THE IMPORTANCE OF GOOD RECORD KEEPING 8/96 As the owner or manager of a small business, you invest tremendous time and energy to ensure your company's success. You want the greatest possible return on your investment, and good financial records can help. Your Key to Success Is Information Think back to the steps you went through to open your business. From the start, you've done everything right. You invested a tremendous amount of time in gathering information - about your abilities, finances, market, customers and competitors. You understood why you wanted to go into business - the opportunity to be your own boss, a desire for financial independence, the free- dom to set your own course. Then you chose the business "right" for you. And, more importantly, your market research showed that your particular "business dream" was in demand. You then took all this information and developed a business plan - the same business plan that helped you get the loan you needed to open the doors. You demonstrated your business skills to the bank stating precisely how much money you needed, why you needed it, and how you were going to repay it. What Went Wrong? While it's true that success often brings success, it's equally true that success often breeds failure - particularly for a small business. That's because as a business begins to grow rapidly, the owners often work frantically to simply meet demand, minimizing the time they devote to keeping good records. If escaping paperwork was one of your reasons for starting a business, it is critical that you hire someone to perform the necessary task of keeping your financial records. Although you must pay for these services, bear in mind that solid financial advice frequently can increase your profits, more than covering the professional fees. Good records will help you answer important questions about your company's financial health. What's really happening in my business? Why is cash flow always a problem? How much is real profit anyway? If you're not exactly sure, then it's time to return to the basics - the basics of good record keeping. WHY? Simply put, a small business that fails to keep complete and accurate financial records places its long-term success and survival in grave doubt. Complete and accurate financial record keeping is crucial to your business success. Here's why: 1. Good records provide the financial data that help you operate more efficiently, thus increasing your profitability. Accurate and complete records enable you, or your accountant, to identify all your business assets, liabilities, income and expenses. That information, when compared to appropriate industry averages, helps you pinpoint both the strong and weak phases of your business operations. 2. Good records are essential for the preparation of current financial statements, such as the income statement (profit and loss) and cash-flow projection. These statements, in turn, are critical for maintaining good relations with your banker. They also present a complete picture of your total business opera- tion, which will benefit you as well. 3. Good records are critical at tax time. Poor records could cause you to underpay or overpay your taxes. In addition, good records are essential during an Internal Revenue Service audit, if you hope to answer questions accurately and to the satisfaction of the IRS. What Exactly Will the Records Tell You? The following checklist highlights the type of information your financial records should provide to assure your success: * How much income are you generating now, and how much income can you expect to generate in the future? * How much cash is tied up in accounts receivable (and thus not available to you), and for how long? * How much do you owe for merchandise? Rent? Utilities? Equipment? * What are your expenses, including payroll, payroll taxes, merchandise, advertising, equipment and facilities maintenance, and benefit plans for yourself and employees (such as health insurance, retirement, etc.)? * How much cash do you have on hand? How much cash is tied up in inventory? What is your actual working-capital budget? * How frequently do you turn over your inventory? * Which of your product lines, departments or services are making a profit, which are breaking even, and which are financial drains? * What is your gross profit? What is your net profit? * How do all of the financial data listed above compare with last year - or last quarter? How do they compare with the projections in your business plan? * How do all the financial data compare with those of your competitors? With those of the industry? While your review of this checklist may have uncovered some glaring deficiencies, it's never too late to correct problems related to poor record keeping. It may take a bit of time and effort to analyze the company checkbook, take inventory, review bank statements and, in general, catch up on your paperwork. It is essential, however, that you make the effort to determine the precise financial condition of your business. It is as critical as maintaining good customer relations. What to Look for in an Accountant Let's assume you follow the path of many successful entrepreneurs and seek professional assistance from an accountant. How do you find an accountant who is knowledgeable, capable and discreet? You should seek an individual with high ethical standards who is a respected member of the community. Due to the ever-changing complexities of tax laws and developments in accounting methods, the accountant must keep up. Look for an accountant who takes advantage of educational seminars, pro- fessional publications and other continuing-education opportuni- ties. You will probably want your accountant to assist you not only as a record keeper, but also as a consultant and financial advisor who