Thursday, May 29, 1997

Elements of good record-keeping

By PAUL TULENKO / Scripps Howard News Service

You did everything right: market research, business plan, enough money, a great marketing plan, trained sales force, but now everything seems to be going down the tube! What happened?

The majority of small- and home-based business owners fall into the trap of putting off the bookkeeping chores till later. The reasoning seemed valid at the time: you were frantically busy trying to make the money and you just didn't have the time to spend on bookkeeping and accounting.

This attitude will get you in deep trouble, if it hasn't already. If you're there now, I suggest you hire an accounting service today and let them help you straighten out your records. You may owe the IRS for payroll taxes and taxes on profits. You may owe the state for employee withholding and sales tax, or you owe the unemployment commission in your state for your contribution ... and who knows what else. Penalties and interest on these due bills can more than offset the small cost of an accounting service.

Why else do you need records? The excuse, "I know who owes me money and to whom I owe." is not valid. You may think you know, but do you know the true cost of having someone pay you in three payments rather than one? This and similar questions can be answered just by keeping good records.

The main reason for records are to provide the financial data that helps you operate more efficiently.

Good record will increase your profits. Accurate records help you identify your business assets, liabilities, income and expense habits; compare them with other firms similar to yours, and point out the weaknesses and strengths of your operations.

In addition, good records help you stay in good stead with your banker or money lender.

These money people want current pictures of how well you are doing, and can often lend money just at critical points where needed. Swing loans, seasonal loans, expansion loans and just plain operating capital loans are all there for you ... but you have to prove your ability to repay, and that's where good records come into play. Income statements (profit and loss) and cash flow projections show how you've managed your money in the past, and predict how you will use future loans.

Finally, when tax time comes around, good records can keep you from overpaying our taxes. And mercy sakes, should you get an audit call, good records can prove your case without expensive attorneys, tax accountants and the like.

If you're still wavering, here's a list of what you will learn with good records:

-- Your income generating capabilities right now, and a projection for the future.

-- The amount of your money tied up in accounts receivable, for how long and how much you are losing daily as a result of this bottleneck.

-- How much you owe for rent, equipment, supplies, merchandise, utilities and the like, and what percentage of your income is tied up in supplying these.

-- How much cash you have available at any one time, and how much is in inventory and accounts receivable.

-- How much money you need for weekly and monthly working capital.

-- The frequency of your inventory turnover and what that costs you.

-- Which products or services are making the most money based on their cost to produce and which products or services you should consider terminating.

-- How your financial data compares with your competition.

-- How much gross profit you generate, then how much turns into net profit.

-- How you did last quarter, and how that compares with the previous quarter or last year at this same time.

OK, you agree you need help. Now how do you go about finding the right person?

The best answer is to look for someone in your community that has been doing this kind of work for a number of years, someone that keeps up with the tax laws and who will act as a financial advisor when you need it and, finally, a person who will take the time to explain all the ratios, comparisons and ins and outs of your business in language you can understand so you can make intelligent decisions.

Ask for referrals from your banker, your attorney, persons in your professional organization or one of your suppliers. If one name keeps coming up, that's your cue to call for a visit.