Financial Record Keeping: Best Practices for Small Businesses

Financial record keeping is essential for smooth tax preparation. Keeping the process of recording all financial transactions thorough, accurate, and precisely helps a business succeed and helps its finances meet all regulations and the required standards of operation.

This article will suggest six financial record keeping best practices for small business owners to simplify their bookkeeping. 

Incorporate a good document management system into your business

As you grow your business, your business documents and files expand, too. Instead of stacking your desk and drawers with piles of paper, try to go paperless so you can access your records easily, at any time, from anywhere. 

You can then implement a digital document management system to organize all your business documents. Then set a document control system that specifies how often to review and update documents.

Back up and secure your records

We live in a time where data breaches and natural disasters are rampant. Take time to back up and secure your records to avoid catastrophe. Whether you store your records on paper or a hard drive, remember to back them up in at least two places. 

Digitizing all your important documents is also a good idea as it protects them from being lost, stolen, or destroyed. However, storing records digitally increases the risk of theft. So when you store your business records online, secure your account with a unique and strong password, and enable two-factor authentication.

Understand the lifecycle of records 

Every record will have its own lifespan, and some financial documents must be kept for a certain amount of time. It’s necessary to ensure that all retention and disposal schedules are correctly applied to each type of record generated in each department. 

Here are the essential documents you need to keep and the time you need to keep them.

Seven years or longer

When it comes to taxes, it’s a good idea to preserve any tax records for at least seven years. The IRS’s audit statute of limitations is three years. In some situations, they can go back as far as six or seven years (e.g., if you underreported your income by 25% or more.) State statutes of limitations vary, so you can consult a tax professional to understand your state’s limitations.

You should also keep for up to seven years any records that corroborate the information on your taxes, such as your W-2 and 1099 forms, receipts, and payments. Keep receipts for any assets you own for as long as you own them, such as receipts for home renovation work. 

One year

Records that you need to keep for at least one year are the following: 

  • Non-tax-related bank and credit card statements
  • Investment statements
  • Paycheck
  • Medical bills 
  • Receipts for large purchases

If you need to support your current-year tax preparation or have an unresolved insurance dispute, don’t throw away these records for at least a year!

Many banks and credit card companies now provide electronic statements, so it’s not necessary to keep paper versions on hand. However, if you still want to keep a copy of those records, you can digitize them by scanning them with a receipt scanner before discarding the original paper documents.

Less than a year

Some documents do not need to be kept in your home for an extended period of time. Don’t bother about keeping receipts unless they’re related to:

  • Product warranties
  • Your tax returns
  • Insurance claims

You can throw away most monthly bills after paying them or after they have been deposited into your bank statement. If you need to go back to verify anything later, see if you can access past invoices through online account access. Many service providers store past bills and invoices available online for the past few months or longer.

Start a new file after each year

Starting a new file at the start of each new year is a simple method that can help you save a lot of time and make going through your information much easier. 

It will also make it easier for you to remove records you no longer need for whatever reason, such as when the five-year retention period has expired.

Keep records of transactions for bank reconciliations

Bank reconciliations help small businesses detect errors and better understand their financial situation. It’s also a good opportunity to double-check that you have records for all of your business dealings.

Some accounting software allows users to attach documents to each transaction, so anyone who opens your books can view the associated record. It’s good to match every transaction in your accounting software to a record during your monthly bank reconciliation. Make sure you have a corresponding invoice, receipt, or contract as you go through your company activities.

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Choose accounting software that can generate records

Today, many accounting software can generate reports from customers’ invoices. For example, Shoeboxed, the painless receipt scanning and expense management app tailored for freelancers and small business owners, can take over the heavy task of preparing reports from your plate. 

After scanning your receipts with OCR engines, Shoeboxed will automatically create clear and comprehensive reports so you can send them out for approval immediately. Shoeboxed can help small business owners save time and effort, allowing them to spend more time on the business’s core. 

The bottom line

Keeping financial records properly can be challenging at first. Still, as long as you keep these financial record keeping best practices in hand, you’ll be able to run your business smoothly even if you don’t have an accounting background. The most difficult part is collecting the information. After you’ve formed the collecting habit, the rest will be in place. 

Don’t forget to subscribe to the Shoeboxed blog for more helpful accounting and bookkeeping knowledge and best practices for small business owners! 

About Shoeboxed

Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes.

Access your Shoeboxed account from your web browser or smartphone app. Stay audit-ready with Shoeboxed for FREE now!

Bad Spending Habits That Could Hurt Your Business

As a business owner, the challenge of how to increase profits is on your mind all the time. Improving the quality of your products and services or investing more in marketing are usually the first methods businesses think of to make more money. Yet, stopping bad spending habits is also a very effective way to grow your income. You can avoid losing money on unnecessary expenses and reallocate that cash to value-driving factors. 