understands your business affairs almost as well as you. Seek out an accountant with broad experience and a well-rounded education. Professional accountants are listed in telephone directories under accountants, public accountants, bookkeepers and tax preparers. Look for references or recommendations from local business associ- ates, your banker or attorney. The Basic System A basic record-keeping system, whether on paper or an off-the-shelf computer software program, should be simple to use, easy to under- stand, reliable, accurate, consistent and designed to provide information on a timely basis. It needs: * A basic journal to record transactions (receipts, disbursements, sales, purchases, etc.) * Accounts receivable records * Accounts payable records * Payroll records * Petty cash records * Inventory records An accountant can develop the entire system most suitable for your business needs and train you in maintaining these records on a regular basis. These records will form the basis of your financial statements and tax returns. Without knowing where your business is financially, you may be forced to close or sell, despite an excellent customer base. You could find yourself in this trap if - * your cash flow is desperate. * you are unable to pay creditors. * too much of your cash is tied up in old inventory and accounts receivable. Sure, owning a business places tremendous demands on your time. It's easy to let things slip. Resolve now to avoid the trap of letting the books wait until you are less busy ... or more rested ... or have time to start and finish the job all in one sitting ... or .... Make a pledge now to maintain your records and assure your success! For More Information Information is power. Make it your business to know what is available, where to get it and, most importantly, how to use it. Sources of information include: U.S. Small Business Administration * SBA District Offices * Small Business Development Centers (SBDCs) * Service Corps of Retired Executives (SCORE) * SBA OnLine (electronic bulletin board) * Business Information Centers (BICs) The SBA has offices located throughout the United States. For the one nearest you, look under "U.S. Government" in your telephone directory, or call the SBA Answer Desk at (800) 8-ASK-SBA. To send a fax to the SBA, dial (202) 205-7064. For the hearing impaired, the TDD number is (704) 344-6640. To access the agency's electronic public information services, you may call the following: SBA OnLine: electronic bulletin board - modem and computer required (800) 697-4636 (limited access) (900) 463-4636 (full access) (202) 401-9600 (D.C. metro area) Internet: using uniform resource locators (URLs) SBA Home Page: http://www.sba.gov SBA gopher: gopher://gopher.sba.gov File transfer protocol: ftp://ftp.sba.gov Telnet: telnet://sbaonline.sba.gov U.S. Business Advisor: http://www.business.gov You also may request a free copy of The Resource Directory for Small Business Management, a listing of for-sale publications and videotapes, from your local SBA office or the SBA Answer Desk. Other Sources * State economic development agencies * Chambers of commerce * Local colleges and universities * Libraries * Manufacturers and suppliers of small business products and services * Small business or industry trade associations Did you know the SBA ... * Has a portfolio guaranteeing over $27 billion in loans to 185,000 small businesses that otherwise would not have had such access to capital? * Guaranteed over 60,000 loans totaling $9.9 billion to America's small businesses in fiscal year 1995? * Last year extended management and technical assistance to nearly 1 million small businesses through its 950 Small Business Development Centers and 13,000 Service Corps of Retired Executives volunteers? * Provided more than 45,000 loans totaling $1.2 billion to disaster victims for residential, personal property, as well as business losses in fiscal year 1995? * Has 7,000 private sector lenders as partners providing their capital to small business? * Has increased its venture capital program with more private capital in the past two years than in the previous 15 years combined? * Provides loan guarantees and technical assistance to small business exporters through U.S. Export Assistance Centers in 15 cities? * Can respond to written small business questions through the U.S. Business Advisor on the Internet (http://www.business.gov)? Did you know that America's 22 million small businesses ... * Employ more than 50 percent of the private workforce, * Generate more than half of the nation's Gross Domestic Product, and * Are the principal source of new jobs? All of the SBA's programs and services are provided to the public on a nondiscriminatory basis. FS0063 (8/96) ---------- Recordkeeping in Small Business INTRODUCTION An appropriate record-keeping system can determine the survival or failure of a new business. For those already in business, good record-keeping systems can increase the chances of staying in business and the opportunity to earn larger profits. Complete records will keep you in touch with your business's operations and obligations and help you see problems before they occur. This publication explains the characteristics of and procedure for establishing a good record-keeping system. THE NEED FOR GOOD RECORDS Accounting records furnish substantial information about your volume of business, such as how present and prior volumes compare, the amount of cash versus credit sales and the level and status of accounts receivable. In addition, good accounting records help to accomplish the following tasks. Monitor Inventory While a large inventory allows goods to be delivered when they are ordered, too large an inventory represents an excess investment. If your inventory does not turn over quickly, your