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How To Avoid Financial Distress By Keeping Good Records

No entrepreneur likes the administrative side of running a business. And you may claim you don’t have the time to do it. Or you say that keeping accurate financial records is difficult. 

But here’s the truth: Every successful business keeps good financial records.

To avoid financial distress (or disaster), you’ll need to appreciate the benefits of good financial record-keeping.

What Are the Benefits of Good Financial Record Keeping?

Good financial record keeping is immensely beneficial to any business – from not paying the IRS a dime more than you should to accurately estimating your net profit.

Benefit #1: Good Financial Record-Keeping Helps You Know Your Company’s Financial Health 

Imagine you’re running an online retail business that sells men’s designer footwear. Perhaps brands such as Gucci, Prada, and Alexander McQueen. But there’s a problem. You can’t figure out how much profit you make.

Known as the bottom line, net income is among the most crucial financial metrics. 

Without knowing this number, you may be:

● purchasing big batches of inventory when you shouldn’t

● hiring new salespeople when you should be downsizing

● mispricing your product

● unknowingly paying an incorrect amount to the IRS

The truth is that misjudging the financial health of your business is often a result of maintaining poor financial records.

Knowing the financial health of your business enables you to make well-informed decisions.

Benefit #2: Good Financial Record Keeping Can Help Cut Costs and Improve Efficiency

Suppose you’re reselling items on Amazon (or another marketplace). But because of poor record keeping, you haven’t turned a profit in six months.

What’s causing your business to stall? Perhaps you aren’t keeping track of your inventory or recording the costs to process returned items. Or you’re not factoring in the cost of your shipping supplies. 

Therefore, you may be selling that name-brand sneaker for 10% more than you paid, but that 10% doesn’t cover the cost of shipping or shipping materials. But you keep buying the same shipping supplies without realizing you need to find cheaper options or raise your selling price slightly.

All of this is because of poor record keeping.

But with good record keeping, all your operating costs will be captured.

And when you’re analyzing your financial records line by line, you’ll discover your shipping costs are 12% of your selling price, and that’s why you’re not making money. 

Good financial record-keeping will help you cut costs and improve efficiency.

Benefit #3: Good Financial Record Keeping Ensures You Don’t Miss Tax Deductions

Imagine this. When preparing his tax return, Craig claims hefty expenses for his retail business. But there’s a problem. Some of these costs are personal expenditures. 

This happened because Craig kept all his receipts in the same envelope, regardless of whether they were personal or business.

When the IRS finds out, they may slap Craig with a large fine or penalty.

But with good financial record keeping, Craig can keep separate envelopes for business and personal expenses and stay in the good graces of the IRS. 

But there’s more. 

With sloppy financial record keeping, a business may overlook some lucrative tax deductions it’s eligible for.

Regardless of the business you’re running, saving receipts and invoices from every company purchase is crucial.  

Besides paperwork validating business expenses and tax deductions, accurate financial processes ensure you pay only the precise tax amount owed.

Benefit #4: Good Financial Record Keeping Can Help Reduce Incidences of Fraud

Here’s a scenario. A purchasing manager at a retail company creates fake invoices for products that were never delivered to the business. 

A manager approves the payment for the fake invoice. This payment goes into the personal account of the purchasing manager.

According to a 2022 survey by financial audit firm PWC, 38% of small businesses experienced fraud in the two years preceding the report’s publication. 

Here’s the troubling part. One in four of these small businesses suffered a loss exceeding $1 million.

Here are some of the typical fraudulent schemes small businesses may encounter.

●     Payroll fraud: This occurs when employees lie about their productivity or falsify expense reimbursement.

●     Skimming: This refers to the fraudulent act of pocketing sales without recording the transactions in the business books.

●     Invoice fraud: Here’s where fake invoices are used to claim payment for purchased items that were never bought.

Fortunately, with good record keeping, including sound petty cash management, incidences of fraud can be reduced or even eliminated. 

For example, invoice fraud can be reduced if you have a system that matches an invoice to the purchase order and delivery note (while ensuring workers responsible for these functions are different).

Maintaining meticulous financial records is not just a mundane administrative task but a pivotal strategy to ensure financial stability and growth.

Accurate record-keeping offers a clear snapshot of a company’s financial health, aids in optimizing costs and efficiency, ensures rightful tax deductions, and acts as a deterrent to potentially fraudulent activities. 

For businesses aiming for long-term success and sustainability, prioritizing good financial record-keeping is non-negotiable.

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