Why Keeping Accurate Financial Records is Important for Your Business (and How to Do It)

Why Keeping Accurate Financial Records is Important for Your Business (and How to Do It)

The biggest struggle for many small and medium businesses is record keeping. You started your own business because you are good at and passionate about what you do – but looking after the financial books and records may not come easy to you. 

It’s ok; looking after business finances does not come easily to most of us.

This article explores why keeping accurate and up-to-date records are so important for your business, and will cover some basic tips to help you get this aspect of your business under control.

Keeping on top of your records is not the most fun part of doing business 

It can feel like it takes up too much of your time, that you would rather use in other aspects of your business. But if you don’t keep on top of the record-keeping you could spend much longer trying to fix records of accounts that you let run away.

When you start looking at your books, there are a few things you should consider. The ATO sets out well what you need to start thinking about:

  • “whether you’ll manage your records yourself, or pay a registered tax or BAS agent, to manage all, or part of it for you
  • what business activities you need to do – for example 
    • reconcile electronic and cash payments
    • issue invoices and pay your own bills
    • pay wages and make superannuation guarantee payments
    • lodge activity statements and tax returns
    • prepare financial accounts, profit and loss statements and balance sheets 
  • how often you need to report.”

Why you should keep accurate and up to date financial records

You need to keep financial records for your business to show what your business earned and to prove to the government what you have paid and are required to pay in terms of:

  • Tax
  • Wages
  • Superannuation
  • Workcover

You also need to keep these records to work out how much revenue your business generated, what expenses it outlaid and whether or not the business made a profit or loss.

If you ever need to provide proof to lenders, investors, suppliers, vendors or any other third party of your business’s earning capabilities, you need records to back you up.

You can try a haphazard method of just shoving all your invoices, receipts and bank statements into a drawer and then trying to sort the mess out when you have to complete your BAS statements or your tax return. This ‘method’ is used by many small businesses, but I certainly wouldn’t recommend it.

What you need to keep records of:

  • Salary and wage records
  • Receipts for all sales and purchases
  • Tax invoices
  • All GST-related payments
  • Any records of business assets
  • Records of tax returns, fringe benefits tax, and employee superannuation contributions

Tips for how to keep accurate and up-to-date records

The ATO recommends that you follow the following tips to avoid the most common mistakes they see:

  • “Keep accurate records of all cash and electronic transactions.
  • Complete regular reconciliations of your sales (both cash and EFTPOS) and enter the amounts into your main business accounting software system. Depending on your business, this may be daily, weekly or monthly.
  • Where business expenses have both business and private use portions, work out and record the business portion accurately.
  • Ensure you have sufficient records to substantiate business expenses claimed as tax deductions.
  • Don’t use estimates to prepare your tax returns and business activity statements (BAS). Ensure you have complete and accurate records to substantiate the information you include in them.
  • Be accurate in how you use your source records to work out the amount you claim for the research and development tax offset, if this is applicable to your business.”

This is very good advice, and while it does sound like a lot, if you keep up with these steps you will be so happy with how much simpler things are at reporting time.

Try not to get overwhelmed by bookkeeping 

Set yourself a list of the tasks you need to complete and a schedule of when you need to complete them. Set time aside for bookkeeping regularly and stick to it.

There is a great table here outlining what recordkeeping tasks you should keep on top of and how often you should be doing so.

I recommend that you look into using a software system that you understand and that integrates with your bank records and also the ATO, as well as letting you input data on the move and store up-to-date information in the cloud. MYOB and Xero are two very well-known options, but there are many more you can look into as well.

One of the keys to keeping accurate and up-to-date records is to spend a little time often to keep them on track. Set some time aside in your schedule and make sure that you stick to this, to document all the amounts that have come in and gone out of your business during that time.

If you don’t do this regularly you will face a backlog of entries when you do finally get around to it, and you run the risk of losing documents and missing important figures in your records.

What if I am not compliant?

You need to keep accurate records of what is happening in your business to keep you compliant with your obligations to pay tax and look after your employees. If you are not compliant penalties can apply, and will vary depending on how serious your reporting breaches are.

Do you need a Tax Professional?

You don’t have to use a tax professional to keep your records or ensure you are reporting correctly, but it’s a good idea to consult one. And if you do use a tax professional to lodge your BAS statements and tax returns, you will still need to keep your own records in between lodgements.

If you engage a tax professional for your reporting, it would be beneficial to find out what software they use so you can use one that is compatible.

Resources that may help

There are a good series of pages here from the ATO which may help you get your head around what records you need to keep.

If you are just starting out, or you suspect you might not be on top of the records as you should be, the ATO has a handy evaluation tool to help you work out exactly what records you should be keeping for your business.

About Author

Kate Gordon

With over 20 years experience in bookkeeping across Australia and the United Kingdom, Kate Gordon brings a wealth of knowledge by working with a range of clients from various industries. Covering a portfolio from small and medium enterprises to large corporations has led her to become proficient in all areas of bookkeeping.

Related posts