This article will help identify the most common spending habits that harm your business. Hopefully, you can steer clear of them to build a healthy financial environment for your business. 

The 4 spending habits to avoid for your business  

Here are the most common spending mistakes that every business owner should be aware of:

Spending without a proper budget 

This mistake is commonly seen in newly established small businesses. They don’t think a budget is necessary when their companies only have a few financial activities. This is in fact incorrect. Not having a reasonable budget can lead to multiple painful consequences like overspending, a high chance of going into debt, a lack of savings, and less financial security. 

Additionally, when your business operates without a budget, it makes dealing with unexpected expenses, cash flow management, and meeting your financial goals way more challenging. In short, a budget allows you to allocate money more wisely, resulting in saving more money.  

If you don’t know how to make a budget yet, check out our 7-step guide to create a business budget.

Inconsistently and insufficiently recording spendings 

It’s disastrous when a business fails to record spending properly. This leads to being unable to keep good track of your expenses. You have no idea how much money was actually spent, making it impossible to determine your net profit. When you don’t have spending calculated accurately, you’re unable to evaluate your financial performance; hence no appropriate business strategies can be devised to create future growth. 

On top of that, poor spending records will guarantee that you have a miserable time when tax season comes. You’ll have no concrete data to file for tax deductions, meaning you’ll need to pay more than necessary to the IRS. That’s why you should always have your spending correctly recorded in your journals. If you don’t have enough time to do the recording, it’s best to outsource a freelancer or a professional bookkeeper.   

Another tip to avoid this bad spending habit is to keep your receipts. Every purchase goes together with a receipt. Keeping and organizing the receipts will help you better keep track of your spending and be ready to provide the IRS proof for tax deductions when required. 

Shoeboxed can help you do this with ease. Shoeboxed is a receipt scanner application that digitizes your receipts in just seconds. Your receipts will be safely stored in the cloud and easy to search whenever needed. Scanned documents from Shoeboxed are also legible and fully accepted by the IRS. 

Don’t lose money to Uncle Sam!  Get your receipts and bookkeeping records organized today! 

You might also be interested in: 7 Bookkeeping Practices Every Business Should Implement.

Not paying your purchase orders on time

Many businesses habitually pay their purchase orders as late as possible, which is fine as long as you pay them on time. This is because not paying on time can have serious consequences in the long run. The most obvious result is late payment penalties. 

While penalty costs may not be much for each purchase order if your payment is only a little late, those small penalty fees add up to hurt your profit. On top of that, late payments will severely harm your business reputation in the long run. Suppliers who may have heard about your history of late payments will be wary of doing business or offering you a good deal. 

Such problems won’t happen if you take extra care with your payment deadlines. Make sure you have the money/documents ready and processed at least a few days before the due date to have enough time to deal with any unexpected issues that arise. 

Using your personal credit card to pay for your business expenses 

Drawing a boundary between personal and professional spending can be confusing and difficult for self-employed individuals, small business owners, and freelancers. That’s why many of them end up using the same credit card for personal and corporate purposes for convenience. However, this habit may not be the best, and there are multiple reasons why. 

Using your personal credit card for business expenses will prevent you from building your business credit history. Without a good business credit history, you’ll find it challenging to apply for business loans, equipment leases, etc. because before lending you money, investors and lenders always check your business’s credit history. 

Additionally, a personal credit card has a lower credit limit than a business credit card. For that matter, your personal credit card will be of no use when you need to acquire something expensive for business purposes like machinery and equipment, office renovation, lease or rent, etc. 

Lastly, this spending habit makes your tax filing process painful. Trying to find business costs by going through your personal credit card accounts takes time, can lead to mistakes, and may even result in an audit. Keep these costs in one place – your company credit card – to make things easier for yourself.

You might also be interested in: Which Small Business Credit card is Best for Your Biz?

Want to read more about business? 

If you’re interested in entrepreneurship stories, business tips, or productivity tools, find more posts like this on the Shoeboxed Blog. Shoeboxed is a well-trusted tool to help businesses, freelancers, and DIY accountants store and organize their receipts. It quickly and efficiently digitizes your receipts and documents, then automatically extracts, categorizes, and human-verifies important data from your receipts. You can scan their receipts, manage expenses, store business cards, and track business mileage easily, helping you boost productivity and bring in more revenue. 

Go paperless with Shoeboxed for FREE today! 

