Business mentor: Good records key to clean bill from IRD

Q. I run my own small business and do most of my own accounts and book-keeping. What good financial practices should I follow to ensure a clean financial bill of health should I be audited by IRD?

Small-business sector specialist Sarah Trotman asked Inland Revenue service centre manager Richard Philp for some advice:

A. To get a "clean bill of health" from an Inland Revenue perspective, business operators need to make sure they attend to their basic responsibilities under New Zealand's tax laws.

This includes the legal requirement for keeping all business records for at least seven years so there is an accurate basis on which to calculate how much tax to pay.

Putting in place an effective system for managing business records is critical. You need to be able to see what you've paid and what you're owed so you can budget.

Research suggests as many as 40 per cent of new businesses do not survive beyond their first five years. There are many reasons for their failure, but a major one is inefficient record-keeping. By setting up the right system from the start, you give yourself a better chance to succeed and can save time and money in the long run.

The more up-to-date your records are, the quicker you'll get through your tax returns and other paperwork. Also if you are doing the day-to-day bookkeeping, your accountant will not have to spend valuable time (that you are paying for) getting your end-of-year books in order.

If you are in business, you can definitely expect to be audited by Inland Revenue at some stage. There will be less time spent on the audit if your records are well kept.

But it's not just about tax. Good record-keeping makes it easier for others to know whether to invest in your business or project. If you are thinking of selling the business, potential buyers are more able to check your performance by looking at your records if they are in good order.

Following hard on the heels of effective record-keeping is an effective budgeting system. A "cashflow budget" is basically a summary of the financial future of your business for the next six months to a year and is used to describe the movement of money in and out of a business.

By checking actual cashflow figures against your cashflow budget (cash in and cash out), you'll be able to tell when you can afford new equipment, hire more staff or arrange finance, in addition to helping you pay your taxes on time.

In a nutshell, good business recording and cash-management systems are key influencers as to whether your business or organisation survives.

The Inland Revenue booklet Smart Business (IR 320) is an introductory guide for businesses and non-profit organisations, offering comprehensive guidance on how to set up and run effective records and cash-management systems.

This booklet is available on the department's website (www.ird.govt.nz/forms-guides - link below) along with a wide range of other online services. These include a tax calendar, depreciation calculator and provisional tax booklet.

You can also contact Inland Revenue's specialist business tax information officers, who offer free tax education and advice to new businesses and smaller organisations, or phone 0800 377-774.