business may lose profits due to obsolescence, deterioration or excess investment. Any items removed from inventory for personal use should be set aside in a special account for two reasons: first, they need to be recognized separately for tax purposes and, second, including these items in business gross profit calculations can be misleading. Control Expenses Accounting records detail the amounts owed to suppliers and other creditors so that you can plan the availability of cash to meet your obligations. Such records also provide information regarding expenditures and allow you to establish controls over them. At all times, you must be aware of your individual expense requirements and how they relate to the overall picture. Fulfill Payroll Requirements Payroll is one of the largest expenses in a small business. Adequate payroll records should meet the requirements of the - Internal Revenue Service. - State department of revenue. - Local department of revenue. - Workers' compensation laws. - Wage and hour laws. - Social security requirements. - Unemployment insurance requirements. For each of these categories you are required to provide annual reports and summaries. In addition, you must provide employees with the W-2 forms needed to file federal and other income tax returns. In order to provide this detailed information, it is essential for you to maintain good accounting records. Determine Profit Margin Good accounting records will indicate a business's level of profit, and provide specific information on the profitability of certain departments or lines of goods within your business. Such analysis is important to avoid continuing product lines far beyond their profitability. In most cases, you can avoid losses if you maintain current records and analyze the information from your records on an ongoing basis. Improve Cash Flow Good accounting records provide detailed reports of cash availability, both on hand and in the bank, and of cash shortages or the diversion of cash. Since cash is your most liquid asset, you must carefully account for it. Use Supplier Discounts A cash budget will provide the business owner with a projection of the availability of cash that may be used to pay invoices as they become due. Discounts from suppliers for prompt payment can amount to substantial savings. A 2 percent discount is common if you pay the bill in full within 10 days; if not, full payment is due within 30 days. In business, this is commonly referred to as 2/10, n/30 where n = the net sum due. It means you pay 2 percent less if you pay within 10 days or you pay full price within 30 days. Take into account that this discount is cumulative. If you make timely payments for each month of the year you will gain a 24 percent benefit (2 percent 12 months). Measure Performance Finally, good business records help you measure your business's performance by comparing your actual results with the figures in your budget and those of other similar businesses. REQUIREMENTS OF A GOOD SYSTEM The following criteria are essential to a good record-keeping system: - Simplicity - Accuracy - Timeliness - Consistency - Understandability - Reliability and completeness There are several copyrighted accounting systems that can be purchased and adapted to the individual business, or you may find it is better to use a system specifically designed for your business and one that meets the above-mentioned criteria. Commercial Record-Keeping Systems Record-keeping systems are currently available from various sources in the marketplace: stationery stores, publishers and business advisory services. These systems either are specifically designed for a certain type of business or are general enough to be used by many different types of businesses. Systems are available for cash basis recording, accrual basis recording and for both single and double entry. Computerized Record Keeping Consider using a computer for your business operations. Compare different software systems and make sure that the system you choose provides accurate and timely information and offers more than adequate presentation of accounting information for small businesses. Low-cost computer programs are available that can handle many of the book entries that are necessary in a system that is maintained by hand. Appropriate hardware and a good general ledger software program can offer you substantial assistance in recording business transactions and summarizing the information into appropriate accounting presentations. Currently available software allows you to enter transactions individually; these transactions are posted directly to the general ledger. A printout at the end of a given period shows the individual account activity, and also includes a balance and total of the accounts and provides a trial balance presentation. If the software is designed properly, it will provide appropriately prepared financial statements (balance sheet, income statements). METHODS OF ACCOUNTING There are two basic methods of accounting: cash basis and accrual basis. The method you choose will depend on your type of business. Cash basis is the simpler method. It is mainly used by service businesses that do not maintain inventory or startup businesses that do not offer credit. The accrual method is used by businesses that provide for credit sales or maintain an inventory. Cash Basis Method In cash basis accounting, you record sales when cash is received and expenses when they are actually paid. Using the cash basis method is like maintaining a checkbook. Under this method, accounts receivable are not recorded as sales until they are collected. Accounts payable are not recorded as expenses until the account is paid. Bad debt, accruals and deferrals are not appropriately recorded under cash basis because they are examples