Your Recordkeeping Systems
Why keep records? There are many reasons. For the individual just starting a consulting services business, an adequate recordkeeping system increases the chances of survival. Established consulting services can also enhance their chances of staying in business and earning increasing profits with a good recordkeeping system.
Keeping accurate and up-to-date business records is, for some people, the most difficult and uninteresting aspect of operating a business. If this area of business management is one that you believe will be hard for you, plan now how you will handle this task. Don't wait until tax time or until you're totally confused. Take a course at a local community college or hire an accountant to advise you on setting up and maintaining your recordkeeping system. Another option is to trade your specialized consulting services with a professional accountant client.
Benefits of Good Records
Here are some of the questions that good business records can answer:
How much business am I doing?
How much credit am I extending?
How are my collections?
What are my losses from credit sales?
Who owes me money? Who is delinquent?
Should I continue extending credit to delinquent accounts?
How much cash do I have on hand?
How much cash do I have in the bank?
Does this amount agree with what records tell me I should have, or is there a shortage?
How much have I invested in supplies?
How often do I turn over my supplies inventory?
How much do I owe my suppliers and other creditors?
How much gross profit or margin did I earn?
What were my expenses? What's my weekly payroll?
Do I have adequate payroll records to meet the requirements of workers' compensation insurance, unemployment compensation insurance, and withholding taxes?
How much net profit did I earn?
How much income tax will I owe?
Are my sales, expenses, profits, and capital showing improvements or did I do better last year than this year?
How do I stand compared with two periods ago?
Is my business's position about the same, improving, or deteriorating?
On what services am I making a profit, breaking even, or losing money?
Am I taking full advantage of cash discounts for prompt payments?
Are the discounts I get from suppliers as great as those I give to my clients?
How do the financial facts of my consulting business compare with those of similar businesses?
The primary function of a good recordkeeping system is to be able to manage profits and taxes. That means easily and accurately tracking income and expenses. Your system can be computerized with numerous accounting programs or it can be a simple journal and ledger — whatever it takes to effectively manage business profits and pay accurate taxes.
Designing a Good System
Your records will be used to prepare tax returns, make business decisions, and apply for loans. Set aside a special time each day to update your records. It will pay off in the long run; you'll get more deductions and fewer headaches. A good recordkeeping system should be:
Simple to use
Easy to understand
Reliable
Accurate
Consistent
Timely
Several published systems and software systems provide simplified records, usually in a single record book. These systems cover the primary records required for all businesses; some are modified specifically for the consulting services business. Check your local office supply store, your trade association, or trade journals for more information on specialized record books.
Simply, your records should tell you these three facts:
How much cash you owe
How much cash is owed to you
How much cash you have on hand
Journals and Records
To keep track of everything, you should have these basic journals:
A sales journal shows the business transaction, date, for whom it was performed, and the amount of the invoice.
A cash receipts register shows the amount of money received, from whom, and for what.
A cash disbursements register or check register shows each check disbursed, the date of the disbursement, number of the check, to whom it was made out, the amount of money disbursed, and for what purpose.
A general journal for noncash transactions and those involving the owner's equity in the business.
In addition, here are other records you will need in your business:
Accounts receivable is the record of accounts for which you haven't been fully paid.
Accounts payable is the record of accounts for which you will have to pay money because you have purchased a product or service but haven't paid for it all.
Inventory record is a record of your firm's investment in paper, envelopes, books, videos, and other items you intend to resell.
Equipment is a record of your firm's investment in equipment that you will use in providing your service and will not normally resell.
Payroll is a record of the wages of employees and their deductions for income, FICA, and other taxes as well as other payroll deductions.
Some businesses combine all of these journals into a single journal. In fact, there are many good one-write systems that allow you to make a single entry for each transaction. You can also use computer software such as Quicken, Quick-Books, Microsoft Money, or Manage Your Money to track income and expenses in a checkbook format. More extensive accounting software programs include Peachtree Accounting and M.Y.O.B. (Mind Your Own Business).
Many small and medium businesses use QuickBooks as their primary accounting system. However, many smaller businesses don't require the level of detail that QuickBooks and similar systems offer. In fact, they can be overkill for a simple business. If you don't need a full double-entry bookkeeping system, consider one of the checkbook systems, such as Quicken (
Cash versus Accrual
One of the questions about recordkeeping your consulting service must answer is: cash or accrual? It pertains to how you will record income and expenses. A cash system records a transaction when the cash is received or disbursed. An accrual system records a transaction when it is accrued or when it is delivered. For example, if you sell your services to a client, you can record the transaction when you receive payment (cash) or when it is earned (accrual).
Most small businesses operate on the cash system. However, if your consulting service often doesn't get paid for services right away because of long-term contracts, you may want to consider accrual accounting. There are advantages and disadvantages to both methods. However, it can be difficult to switch your accounting system from one to the other, so it is better to select one method and stick with it. Ask your accountant to advise you on the best method for your consulting business's needs and structure.
When you report your business income and expenses for taxation, you will identify whether your business tracks on a cash or accrual basis. If you change your accounting method from that of a prior taxable year, you will need to report it to the IRS on Form 3115. Contact your local Internal Revenue office or go online (
