A success-oriented business person must keep business records to succeed. Never avoid that fact because it’s a legal requirement in all countries worldwide. In Uganda, for instance, keeping business records is mandatory for any person carrying on a business. The Income Tax Act 1997 Section 157 spells out that “A person who deliberately fails to maintain proper records for a year under the requirements of this Act is liable to pay a penal tax equal to double the amount of tax payable by the person for a year”.
Putting the legal requirement aside, you need to keep business records to enjoy the benefits of being organised in business. We shall talk about them later. Read this post if you intend to start or are already in business. And when you read it to the end, you will get a better understanding of the following:
- Meaning of business records.
- Reasons for keeping business records.
- The different types of business records you should keep.
- What you should do to keep proper business records.
#1 – Meaning of Business Records
What are business records? Briefly, these are documents that record business dealing or transactions. They’re a record of all the transactions that a business carries out in a given period. The period can be a day, a week, a month, a year or more years.
Since business depends on trust, your records must be accurate and easily retrievable. The creation of these records must be perceived to deliver a clear and valid picture of your business consistently.
Business records can either be in hard copies or digital form. If you choose to keep your documents electronically on a computer, I strongly advise you to maintain a backup which you can run in case it collapses. It’s also advisable to keep hard copies of your records.
#2 – Why Should You Keep Business Records?
If you’re self-employed, then you must keep records. Keeping good records is helpful to you as a business owner and very important to your business. Good records will help you to achieve the following:
- Monitor your business progress.
- Keep track of your income sources.
- Keep track of your business expenses.
- Project your estimated tax payments.
- Prepare your financial statements.
- Prepare your tax returns with support documents of the items reported.
- Ability to grow your business.
- Make it possible to distribute profits to shareholders without any difficulty.
Monitoring Your Business Progress
Did you know that most small businesses in a country like Uganda collapse because they fail to keep records? If you were not aware, read about this revelation of a businessman who collapsed because he couldn’t consider bookkeeping vital. The business collapsed in a limited timeframe because the owner didn’t keep business records.
You cannot monitor the progress of your business without records. How will you know? You will never know whether you’re improving or collapsing. It’s only possible with evidence because they will show you whether your business is growing, which items sell, and what changes you need to make. You can quickly reflect on your current business position. You get to know your strengths and weaknesses to increase the likelihood of your business success.
Keeping Track of Your Income Sources
You can easily track your income sources or receipts when you keep records. In business, you will get money from several sources. And it’s only the records you maintain that can help you identify these sources. This information is helpful for you to separate business from non-business receipts and taxable from nontaxable income.
Keep Track of Your Business Expenses
By keeping a record of your payments with receipts, you make it easier to know them. Unless you establish a system for tracking deductible expenses, you’ll forget them. Remember that this is important because it will help you prepare your tax returns and manage costs.
Project your Estimated Tax Payments
Every year in Uganda, businesses project their income tax liability so that they make estimated tax payments. Estimated tax is an annual advance payment of tax returns based on the income your business earned and the estimated tax liability incurred. For instance, if you project your business to make an annual profit of 1,000 USD (UGX 3,750,000), 30% of that will be 300 USD (UGX 1,125,000).
In Uganda, companies must submit provisional tax returns (indicating estimated tax payable) within the first six months from the beginning of their accounting period (i.e. July to December of every year). This estimated tax is payable in two instalments as follows:-
1st Installment – tax payable by the end of the sixth from the beginning month of the accounting period
2nd Installment – by the end of the twelfth month from the beginning of the accounting period.
You must maintain proper records to provide a realistic projection of your estimated tax; otherwise, you risk paying more or less. And if you spend less than you should, you risk getting penalised. People who don’t keep business records get unrealistic tax assessments and complain to the revenue authority. The solution to that is to maintain proper records of your business.
Prepare Your Financial Statements
You need to have proper records to be able to prepare financial statements. These include profit and loss statements, cash flow statements and balance sheets. Financial statements are helpful to you in the following ways:
- First, they offer you evidence of the financial health of your business. By looking at the records, you can quickly know whether your business is growing or not and many others.
- Secondly, financial statements help you to decide on important issues related to the strategies and operations.
- Thirdly, they form part of a business plan.
- They are a requirement for getting business loans and investment capital.
- Lastly, they form a foundation for your income tax returns.
Prepare Your Tax Returns and Support Items Reported
To prepare your tax returns, you need well-kept business records. These records support your income, expenses and credits you report. If you don’t have them, the taxman will never listen to you because he is ever looking for evidence. And this evidence is with the supporting documents. They support the items you report on your tax returns.
Remember that when you make an entry on tax returns, you have the burden of proof. You must prove that you have entitlement to certain deductions and expenses to be able to claim them. You can only establish this proof if you keep business records. With records, you can substantiate those deductions and expenses.
Ability to Grow your Business
Often, bidding requires you to submit financial statements and proof of compliance with tax payments. If you want your business to prosper, it’s vital to keep business records. From your business records, you will be able to fulfil the bid requirements because you can prepare financial statements and prove your compliance with tax payments.
Making It Easier to Distribute Profits to Shareholders
You’ll have to share profits at the end of each financial year if you’re a company. Without records, you won’t be able to prepare financial statements. Consequently, it becomes hard to determine profits or losses. Such a scenario can lead to the collapse of the business due to a lack of trust.
#3 – The Different Types of Business Records You Should Keep
Having thrown more light on the benefits of keeping business records, let’s now dive into the different types of documents you should keep. They include the following:
- Financial statements – (they consist of profit and loss accounts, cash flow statements, balance sheets, and depreciation schedules)
- Asset register – (this is a record of the fixed assets that belong to your business. The primary purpose of this business record is to keep track of the book value of your property and determine the depreciation calculated and recorded for management and taxation purposes.)
- Cash records – (they include records like cash books, purchases and sales records, expenses records, cash receipts, cash payment receipts, bank deposit slips, etc.)
- Banking records – (these include bank statements, bank reconciliations and bank loan documents)
- Debtors’ records – (these are records of the people who owe your business)
- Creditors’ records – (these are records of people you
- owe as a business)
- Stock inventory – (you keep track of the stock you have in business)
- Employee records – (they include documents relating to your employees like contracts, wages/salaries, PAYE, appointment letters, etc.)
- Minutes of directors’ meetings and correspondences
- Customer records – these are records containing customers’ full name, company name, address, telephone, email address and business information.
#4 – What You Should Do to Keep Proper Business Records
Every business must keep records because it’s a foundation for building a successful business. Secondly, it’s a requirement by law to have documents relating to your business. However, keeping records is so tricky for most business owners. The solution is to break things down into straightforward and manageable tasks.
You need to establish a business record-keeping system that will enable you to update your records regularly. It’s when you will find it manageable. Make sure you always keep all documents containing details of receipts, payments, credit purchases and sales, assets and liabilities.
If you cannot get a receipt for a given expense, make a note and record the details immediately.
Most business persons cannot prepare financial statements because they don’t know. In such a case, you need to seek the services of a professional accountant to make them for you. But for the professional accountants to do the work, they’ll ask for the records from you. They will need the documents and some of the information we have identified above.
As a tip, it’s always good for a business person to acquire basic accounting knowledge. That’s when you manage your business records well. For instance, you can enrol on a bookkeeping course. It will help you solve the problems you may encounter along the way emanating from a lack of proper records.
If you want to succeed in your business, keep business records from the first day. The benefits are many. And I have explained them to you above. If you find yourself not conversant with business record keeping, learn. Or seek the services of a professional. Do you have a question? Let’s hear from you!