of outstanding credit (business notes). The cash basis method is not appropriate for businesses that extend credit. Accrual Basis Method In accrual basis accounting, you report income or expenses as they are earned or incurred rather than when they are collected or paid. Record credit sales as accounts receivable that have not yet been collected. The accrual basis also provides a method for recording expenditures paid in a single installment but covering more than one period. For example, interest may be paid semiannually or annually, but it is recorded on a monthly basis. The accrual method satisfies the matching concept, i.e., matching income with related expenditures. Consequently, it can provide a clear and accurate view of business operations for a given period. THE ACCOUNTING CYCLE The accounting cycle can be described as follows: 1. A business transaction occurs, giving rise to an original document that is recorded in a book of original entries called a journal. 2. The totals from the journal are summarized and reported in a book of accounts, known as a general ledger. 3. The general ledger contains the individual accounts maintained by the business. 4. The individual accounts are listed in the form of debits and credits, known as the trial balance of the general ledger. 5. From this trial balance, after making certain adjustments, you prepare the business's financial statements. Journals You derive the information for each journal entry from original source documents, such as, sales slips, cash register tapes, check stubs, purchase invoices and other items that record your business transactions. You may need to create subsidiary journals for specific, frequently occurring types of transactions, such as sales and expenses. General Ledgers The summary and totals from all journals are entered into the general ledger. A general ledger is a summary book that records transactions and balances of individual accounts, and is organized into five classes of individual accounts, as follows: 1. Assets - A record of all items that the business owns. 2. Liabilities - A record of all debts the business owes. 3. Capital - A record of all ownership or equity. 4. Sales - A record of all income earned for a specific period. 5. Expenses - A record of all expenditures incurred during a given period. When the trial balance is prepared, these classifications are easily recognized. Trial Balance At the end of the fiscal year or accounting period, the individual accounts in the general ledger are totaled and closed. The balances of the individual accounts are summarized in the financial statements. Financial Statements The main types of financial statements are the balance sheet and the income statement, also known as the profit and loss statement. The balance sheet is a report of a business's financial condition (assets, liabilities and capital) at a specific moment in time (see Example 1) and the income statement is a summary of profit and loss for a specific period of time, generally a month, quarter or year (see Example 2). Other statements may be prepared. For example, a cash flow statement identifies the sources and applications of cash. Statements may also be prepared to indicate manufacturing expenses or other special areas that are of interest to you. Percentages Percentages are used in financial statements to show the part of each sales dollar used by the various expenses. Percentages are especially helpful for comparing current year financial statements with those of prior years to determine business trends. Percentages are also helpful for comparing your figures with those of other firms in the same line of business (see Example 3). ------------------------------------------------------------------------- Example 3 Appliance Repair Company Income Statement Showing Expenses as Percentage of Sales Total Parts Service --------------- ------------------------ Amount Percent Amount Percent Amount Percent ------------------------------------------------------------------------- Gross Sales $70,000 100.00 $25,000 100.00 $45,000 100.00 ------------------------------------------------------------------------- Cost of sales Opening inventory 13,000 13,000 Purchases 25,000 25,000 Total 38,000 38,000 Ending inventory 14,000 14,000 Total cost of sales 24,000 34.29 24,000 96.00 Gross Profit 46,000 65.71 1,000 4.00 Operating expenses Payroll 26,000 37.14 26,000 57.78 Rent 3,000 4.29 1,500 6.00 1,500 3.33 Payroll taxes 1,500 2.14 1,500 3.33 Interest 600 .86 300 1.20 300 .67 Depreciation 1,400 2.00 1,400 3.11 Truck expense 5,500 7.86 5,500 12.22 Telephone 2,400 3.43 1,200 4.80 1,200 2.67 Insurance 1,000 1.43 400 1.60 600 1.33 Miscellaneous 1,000 1.43 500 2.00 500 1.11 ------------------------------------------------------------------------- Total Expenses 42,400 60.58 3,900 15.60 38,500 85.55 ------------------------------------------------------------------------- Net Profit (Loss) (Exclusive of owner's salary) 3,600 5.14 (2,900) (11.60) 6,500 14.44 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Example 1 ABC SALES CO. BALANCE SHEET December 31,199- Assets Current assets Cash.................................. $23,590 Notes receivable........................ 10,000 Accounts receivable..................... 20,880 Merchandise receivable.................. 62,150 Store supplies.......................... 960 Office supplies......................... 480 Prepaid insurance....................... 1,650 ------ Total Current Assets................ $119,710 Plant assets Land.................................. $20,000 Building.............................. $140,000 Less accumulated depreciation....... 33,900 106,100 Office equipment...................... 15,570 Less accumulated depreciation....... 8,720 6,850 Store equipment....................... 