Banks are in the business of lending money after all and if your business can demonstrate a proven track record in the industry and cash flow is strong, they’re likely to offer loans based on what your business is capable of repaying versus what you actually need. It’s a tempting proposition for many business owners, especially those who only have a vague idea of their true financial assets.

Understanding your finances down to the penny can help you avoid borrowing any more money than you need to, thus reducing the amount of profit you’ll use to pay interest on the loan. How much you actually need to borrow is often less than how much you can reasonably afford to borrow—use your financial record to help you, not the bank, determine what’s smartest for your business.

Making Better Decisions
If you’re in the habit of reviewing your business’ records on a regular or even semi-regular basis, you’ll arm yourself with the knowledge to make better business decisions overall. This is especially true if your business experiences seasonal peaks that increase inventory and staffing needs. Not only will you know how much product to bring in and how much you need to pay for it, you’ll also reduce the risk of understaffing and potentially compromising customer service, or overstaffing and losing money or having to manage employee terminations.

Personal Gain
Lastly, your business records may do more than help you file your taxes—they may save you money. Track tax deductible items throughout the year so they’re not lost or forgotten when it’s time to file. According to the IRS Web site, many small business owners shortchange themselves by not keeping tabs on the majority of tax-deductible expenses. Good record keeping practices will also let you track non-taxable or tax deferred income, like disaster relief payments or SEP IRA contributions.

What to Keep
Ultimately, you’ll learn from experiencing what kind of record keeping system works best for you. When you’re setting up a record keeping system for the first time however, you may want to consider organizing records by function or purpose. Below is a partial list of records you’ll want to consider keeping:

• Financial statements. Balance sheets, profit and loss statements, cash flow statements, income statements, and retained earnings.
• Employee Payroll. Number of employees over time, person hours required to run your business for a given period of time, salaries, benefits and payroll taxes.
• Sales and inventory. Quantities of each item, overall sales volume and average length of sales for each product or product line.
• Receipts. File all your business purchase receipts in a manner that works for you—a designated file box, file cabinet, accordion folders, even a shoebox.Better yet, purchase a receipt scanner and store them electronically.
• Contracts and legal documents. Leases, incorporation or DBA papers, applicable permits, loan documents and client and vendor contracts.