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A Quick Guide to Financial Records Small Businesses Should Keep

by BBB Staff BBB Staff | May 18, 2022 12:00:00 PM

The paperwork adds up. This is the stark reality many small business owners face when they don’t have the time, tools, or know-how to keep up with their financial records.

Unfortunately, this is also one of the reasons small businesses don’t make it. Cash flow is the top obstacle for new businesses, and for small businesses in general, 82% of them don’t survive for this same reason. When money is tight, there’s little room for error, which makes financial record-keeping critical.

Despite the real talk, these revelations are not necessarily bad news; they’re a chance for entrepreneurs to prioritize making sound decisions when it comes to finances. After all, staying accountable to yourself is a big part of embodying integrity, one of BBB’s 8 Standards of Trust. At the end of the day, tracking your financials is about keeping your word to yourself and to your community. This post provides you with insights on what financial records small businesses need to keep.

Financial records for small businesses

Despite a small business’s size, running one involves quite the accumulation of forms and files. The trick is to stay on top of them with an intense devotion to organization, especially when it comes to your financial documents.

When tax season rolls around, the last thing you want to do is have to hunt for your accounting documents. Also, these records could come in handy if you’re applying for new financing, so make sure they’re accessible, up to date, and comprehensible. This will allow you to monitor your business’s progress while you track your revenue and expenses throughout the year. The main financial records for a small business to maintain are as follows:

Balance sheet

A balance sheet is an overview of a business's financial standing. Just like a traditional scale suspending two weighted plates, there are two sides to a balance sheet. One side details a business's current assets, and the other side is a rundown of the current liabilities and investor/shareholder equity. In a nutshell, this record captures a moment in time, providing insights on what the business currently owns versus what it owes.

A balance sheet is normally prepared at the close of a reporting period, such as the end of a fiscal year. This outlines a typical breakdown of assets and liabilities:

  • Assets are divided into current and long-term assets. Current assets include cash and accounts receivable. Long-term assets include buildings, land, office equipment and machinery, and the organization's vehicles.
  • Liabilities and owner equity tabulate all obligations and debts the small business owes besides its vendors, creditors, and lenders that should be paid within the current fiscal year.

What to do with your balance sheet: Calculate the totals of each side (current assets and current liabilities). Ideally, your current assets are greater, which means you’re in good financial standing to cover your financial liabilities. These findings could also determine your business's liquidity, leverage, and rates of return.

Income statement

Also known as a profit and loss statement, an income statement summarizes your business's profit or loss for a particular timeframe.

An income statement may be prepared monthly, quarterly, or annually, and tracks your business's revenues and expenses to determine its performance over that period. Your income statement should include the following elements:

  • Sales — the total revenue generated by your small business minus any sales discounts and product returns.
  • Cost of goods or service — the expenses directly associated with manufacturing products or acquiring them from suppliers; if your business provides a service, this figure includes your employees' salaries and benefits.
  • Gross profit — net sales minus the cost of goods or services from the net sales.
  • Operational expenses — your day-to-day costs of operating the business, which can be divided into administrative, marketing and sales expenses, utilities, rent, office wages, advertising, collateral and promotions, depreciation, and overhead costs.
  • Total expenses — all expenses incurred when running your business, exclusive of any interests on interest income or taxes.
  • Net income before taxes — gross profit minus operational expenses.
  • Taxes — the amount you owe the federal, state, or local government in the form of income tax.
  • Net income — the final figure your small business earns after you pay your income taxes.

Cash flow statement

A cash flow statement documents all the money that flows in and out of your business. This illuminates whether the business is making profits or losses. Cash flow activities are divvied up into three categories: financing, investing, and operational activities.

Financing activities capture the flow of money from creditors and shareholders' equity meant for financing the small business. Cash flow on investing activities refers to the money the small business gains or loses from activities like buying or selling an asset. Operational activities are the daily expenses involved in running your operation.

An important note: A cash flow statement can be negative or positive. Negative cash flow indicates that you’re spending more than you’re earning. You could remedy this by coming up with ways to generate more revenue or cut down on operational costs. In the event of positive cash flow, you’re in healthy financial standing to expand your small business.

Final thoughts

There’s no “well, maybe” when it comes to proper bookkeeping for small businesses. These three documents are a must and could be the key to providing not only financial insights, but also accessing loans, and persuading potential investors during their decision-making process.

Lastly, if you don’t have any financial record-keeping experience, you’re in luck. This is a magical time with an abundance of tools, apps, and resources available for your bookkeeping needs.

Here are some places to start:

  • Wave, ZipBooks, or Sunrise are great options to handle your recordkeeping.
  • A handy guide of need-to-know financial terms is available here.
  • If you’re a small business and have the means to hire an accountant, do so. (BBB.org has a few trustworthy ones to recommend.)

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