27,100 Less accumulated depreciation....... 15,700 11,400 Total plant assets.................. 144,350 ------- Total assets............................ $264,060 Liabilities Current liabilities Accounts Payable...................... $22,420 Mortgage note payable (current portion) 5,000 Salaries payable...................... 1,152 ------- Total current liabilities $28,572 Long-term liabilities Mortgage note payable 20,000 ------- Total liabilities $48,572 Stockholders' Equity Capital Stock........................... $100,000 Retained earnings....................... 115,488 -------- Total stockholders' equity............ $215,488 -------- Total liabilities and stockholders' equity $264,060 ---------------------------------------------------------------------------- --------------------------------------------------------------------------- Example 2 ABC SALES CO. INCOME STATEMENT December 31,199- Revenue from Sales Sales $732,163 Less: Sales returns and allowances... $6,140 Less: Sales discount................. 5,822 11,962 ------ ------- Net sales............................ 720,201 Cost of merchandise Merchandise inventory Jan. 1 purchases 530,280 Less purchases discount............ 2,525 ------- Net purchases........................ 527,755 ------- Merchandise available for sale....... 587,455 Less merchandise inventory Dec. 31. 62,150 Cost of merchandise sold............. 525,305 ------- Gross Profit........................... 194,896 Operating Expenses Selling expenses Sales salaries....................... $60,044 Advertising.......................... 10,460 Depreciation-store equipment......... 3,100 Insurance-selling.................... 2,080 Store supplies....................... 2,010 Miscellaneous (selling).............. 630 ------- Total selling expenses............. 78,324 General expenses Office salaries...................... 21,032 Heating and lighting................. 8,100 Taxes................................ 6,810 Depreciation-building................ 4,500 Depreciation-office equipment........ 1,490 Insurance-general.................... 830 Office supplies...................... 610 Miscellaneous........................ 760 ------- Total general expenses............. 44,132 ------- Total operating expenses........... 122,456 ------- Net income from operations......... 72,440 Other Income-interest income....... 3,600 Other expense-interest expense..... 2,440 1,160 ------- ------- Net Income........................... 73,600 --------------------------------------------------------------------------- HOW TO ANALYZE YOUR RECORDS To chart the progress of your business, you should become familiar with various forms of financial statements analysis and measurement. Financial statements indicate which items need more attention. For example, profits may be too low or rent unnecessarily high. Perhaps there is a way to use the business vehicles more efficiently, to increase inventory turnover or to reduce long distance telephone bills. In analyzing financial statements, carefully examine all items that do not seem realistic. Answer the following questions: - Why are certain expenses at a particular level? - Are there any ways to reduce or avoid certain expenses? - Should you incur all of your expenses? - Does the level of profit justify your investment, time and effort? Financially significant items should be analyzed regularly. For example, examine payroll as a percentage of total administrative expenses. Keep in mind that, if your business is a proprietorship, your salary is not a payroll expense; however, if your business is a corporation, your salary should be a payroll expense. Analyzing Payroll Expenses In justifying payroll and other expenses, answer the following questions: - Are accurate records maintained for time spent on various jobs and functions? - Is the eight-hour day of each employee accounted for appropriately? - When employees are paid overtime, is the additional expense reflected in charges to the customer? - Is the level of payroll expense appropriate for your type of business? - Are you billing on a guaranteed price basis or on an hourly basis? - When using guaranteed price basis for billing, does actual time spent exceed time estimated for the job? - Do employees work with a minimum of wasted effort and time? - Are you operating at maximum efficiency? What strategies can be implemented to maximize efficiency? Ratios Accountants use various ratios to evaluate financial statements, such as ratios that assess liquidity, solvency and profitability. Liquidity These ratios indicate the availability of cash and the firm's ability to pay liabilities. Current ratio: Current assets ------------------- Current liabilities Acid test Cash, cash equivalents (liquidity ratio): and receivables ---------------------- Current liabilites Day's sales Accounts receivable in receivables: --------------------------- Credit sales divided by 360 Inventory Cost of sales turnover: ------------- Average inventory Capital and Long-term Solvency These ratios indicate the firm's ability to meet debts when due. Equity/debt Total equity ratio: ------------ Total debt Total equity to Total equity fixed assets ------------ Net fixed assets Profitability These ratios indicate your firm's performance. Gross profit Gross profit margin ------------ Sales Net income Net income to sales ---------- Sales Operating Income before income taxes income to sales -------------------------- Total assets Return on Net income and interest expenses total assets -------------------------------- Total assets Return on total Net income ------------ Total equity OTHER IMPORTANT RECORDS In addition to accounting records, you will need to keep separate records for accounts receivable, payroll and taxes, petty cash, insurance, business equipment and perhaps other items. Accounts