Importance of keeping accurate financial records

Why keep good financial records?

Photo courtesy of CDC Global


Here’s a ready-made article for your clients


With a new financial year starting, it’s timely to comment about the importance of keeping complete and accurate accounting records.


We know you’ve just been through your busiest time as an accountant, and you’re probably trying to forget how many of your clients came in with their records and receipts “organised” in boxes. Undoubtedly, these records, or lack thereof, held a few surprises for both parties as the tax process unfolded.


To help prevent this scene next year, we’ve created an article to highlight the importance of keeping accounting records. Here, we emphasise the benefits of maintaining complete records all year long for multiple business reasons, not just to fulfill obligations to the tax department. Feel free to pass this information on to your clients.


Keeping good financial records:


3 vital areas a watchdog should be guarding


You’ve got a successful business and you want it to keep thriving. Maybe you’ve even got plans to expand this year…


All of this is rather exciting, but how did your end of financial year go? Was it a bit stressful when you last visited your accountant and struggled a bit due to gaps in your record keeping?


We want to help you avoid making record keeping mistakes that could hurt your business or even send your dreams into liquidation. We recommend you use the following points as motivation to improve your record keeping practices:


1) Your personal liability


As a director (and/or business owner) you need to be aware of what records you should keep, how you should be keeping your records and for how long. The IRD has current information (organised in a way that’s useful!) that we recommend you review and then pass on to the person in charge of your books, if there is someone helping you.


Knowing your responsibilities and taking steps to meet them will help you ensure your business has a solid foundation for continued success. Directors have a duty, set out in the Companies Act 1993, to keep accounting records. Failing to do so could leave the directors personally liable for the company’s debts.


As a director, we know you have many business items to attend to, but we encourage you to stay informed and keep your records in good standing.


2) Your risk for default or liquidation


The only way to know if you’re business is showing early signs of financial trouble, is to keep your financial records up-to-date. There are key places to be looking and regularly maintaining records to be sure you’re business isn’t headed for default.


Debtors and creditors


If you don’t yet have an accurate debtor ledger, you could very quickly start having cash flow difficulties. If you aren’t recording creditor invoices correctly, some may fall through the cracks. Having complete records for all your debtors and creditors makes it easy to identify who owes you money and who you owe money to. Good business is about avoiding nasty surprises.


If you’re not maintaining complete records here, you’re likely delivering goods and services without timely payment. How long do you feel your business can survive if you’re not being paid? Two weeks? One month? Three months? Shouldn’t you be paid on time, every time?


There’s a great deal of good accounting software out there if you don’t have someone who can help you with managing your ledgers. Use these programs to quickly identify when debtors are behind before overdue payments become a significant problem for your business. This can get out of hand much more quickly than you might think! We’ve seen it happen too many times.


Similarly, if you aren’t fully aware of your creditor position, you run the risk of getting behind with your own debts. This is just as dangerous for your business as not being paid for what you do.


Making the right spending decisions


Without proper accounting records, spending decisions are often made without a financial basis. This translates to your bottom line in a serious way as you’ll be facing quite a few surprises about your revenue stream without a detailed picture of what’s going on in your business.


For example, you may think that a product or service should be giving you a 30% profit margin but changes over time and expenses you haven’t figured into the numbers may actually leave you with a 5% margin. What’s worse, by the time you work out the difference, it may be too late!


For the good of your business, you should know:


  • Which product lines are performing well
  • Where the business is currently investing its resources
  • Where the company should be putting energy and resources … or cutting them

3) Your business growth


Is your business doing well? Despite a hectic end-of-year finance session, are you looking forward to what this financial year brings? Are you thinking about a business loan in order to proceed with plans for expansion?


That’s excellent news but organising your records for tax season is not enough to keep your business in good standing for capital loans. While we’ve touched on some of the general areas you should be minding, we thought we would also highlight the sorts of records that need to be maintained to prove the financial position of your business when requesting loans from banks or lenders:


Key financial information you should maintain at all times:


  • Debtors (people or businesses that owe you money)
  • Creditors (people or businesses that you owe money to)
  • Sales
  • Purchasers and expenses
  • What assets are owned by the company?
  • What money is owed by the company?


Banks and lenders must ensure your business is stable before agreeing to lend money.


Without complete and accurate financial records, your odds of securing additional capital are fairly slim. You’ll likely have quite a bit of work to do to correct the state of your books, so why not save yourself headaches by improving your record keeping practices now?


Start taking steps toward a better financial future


As you can see, it pays to maintain accurate accounting records. Record keeping is not a tax season-only exercise. Record keeping is a year-round practice that will help strengthen your business’s long-term financial standing.


In liquidations, it’s often the case that companies did not have adequate accounting records. If their records had been in order, issues would have become apparent much sooner, meaning steps could have been taken to avoid the final outcome.


Before dreaming up your next business innovation, take the time to improve how you maintain your financial records.


If you ever find yourself with client who is experiencing serious financial issues that need further consideration, please contact us and ask for Simon. We’re here to help.