Tracking Your Mileage

By Gloria Gibbs Marullo

In the excitement of starting a business, many entrepreneurstend to ignore the paperwork. Don't. "Lots of things canhappen if you don't keep the right records," says BruceGoldberg, a partner with the accounting firm of Coopers &Lybrand in Philadelphia, "and none of them are good."

The most ballyhooed reason for record-keeping is the fear of anIRS audit, where you would be asked to substantiate both yourincome and deductions. But, while less than five percent of soleproprietors are audited, poor records can still put your entirebusiness at risk.

For example, are you sure that your fastest-selling product lineis really making money? If you don't have a handle on how toprice your product, and allocate overhead costs such as rent,electricity, and the depreciation on your new computer, you mayfind out too late that you're actually losing money with everysale. And then there are credit sales. Even with correctly pricedproducts, a cash crunch could close your doors if your customerspay late--or not at all.

"Your tracking system doesn't have to be elaborate orexpensive," says Goldberg, "but you must be able to getthe management information you need, how and when you needit." At a minimum, you need to account for sales, expenses,assets and liabilities--in a word, your investment in thebusiness--and taxes. These accounts will give you the informationyou need to compile a monthly income statement and balancesheet.

Most people are familiar with the income statement that totalsyour revenue, subtracts your expenses, and tells you if you'vemade or lost money. While an income statement covers a period oftime, such as a month or a year, the balance sheet is a"snapshot" of your assets, liabilities and owner'sequity on one given day--usually the last day of the month or, fora year-end balance sheet for a calendar-year taxpayer, December31st. This is the statement your banker uses to analyze how muchmoney you have invested in the business (the capital account), thedebt you already have (what you owe to your banker), how many saleshave yet to be collected (accounts receivable), and the bills youhave yet to pay (accounts payable).

You can't wait a month, however, to find out if your salesare on track. You should be able to retrieve, within minutes, yourbank balance and cash on hand, that day's sales and cashreceipts, accounts receivable, all monies paid out by cash orcheck, and accounts payable.

If you have employees, you will also need access to weeklypayroll records with the name and address of each employee, theirsocial security number, the number of exemptions, the date the payperiod ends, hours worked, the rate of pay, total wages,deductions, net pay and check number. You also need a weeklyaccounting of the income tax withholding and FICA taxes due to thefederal and state governments.

On a monthly basis, your record-keeping system should also letyou reconcile your bank statement to the cash account in yourgeneral ledger, reconcile your petty cash account, and producestatements showing costs and income attributable to each product orproduct line. Ideally, your system will also track, at leastmonthly, the "age" of your accounts receivable. Anyreceivable over 30 days old is a potential problem. Receivablesthat hit the 60- and 90-day marks should make both you and yourbanker nervous. If your inventory isn't moving--or you'reconstantly out of stock--you probably need a monthly inventoryreport. Your monthly income tax withholding and FICA reports shouldbe tied to your weekly payroll reports.

You'll need quarterly reports showing gross sales andtaxable income, and state and local sales taxes on gross receipts.At year's end, you'll need to create summary reports thatitemize all information for your annual income statement andbalance sheet, as well as for your federal and state income taxreturns.

You can't run a business without records, says Dan Smogor, apartner with Kruggel Lawton Co. in South Bend, Indiana, butdon't get lost in the numbers. "There's nothing wrongwith paper-and-pencil records until you get up to speed," hesays. "Eventually, you will want to use a computer. Just makesure you understand what you are doing before you automate yourrecord-keeping."

In addition to your handwritten ledgers and computer reports,you need to keep original invoices documenting expenses paid, aswell as copies of the invoices you send to customers. You also needto keep your bank statements, employee payroll records, andinventory records. Assets such as computers and office furnitureshould have a permanent file showing the cost of the assets and adepreciation schedule.

As long as you're doing everything right, open a separatechecking account for your business; life--and record-keeping--willbe simpler if you keep your business and personal accountsseparate. The same holds true for telephone and gas credit cardaccounts used exclusively for business.

Accurate records are just the first step. You also need todevelop a comfort level on how you--and your banker, attorney andaccountant--will use your accounting records. Jenai Lane, presidentof Respect Inc., a designer of jewelry and accessories in SanFrancisco, recommends that start-up business owners take a formalcourse in the basics of financial statements. "When my bankerfirst asked for my debt-to-net worth ratio," says Lane,"I thought she was speaking in a foreign language."

There is always, of course, the temptation to put everything ina shoebox and "let the accountant do it." Just remember,this business belongs to you, not the accountant.