Receivable A good record-keeping system should provide you with a detailed report of accounts receivable, including current information on customers and a running balance of their accounts. To maintain a good accounts receivable system, record credit charges on a regular basis. It is essential that you follow up on all late paying and delinquent customers. Accounts receivable should be aged at the end of each month. This means organizing the accounts into those that are current; 30-, 60-, and 90-days old and older. This arrangement helps you to take appropriate, timely actions. One example of a timely action is to transfer delinquent accounts to a notes receivable account. Notes receivable are loans the business makes to others, either inside or outside the business. Each note receivable should contain specific terms of credit and interest and should be signed by the customer. An additional timely action to decrease the number of bad accounts and avoid the effort of collecting payments from slow-paying customers is to issue a formal complaint with your local credit bureau. Payroll and Taxes Current Internal Revenue Service (IRS) regulations require that you withhold federal income tax and social security (FICA) from each employee. You must remit the amount for taxes to the IRS on a quarterly, monthly or more frequent basis. A detailed reporting system for payroll will help you make timely tax payments. Gather specific information about each employee on individual employee record cards. All employees should fill out federal Form W-4, which indicates their filing status and the number of exemptions they claim. Use this information to compute the federal withholding and social security (FICA) deductions for each payroll check. Prepare Employees Quarterly Federal Tax Return (Form 941) by totaling each employee's withholding for federal taxes and social security. File Form 941 with the IRS. Each payroll period, total the accumulated withholdings of both federal taxes and social security for all employees. If this total exceeds $500 for any month, you must deposit this amount by the 15th day of the following month in a depository bank (an authorized financial institution or a federal reserve bank). Generally, when the total exceeds $3,000, you must deposit this amount within three business days. Any overpayment in taxes is paid back to you quarterly. At the year's end, you are required to prepare not only the information normally required for that quarter, but also summaries of each employee's total earnings and withholdings for the year (Form W-2). Provide this form to each employee and the IRS. A Word of Caution It is very easy to fall behind in making tax payments. If you find yourself short of cash, do not be tempted to delay payment of taxes. The IRS will not bill your business for taxes due nor will it notify you of late payments. Delayed payments can easily add up to a large sum; the debt may impede the growth of your business and may even force you to close your business, to say nothing of the federal penalties incurred for late payments. With a good record-keeping system, you can simplify the process of filing taxes to the point where the information needed to complete the forms is automatically generated. Setting up such a system is a rather technical task and you may need to seek guidance. Petty Cash Sometimes a petty cash fund is needed to purchase small items required on a day-to-day basis. If this is necessary, draw a check to petty cash for a nominal amount. Problems often arise when cash is easily available; therefore, if possible, avoid a petty cash fund. However, very often the convenience of having a small amount of cash available will facilitate the smooth operation of your business. Be sure to balance this fund monthly, based on the cash balance plus receipts for all expenditures. Insurance Most businesses have several types of insurance. For each policy, you should have the following information: - Clear statement of the type of coverage. - Names of individuals covered. - Effective dates and expiration date. - Annual premium. Review your insurance policies on a regular basis. In addition, annually consult an insurance specialist, who will review the total insurance package to determine what coverage is appropriate and ensure that premiums remain in line with prior quotations. Business Equipment Keep an accurate list of permanent business equipment used on both a regular and stand-by basis. The list should describe the equipment and provide serial numbers, date of purchase and original cost. Keep the list available for insurance or other purposes. You will also need this information to prepare accurate depreciation schedules. ACCOUNTING SERVICES You have several choices in who should maintain your accounting system. You can - Maintain the books yourself. - Hire a bookkeeper on a full-time or part-time basis. - Hire the accountant who set up your books. - Set up a hybrid system in which you maintain the day-to-day reports, while an accountant does the period-end record preparation, summaries and reconciliations and the returns for sales tax, excise tax and payroll taxes. In making the choice, you must decide whether you have the ability and time to set up and maintain good records or if you should engage an outside accounting service. It is usually suggested that you hire an accountant to do the final year-end preparations and to advise you. No matter what you choose, you should remain familiar with your books and participate in the record-keeping process. This will maximize the services provided by the accountant and allow you to keep track of your business. Selecting the Accounting Service If you decide to hire an outside service, find an accounting firm that will work closely with your business and provide