to constantly improve your business.
2. Document profitability and cash position: If you want people to invest in your business, documenting that it is profitable, or could be, is essential. Keep accurate records to create financial statements and ratios.
3. Prove that payments have been made: Accurate, up-to-date records help prevent arguments, because they prove you have paid a bill or that a customer has paid you. Records can also prove that you have paid your taxes—the fee levied (charged) by a government on the income or activity of an individual or legal business entity (corporation). Sometimes the Internal Revenue Service, the federal agency that collects taxes, will visit a business and check its financial records in a process called an audit.
4. Take advantage of tax deductions: U.S. tax law allows business owners to deduct many expenses from their taxes. These deductions, or write-offs, are reductions in the gross amount on which taxes are calculated, and they will save you money. But you must keep receipts and record check payments to show that you actually had the expenses.