Common Business Questions

What do I need to know about business recordkeeping systems?

BY JANET HARTE Washington State University Small Business Development Center

Q: I need more cash in my business but my banker won't loan it to me because, besides my check book, I don't have a very good recordkeeping system. What do I need?

A: While your checking account is the most basic way to track deposits and disbursements, it is only one component of a recordkeeping system. There are five parts to an accounting system: revenue, expenses, assets, liabilities and owner's equity. Accounting records help you compare performance, manage cash and predict profits, track receivables and payables, and set goals. You must have a system that gives you instant access, is timely and is accurate, consistent, and complete.

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Q: What are some elements of a good recordkeeping system?

A: Whatever system you choose should be based on your type of business. Consult your Certified Public Accountant to set up a chart of accounts appropriate for your business. Most businesses need a checking account, record of sales, record of cash received and a cash disbursements journal for recording expenses. If you have employees, you will need to track hours worked, deductions and withholding, and all taxes.

If you don't have a 100 percent cash business, you will need to record and track accounts receivable and accounts payable.

Q: A complete recordkeeping system will help me track revenue and expenses and give me information about cash flow. What else does it do?

A: A good recordkeeping system will help you gain a complete understanding of your financial health so you can make decisions that reduce risk, realize higher profits and maximize cash flow. If your revenue is greater than your expenses, you will make a profit.

However, profits and cash are two different things. Cash appears as an asset on your balance sheet - some of which is converted into inventory, accounts receivable and equipment and other assets. Your cash account lets you know how much money you have to pay bills immediately. Accounts receivable is what others owe you for past sales. Inventory is an asset that is reduced when items are sold. Equipment is essential to production.

All of these assets fuel sales. On the other side of the balance sheet are the sources of cash used for assets. Unless you use all your own money, you will borrow cash by using lines of credit, credit cards, suppliers and other debt. The difference between your investment in assets and your total liabilities is owner's equity.

This amount represents that portion of the business that you truly own. The profit that results from revenue (minus expenses) can be used to add or change assets, reduce liabilities or disburse the profits to owners. It is your ability to efficiently manage all of the items on the balance sheet that impact profits and cash.

Q: What method of recordkeeping should I use?

A: Your CPA also will have recommendations on the method of recording entries. Depending on your business, the CPA will recommend programs that are most accommodating and user-friendly.

It helps when your CPA has specialized expertise in the method you plan to use. Special purpose recordkeeping, like point of sale systems, are often recommended for the scope and depth of information they provide.

Janet Harte is the Washington State University/Small Business Development Center certified business adviser and center director for Clark and Skamania counties. She can be reached at 360-260-6372, jharte@vancouver.wsu.edu or www.wsbdc.org.