you with the information necessary to develop a successful operation. Interview several accounting professionals and compare their level of accounting knowledge, computer literacy, knowledge of and experience with small business accounting and any specialized knowledge required in your business. There are many types of professionals you may consider, such as a certified public accountant, an enrolled agent or an accredited accountant. - Certified Public Accountant (CPA)A person who has passed the American Institute of CPAs' national examination, which tests an individual's ability in accounting, auditing, law and related areas. - Enrolled Agent (EA)An individual who has passed a two-day exam prepared by the IRS, covering many areas of federal taxation. This person is generally considered a tax specialist. - Accredited AccountantAn individual who has passed a rigorous examination prepared by the Accreditation Council of Accountancy and Taxation, a national accounting accreditation board affiliated with the National Society of Public Accountants and the College for Financial Planning in Denver, Colorado. Accredited accountants specialize in small business accounting. Other accountants in public practice perform various levels of accounting and write-up services. When selecting an accountant, the cost of the accountant's fees must be weighed against the benefits received. Frequently, the accountant's professional advice can increase profits to more than cover the expense. Monthly services by an accounting firm will provide you with complete and timely information and also will allow the accountant to develop knowledge of your business and be in a more comfortable position to render professional advice as the business grows. Advice and Assistance In addition to bookkeeping, an accountant can advise you on financial management. He or she can assist with cash flow requirements and budget forecasts, business borrowing, choosing a legal structure for your business and preparation and advice on tax matters. Cash Flow Requirements An accountant can help you work out the amount of cash needed to operate the business during a certain periodfor example, a three-month, six-month or one-year projection. The accountant considers how much cash you will need to carry your accounts receivable, to increase inventory, to cover current invoices, to acquire needed equipment and to retire outstanding debts. Additionally, the accountant can determine how much cash will come from collection of accounts receivable and how much will have to be borrowed or provided from other sources. In determining cash requirements, the accountant may notice and call attention to danger spots, such as accounts that are in arrears or delinquent areas or areas of excess expenditure. Business Borrowing An accountant can assist you in compiling the information necessary to secure a loan: the assets the business will offer for collateral, the present debt obligations, a summary of how the money will be used and repayment schedules. Such data show the lender the financial condition of the business and your ability to repay the loan. Remember, lenders have two very definite requirements: (1) that the business have adequate collateral to secure the loan and (2) that the business will be able to repay the loan. An accountant can advise on whether you need a short- or long-term loan. In addition, your accountant may introduce you to a banker who knows and respects his or her financial judgment. Legal Structure It is wise to discuss the type of business organization that best fits your needs with an accountant and an attorney. They can point out the advantages and disadvantages of the various forms of business organization, such as a - Proprietorship - An extension of individual ownership. - Partnership - Multiple proprietors. - Corporation - A completely separate legal entity. In addition, they can advise you on immediate plans regarding management, financing, long-range plans to bring others into the business and estate planning, all of which affect the type of business you choose. Tax Considerations This is an area in which an accountant can provide much advice and assistance. Your accountant can suggest methods to record and document the various types of information necessary for taxes. APPENDIX A: FINANCIAL STATUS CHECKLIST What You Should Know Daily - 1. The balance of cash on hand. - 2. The bank balance. - 3. Daily summaries of sales and cash receipts. - 4. Any errors or problems that have occurred in collections. - 5. A record of monies paid out, both by cash and by check. Weekly - 1. Accounts receivable (particularly those accounts that appear to be slow paying). - 2. Accounts payable (be aware of the discount period mentioned above). - 3. Payroll (be aware of the accumulation of hours and the development of the payroll liability). - 4. Taxes (be aware of any tax items that are due and reports that might be required by government agencies). Monthly - 1. If you engage an outside accounting service, provide records of receipts, disbursements, bank accounts and journals to the accounting firm. This will allow the firm to maintain good records and present them to you for review, consideration and support in decision making. - 2. Make sure that income statements are available on a monthly basis, and certainly within 15 days of the close of the month. - 3. Review a balance sheet that indicates the balance of business assets and the total current liability. - 4. Reconcile your bank account each month so that any variations are recognized and necessary adjustments made. - 5. Balance the petty cash account on a monthly basis. If you allow this account to extend for a longer period, it may create substantial problems. - 6. Review federal tax requirements and make deposits. - 7. Review