Every business is different, but they all have one thing in common. Achieving success can only happen by getting control over and understanding business finances. Making informed financial decisions requires planning, tracking, assessing results, and adjusting as needed.
Tracking business income, expenses, receivables, and commitments may be the most important financial management activity. Why? Because information tracking provides the historical record needed to see what is really coming in and how much it really costs to run the business. Collecting and documenting financial information is the only way to examine and understand it.
So, how do you track your business financial activity? Follow these three steps:
Maintain a Record of all Financial Activity
The IRS does not specify a particular system or format for financial records. The only requirement is that financial records are accurate, complete, and provide enough detail to identify the business purpose of each item. Using QuickBooks or another accounting application is an option, but using a spreadsheet can work, too. Expenses should be tracked by categories, such as rent and advertising, so you know where your funds are going.
Organize Source Documents Using a Logical Filing System
No matter what format you use to record your income and expenses, it’s important to keep support documents that capture the five information elements that are required by the IRS – when, what, who, how much, and why. In other words, capture the date, item description, payee/payer, dollar amount, and business purpose. Documenting all five of those elements will substantiate the business income and deductible expense.
Keep a Running Total of Your Financial Position
Seeing the financial status of your business at a glance is immensely powerful. That power comes from complete and accurate tracking of all financial activity and keeping running totals. QuickBooks or a bookkeeper can provide that information in the form of financial statements at any time. Spreadsheet users can achieve the same goal by keeping up-to-date totals for income, expenses, receivables, and commitments and examining the bottom lines.
Tracking financial information provides the historical record needed to see what is really going on with your business. Keeping up-to-date financial records and examining the bottom line is the only way to make informed financial decisions to achieve success. Taking these three steps will give you a powerful tool to make informed financial decisions and satisfy the IRS, too.