4 Most Used Budgeting Methods for Businesses

A budget is a crucial planning tool for every business. It estimates your future expenses, revenue, and profits. It helps you better control spending and identify situations where revenue may not be sufficient to cover expenditures. Moreover, a budget allows you to realize potential growth opportunities when you may have extra cash available to invest in new ventures.

This article will look into four different budgeting methods used widely among businesses and help you find the one that best suits your current situation and type of organization.

4 Types of budgeting methods: Which one is right for your business? 

Below are the most common types of budgeting methods that you may want to consider for your business.

Budgeting method #1: Incremental budgeting 

One of the most popular approaches is incremental budgeting. There’s no fixed formula for incremental budgeting – you simply change last year’s budget by an increment or percentage to obtain this year’s budget figure. 

This method focuses on small changes from the actual or budgeted results from the preceding period. It’s perfect when your primary cost-driving factors don’t regularly change. Without the need for complex calculations, incremental budgeting is the quickest of all budgeting methods. However, be aware that your company’s departments may overspend to avoid receiving a smaller budget the following fiscal year. It’s best to look into specific expenditures and spending habits to prevent any kinds of budgetary slack. 

Best for: Those who are limited on time but need a method that is  effective and reasonable. It’s also well-suited if you have an established business with predictable and consistent cash flow and financial activities. 

See also: How To Create a Business Budget with 7 Steps.

Budgeting method #2: Activity-based budgeting (ABB)

Activity-based budgeting (ABB) is a budgeting method in which every activity that incurs costs is tracked and analyzed to identify areas for improved cost-saving. After figuring out how to enhance cost-efficiency, a business will create a budget based on those findings. Companies typically employ this budgeting method to cut expenses, boost productivity, gain a competitive advantage, and improve overall operations efficiency. Rather than just using the past budgets to determine a new budget like the incremental budgeting method, the ABB system digs deeper into the company’s performance.

The ABB system gives you more control over the budgeting process. Since the budget uses relatively precise data for the projections, it helps managers align the budget with overall company goals much easier. Due to its complexity, the ABB method is more expensive and time-consuming to implement and maintain.

Best for: New companies without historical budgeting data should consider this method. The ABB method is also popular in major industries, like manufacturing, construction, and healthcare. Companies that are going under significant changes, such as new subsidiaries, large clients, business locations, or products, are likely to use the ABB technique as well.  

Budgeting method #3: Value proposition budgeting (VPB) 

Value proposition budgeting (VPB), or priority-based budgeting, is all about driving value. With this method, you go through every cost item to decide whether the value it brings justifies its cost. This allows your business to focus on true value drivers while avoiding wasteful spending. One of the main downsides of the VPB method is that value is not easy to determine as it depends on multiple factors like politics or economic trends. If there isn’t a clear understanding of value, business owners may make short-term decisions that negatively influence long-term goals. 

When preparing for the VPB method, businesses have to answer these essential questions:

  • Why are we spending this amount of money?
  • What value does it bring to our customers and stakeholders? 
  • Does the value outweigh the cost? 

Best for: This method best suits companies aiming to reduce unnecessary expenses and refocus on creating what customers want most. Many government entities also favor this budgeting method because it involves a lot of financial restructuring throughout the year, and VPB can help them identify which services are most valuable and most needed within the community.

See also: Are You Maximizing Your Business Budget?

Budgeting method #4: Zero-based budgeting (ZBB)

Zero-based budgeting (ZBB) is another common budgeting method. When applying the ZBB method, you assume that all department budgets are zero and must be rebuilt from scratch. In other words, past budgets’ numbers are not considered. Budget planners must justify every penny spent. The ZBB method is very strict, attempting to eliminate any expenses that do not contribute to the company’s profit. It’s difficult and time-consuming to carry out a zero-based budget, so many companies only use this approach on occasion.

Best for: This extreme budgeting method is very useful when a business has an urgent need to reduce cost, for example, a financial restructuring.  

The bottom line 

Employing a suitable budgeting method for your business is an effective way to save costs, increase productivity, and bring in more profits. 

By understanding the basics of commonly-used budgeting methods among businesses, you can gain a deeper insight into your own business’s situation to improve your financial performance. 

In order to determine your ideal budgeting method, it’s important that you have accurately recorded expenses. In order to do so, you need to have your receipts organized and stored safely.  

Shoeboxed can help you. 

Shoeboxed is a well-trusted tool to help businesses, freelancers, and DIY accountants store and organize their receipts. It is a software program that quickly and efficiently digitizes your receipts and documents. This app automatically extracts, verifies, and categorizes important data from your receipts, then stores them securely in the cloud. Most importantly, scanned documents from Shoeboxed are accepted by the IRS


Go paperless with Shoeboxed for FREE today!