and age accounts receivable so that slow and bad accounts are recognized and handled. APPENDIX B: INFORMATION RESOURCES U.S. Small Business Administration (SBA) The SBA offers an extensive selection of information on most business management topics, from how to start a business to exporting your products. This information is listed in "The Small Business Directory". For a free copy contact your nearest SBA office. SBA has offices throughout the country. Consult the U.S. Government section in your telephone directory for the office nearest you. SBA offers a number of programs and services, including training and educational programs, counseling services, financial programs and contract assistance. Ask about - Service Corps of Retired Executives (SCORE), a national organization sponsored by SBA of over 13,000 volunteer business executives who provide free counseling, workshops and seminars to prospective and existing small business people. - Small Business Development Centers (SBDCs), sponsored by the SBA in partnership with state and local governments, the educational community and the private sector. They provide assistance, counseling and training to prospective and existing business people. - Small Business Institutes (SBIs), organized through SBA on more than 500 college campuses nationwide. The institutes provide counseling by students and faculty to small business clients. For more information about SBA business development programs and services call the SBA Small Business Answer Desk at 1-800-8-ASK-SBA (827-5722). Other U.S. Government Resources Many publications on business management and other related topics are available from the Government Printing Office (GPO). GPO bookstores are located in 24 major cities and are listed in the Yellow Pages under the "bookstore" heading. You can request a "Subject Bibliography" by writing to Government Printing Office, Superintendent of Documents, Washington, DC 20402-9328. Many federal agencies offer publications of interest to small businesses. There is a nominal fee for some, but most are free. Below is a selected list of government agencies that provide publications and other services targeted to small businesses. To get their publications, contact the regional offices listed in the telephone directory or write to the addresses below: - Consumer Information Center (CIC), P.O. Box 100 Pueblo, CO 81002 The CIC offers a consumer information catalog of federal publications. - Consumer Product Safety Commission (CPSC) Publications Request Washington, DC 20207 The CPSC offers guidelines for product safety requirements. - U.S. Department of Agriculture (USDA) 12th Street and Independence Avenue, SW Washington, DC 20250 The USDA offers publications on selling to the USDA. Publications and programs on entrepreneurship are also available through county extension offices nationwide. - U.S. Department of Commerce (DOC) Office of Business Liaison 14th Street and Constitution Avenue, NW Room 5898C Washington, DC 20230 DOC's Business Assistance Center provides listings of business opportunities available in the federal government. This service also will refer businesses to different programs and services in the DOC and other federal agencies. - U.S. Department of Health and Human Services (HHS) Public Health Service Alcohol, Drug Abuse and Mental Health Administration 5600 Fishers Lane Rockville, MD 20857 Drug Free Workplace Helpline: 1-800-843-4971. Provides information on Employee Assistance Programs. National Institute for Drug Abuse Hotline: 1-800-662-4357. Provides information on preventing substance abuse in the workplace. The National Clearinghouse for Alcohol and Drug Information: 1-800-729-6686 toll-free. Provides pamphlets and resource materials on substance abuse. - U.S. Department of Labor (DOL) Employment Standards Administration 200 Constitution Avenue, NW Washington, DC 20210 The DOL offers publications on compliance with labor laws. - U.S. Department of Treasury Internal Revenue Service (IRS) P.O. Box 25866 Richmond, VA 23260 1-800-424-3676 The IRS offers information on tax requirements for small businesses. - U.S. Environmental Protection Agency (EPA) Small Business Ombudsman 401 M Street, SW (A-149C) Washington, DC 20460 1-800-368-5888 except DC and VA 703-557-1938 in DC and VA The EPA offers more than 100 publications designed to help small businesses understand how they can comply with EPA regulations. - U.S. Food and Drug Administration (FDA) FDA Center for Food Safety and Applied Nutrition 200 Charles Street, SW Washington, DC 20402 The FDA offers information on packaging and labeling requirements for food and food-related products. For More Information A librarian can help you locate the specific information you need in reference books. Most libraries have a variety of directories, indexes and encyclopedias that cover many business topics. They also have other resources, such as - Trade association information Ask the librarian to show you a directory of trade associations. Associations provide a valuable network of resources to their members through publications and services such as newsletters, conferences and seminars. - Books Many guidebooks, textbooks and manuals on small business are published annually. To find the names of books not in your local library check "Books In Print", a directory of books currently available from publishers. - Magazine and newspaper articles Business and professional magazines provide information that is more current than that found in books and textbooks. There are a number of indexes to help you find specific articles in periodicals. In addition to books and magazines, many libraries offer free workshops, lend skill-building tapes and have catalogues and brochures describing continuing education opportunities. ---------- End of Document