Our January, 2003  newsletter is entitled "Keeping Your Financial Records."   Our newsletters feature articles on various aspects of preparing a business plan and over time should lead you through the entire business planning process.  

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Keeping Your Financial Records
Once you begin operating your business you will quickly learn that a considerable amount of time is spent dealing with paper flow. Everything you do, every transaction initiated, will involve at least one piece of paper. In fact, many new business people have claimed that managing paper flow takes up as much as 30% to 50% of their time. Usually this was something that they had not considered when planning their business. If you do not maintain this ongoing paper flow in an orderly fashion disorganization will result, thus affecting the efficiency of daily business operations.

Financial records must be kept by all businesses, regardless of their size. You will continually be generating records such as bank deposit slips, delivery slips, invoices, receipts, sales slips, contracts, cheque stubs, bank statements, payroll records, government forms, and many other documents. You should establish a system for maintaining these records so they are easily accessible, and can be utilized in developing your accounting system.

The Importance of Accounting

Maintaining a reliable, accurate and timely accounting system will be one of the keys to your success. A well designed and up to date accounting system will allow you to:

• Monitor the results of your operations on a regular basis.
• Compare actual results to your original plans.
• Identify areas of weakness, or areas in which you may be over spending.
• Be better informed as to the overall financial position of your company.
• Be in a better position to make ongoing decisions for your business, as you will have solid information on which to make decisions.
• Maintain better relations with your banker and other investors.
• Fulfill your obligations to the government.

How To Keep Your Daily Records

The complexity of your filing system will depend on the size and nature of your business. It is a good idea to file similar documents together in chronological order. This means that documents should be filed in date order with the most recent at the front or top.

Documents can be filed either in binders or file drawers. Keep a copy of all documents for your files, even if you have to photocopy the original.

New chronological files should be started at the beginning of each fiscal year.

At a minimum, separate files should be kept for:

• Customer invoices
• Unpaid supplier invoices
• Paid supplier invoices (which may be filed chronologically, or in alphabetical order if you have many suppliers.)
• Bank statements
• Payroll records
• General correspondence
• Taxation records

Developing Your Accounting System

A basic accounting system, whether it be manual or computerized, should contain the following:

Cash Receipts Journal - which details all cash received and deposited, the date received and from whom received. Each amount received is classified as one of the following:

• Cash sale
• Bank deposit
• Cash received on account from a customer
• Other receipt

Cash Disbursements Journal - which details all cash disbursed and cheques issued, the date disbursed, and to whom disbursed. Each amount is classified as one of the following:

• Various expenses
• Loan payments
• Fixed asset purchases
• Payment of accounts payable
• Other disbursements

Payroll Journal - contains a sheet for every employee. It lists their:

• Name
• Address
• Social insurance number
• Rate of pay - Payroll date
• Gross pay
• Employee deductions
• Net Pay
• Payroll cheque number

The Payroll Journal also contains a summary of total payroll and total deductions for each pay period.

General Ledger - This is the final point of the accounting system. The entries from the Cash Receipts Journal, Cash Disbursements Journal and the Payroll Journal are collected and totaled in the general ledger. The financial statements are prepared from this ledger.

Depending on the nature and size of the operations, the accounting system may also include an Accounts Receivable Ledger, Accounts Payable Ledger, Sales Journal and Purchases Journal.

An Accounts Receivable Ledger contains the account of each customer who has purchased goods on credit. Each customer has a ledger sheet that details:

• Their name, address, phone number, credit information
• Date of sale
• Invoice number
• Date of payment
• Receipt number
• Balance owing

Periodically, the individual balances are added up (usually once a month) and the total reconciled to the Accounts Receivable balance in the General Ledger.

An Accounts Payable Ledger records the individual account of every supplier to whom money is owed. The information and procedures are identical to the Accounts Receivable Ledger.

A Sales Journal records all sales.

A Purchases Journal records all purchases

Accounting Systems

Accounting systems range from a simple, inexpensive manual operation to a complex computer system. Seek the advice of an accountant in order to determine which system best suits your needs.

If you are just starting your business and are not familiar with computers, it may be a good idea to start with a manual system in order to develop an understanding of the accounting process. Later on, as the business expands, you can switch over to a computerized system. On the other hand, if you are familiar with computers, or know someone who is, there is nothing wrong with starting off "computerized". It depends on your personal preference. The important thing is that you implement a system that works!

There are several inexpensive and user friendly computerized accounting systems on the market today. A computer system will reduce errors, the amount of time spent on accounting and the amount of paper produced. One of the benefits of a computer system is that it automatically maintains your general ledger and prints your financial statements.

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