If it’s not in writing it didn’t happen

The documentation you keep for your business is very important for many reasons.

Being audited is one of the most common fears that a business owner may have. Documentation provides backup for what happened in your business, so you can prove you are doing things by the book. In the case of your dealings with other businesses, either in a customer or vendor capacity, you will want to keep a good chain of communication so it can be referred to later if needed. 

Get it in writing

When dealing with clients or vendors, it may seem easiest to pick up the phone and hash things out when making plans. However, unless the call is recorded, anything said during a phone call can easily be disputed. This may sound alarmist, but you really never know what is going to happen in the future nor when you may need proof of something being said or promised.

“They told me they would…”

“I know I gave him the cash…”

… are common phrases that will be answered with “OK, prove it.”

The need for proof is why I am so insistent that you use email as your primary form of communication on important matters, as it creates documentation that may be relied upon later. I’m sure you’ve also had phone conversations that have travelled in circles, with both parties leaving the conversation with a different understanding of what was settled on. In these instances, email saves you time as well!

With email, it is easier to come to a consensus because people have time to respond thoughtfully.  (Some don’t always take advantage of this time but that is another topic altogether).  Email correspondence can be used to show the intentions of both parties and therefore it is crucial that you don’t delete any emails between you and your customers or vendors.

CYA

CYA = Cover Your Ass. Documentation equals PROOF, I think that point is now clear… but what kinds of documentation will you be asked to provide? 

This completely depends on who is auditing you, and why.  For example, if you were having a sales tax audit, the tax authority would want to see copies of your invoices to customers showing that proper sales tax was charged.  They would also want you to pull some invoice you’ve paid, to show the sales tax that you paid out. 

However, if the audit was happening due to legal issues arising, they might be more interested in seeing your email correspondence with customers and the contracts you have signed.

This should go without saying… but just in case:

You should always keep all contracts that your business enters. 

I feel I should also add here that you should ensure that you have read and understand all aspects of the contracts you have entered.  Contracts can be tricky, and it is often advisable to have a lawyer review important contracts to ensure that your business’ interests are protected, especially if they are high value contracts.

Documenting your Sales transactions

Following the execution of a contract agreeing on goods or services being provided for a defined sum of money, you will send your client an invoice for the amount they owe you. These invoices must also be kept for all sales that your business makes. Sometimes there will be a formal purchase order issued which can be attached to these sales invoices as proof that they are valid. Other times, email correspondence might be proof that the sales invoices have been agreed to.

The reason it is so important to have backup for your sales invoices is that it is a common way that company financials are falsified to make the business appear to be doing better than they are. Invoices (and the corresponding revenue) are booked into the system with no expectation of payment, to boost the financial ratios derived from the company’s balance sheet. 

You aren’t doing this, but some do, and this is why auditors want to ensure that all of the sales invoices making up your accounts receivable balance are valid and supported with a contract or commitment from your customer to pay.

In the instance of point-of-sale transactions where someone purchases goods from an online store for example, the records from your payment processing company will support this.  For service-based companies, the invoicing is often done separately from the “job getting done”, and they’ll want to see that all money into your bank account is supported by invoices.

Documenting your expenses

Auditors will be VERY interested in the backup you keep for the expenses your business incurs.

You must always keep the receipts of everything you buy for your business. These are the ‘write offs’, or tax deductible expenses that your business incurs to earn its revenue.  These also will be cross referenced against the “money out” transactions in your business bank account.

The concern here for an auditor is whether or not the expense is actually related to your business’ operations, rather than a personal expense of the owner of the business, which must be treated as income by the owner. The auditors will want to look at a random sampling of expenses listed in your books and you will need to provide the itemized receipts and a description of the purchases.

Save some trees, would ya?

For a long time, documentation meant stacks and stacks of paper. We don’t have to live like that anymore, as much as some people would like to. There are certain instances where you should never destroy original contracts if they contain actual signatures, but I’m finding these to be more and more rare as the digital signature technology has become so robust and secure.

The most widely used form of digital documentation is email. It is so easy and convenient to use email that it is sometimes easy to forget how important it is to retain the information shared over email. Most receipts to back up your business spending are delivered to you via email, so you must be sure never to delete emails that contain financial information. It is safe to delete an email containing financial information if you have forwarded the email to a document retention software or saved the file(s) separately on your company devices.  When audited, you will need to call upon these emails and documents to provide transaction backup to the auditors.

The environmentalist in me urges you to go paperless if possible. Sometimes this requires action by you, to “opt in” to digital documentation.  Once you have the tools in place to maintain your digital documentation, you will wonder how the heck you ever managed with so much paper!

Documentation Solutions

As can be expected, there are cloud-based solutions to keep all your receipts and electronic documentation in one place. The software I use personally is Hubdoc, but there are others out there such as Dext (formerly Receipt Bank). I think that the most important feature is that the software integrates with your bookkeeping platform.

When I receive a receipt via email, I forward it to Hubdoc, and Hubdoc extracts the information from the receipt and from there it can be pushed into the financial software and attached to the appropriate expenditure.

Each country’s tax authority creates their own rules around how long documents must be kept.  In Canada, you must keep all sales invoices as well as purchase receipts for seven years and your tax filing information *forever*.  In the United States, documentation doesn’t have to be kept quite as long.  Be sure to check with your government’s tax authority to see how long you are legally required to retain the receipts for your business transactions. 

If you have any questions about document retention - or anything related to the financial management of your business, I encourage you to check out my community, The Beehive. For a low monthly subscription you have access to all of the educational materials I put out, a dedicated Discord server to ask your questions and collaborate with other entrepreneurs, and monthly calls where I answer your questions.