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A successful business rests on sound recordkeeping practices and solid cash flow. Without good records it is impossible to determine the financial condition or profitability of a business. Similarly, in order to survive a small business must achieve a positive cash flow in the long term. This Financial Guide provides the basic information the owner of a small business need to establish good recordkeeping practices in your business and to minimize cash flow problems.

Recordkeeping—Why It's Necessary
What Exactly Will The Records Tell You?
The Basic Recordkeeping System
Understanding Cash Flow
Planning A Positive Cash Flow
Keeping A Cash Reserve
Using A Personal Computer

Large and medium-size companies have internal accounting personnel and sophisticated records and systems to guide management. On the other hand, the owner of a small business usually relies primarily on a bookkeeper and an outside accounting firm to maintain the company's records and provide guidance. Therefore, the small business owner should be familiar with, and recognize the importance of, proper recordkeeping requirements and cash flow planning.

Many small business owners are very knowledgeable about their accounting procedures and quite adept in analyzing their financial records and statements. For less-sophisticated business people, this Financial Guide offers an introductory discussion of recordkeeping and cash flow planning to enhance their awareness and understanding.


Complete and accurate financial record keeping is crucial to your business success for a number of reasons:

  • Good records provide the financial data that help you operate more efficiently, thus increasing your profitability. Accurate and complete records enable you, and 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.
  • 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 operation, which will benefit you as well.
  • 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 IRS audit, if you hope to answer questions accurately and to the satisfaction of the IRS.


The specific records a company needs depends on a number of factors, such as the type of business, the company's goals, management's needs and interests, and cost factors. Based on the relevant factors, your accountant can help you determine what records to keep and what information they should provide. In fact, you might want to update your record keeping procedures to reflect your current business needs. Here are just some of the questions that might be considered in assessing your record keeping needs:

  • 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?

It is essential that you try to determine the precise financial condition of your business. It is as critical as maintaining good customer relations.

Good recordkeeping is time-consuming and can take away from the time you need to run your business. However, as shown above, it is essential.


A basic record keeping system, whether on paper or an off-the-shelf computer software program, should be simple to use, easy to understand, reliable, accurate, consistent and designed to provide information on a timely basis. It generally 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

Your 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.


To be competitive, small business owners must prepare for all future events and market changes. One of the most important aspects of such preparation is cash flow planning. Failure to properly plan cash flow is one of the leading causes for small business failures.

Experience has shown that many small business owners lack an understanding of basic accounting principles. Knowing the basics will help you better manage your cash flow. There are also self-instruction guides from which you can obtain a more thorough knowledge of accounting.

The operating cycle is the system through which cash flows, from the purchase of inventory through the collection of accounts receivable. It measures the flow of assets into cash. If your operating cycle from the purchase of supplies through the collection of receivables totals 180 days, this is the amount of time which you must finance.

Since capital providers, such as lenders, require a return on their investment, this financing will, of course, bear interest. The longer your operating cycle, the higher your financing cost will be. It is important to analyze your operating cycle and forecast your cash needs to minimize the amount which must be financed without running short of cash.

Cash flow analysis should show whether your daily operations generate enough cash to meet your obligations and how major outflows of cash to pay your obligations relate to major inflows of cash from sales. As a result, you can tell if inflows and outflows from your operation combine to result in a positive cash flow or in a net drain. Any significant changes over time will also appear. Understanding this will lead to better control of your cash flows and will allow adequate time to plan and prepare for the growth of your business.

It is best to have enough cash on hand each month to pay the cash obligations of the following month. A monthly cash-flow projection helps to identify and eliminate deficiencies or surpluses in cash and to compare actual figures to past months.

When cash-flow deficiencies are found, business financial plans must be altered to provide more cash. When excess cash is revealed, it might indicate excessive borrowing or idle money that could be invested. The objective is to develop a plan that will provide a well-balanced cash flow.


To achieve a positive cash flow, you must have a sound plan. Your business can increase cash reserves in a number of ways:

  • Collecting receivables: Actively manage accounts receivable and quickly collect overdue accounts. Revenues are lost when a firm's collection policies are too passive. The longer your customer's balance remains unpaid, the less likely it is that you will receive full payment. Conversely, the faster you collect on your receivables, the shorter your operating cycle will be.
  • Tightening credit requirements: As credit and terms become more stringent, more customers must pay cash for their purchases, thereby increasing the cash on hand and reducing uncorrectable accounts. While tightening credit is helpful in the short run, it may not be advantageous in the long run. Looser credit allows more customers the opportunity to purchase your products or services. Any consequent increase in sales should be measured against a possible increase in uncorrectable accounts.
  • Adjusting the  price of products: Many small businesses fail to make a profit because they erroneously price their products or services. Pricing is the critical element in achieving a profit and maintaining positive cash flow. Before setting your prices, you must understand your product's market, distribution costs and competition. Remember, the marketplace responds rapidly to technological advances and international competition. Monitor all factors that affect pricing on a regular basis and adjust as necessary.

Related FG

Related FG: For a basic discussion on pricing, please see the Financial Guide PRICING YOUR PRODUCTS AND SERVICES: A Basic Review.
  • Taking out short-term loans: Loans from various financial institutions are often necessary for covering cash-flow problems. Revolving credit lines and equity loans are common types of credit used in this situation.

Related FG

Related FG: For a review of financing possibilities, please see the Financial Guide RAISING CAPITAL: How To Get Money For A Small Business.
  • Increasing your sales:  Increased sales would appear to increase cash flow. However, if large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually will not be collected until, say, 30 days after sales, a substantial increase in sales can quickly deplete your firm's cash reserves. A computer can facilitate tracking this critical data, as well as speed the time required to consider "what if" scenarios.
  • Managing your expenses:  Watch your expenses carefully. It makes sense to pay early if your suppliers offer a discount for early payment. If no discount exist and the supplier allows you 30 days to pay, take advantage of the 30 days and do not pay in 5. However, beware of penalties for late payment and the potential impact on your credit rating. You should monitor your expenses to make certain they are necessary and reasonable in amount.


You should always keep enough cash on hand to cover expenses and as an added cushion for security. However, it is unwise to keep more money on hand than is necessary. Excess cash should be invested in an accessible, interest-bearing, low-risk account, such as a savings account, short-term certificate of deposit or Treasury bill. Keeping excess cash on hand limits both your growth and the return on your investment.


Projections, as well as good accounting records, are important tools for a small business. They will help answer important questions about the company's financial future and provide direction. The failure to make proper projections, even if only informally, reduces the potential for long-term success.


The computer makes it easy to develop cash-flow projections and many other useful financial-planning tools. A good financial-management package will enable you to review projected inflows and outflows of cash from month to month or year to year. By analyzing these projections, you can see the fluctuations in cash flow and create management policies to avoid potential shortfalls.

There are numerous computer programs for making projections and keeping records. Programs range from basic bookkeeping and "what if" analysis to inventory control or market-demand projections.

Related FG: COMPUTER SYSTEMS: How To Set One Up That Best Meets Your Needs






















Shows the due dates for filing tax returns, reporting tax information and taking certain actions to obtain a tax benefit. 

Related FGs

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