The Records That Keep Your Business From Depending on You

Every company has a story. In many small businesses, however, that story can be told only by the owner. The owner knows why money was borrowed, why equipment was purchased, why a key employee was hired and why the company changed direction. But what happens when the owner is not in the room? What happens when the owner must defend a past decision and has only memories and recollections to offer?

A company should not depend upon its owner to explain every important action. Its records should be capable of telling the story. Three components build that narrative: the business plan, the bookkeeping and the corporate records. Together, they explain where the company intended to go, what actually happened and who authorized the important decisions along the way.

The business plan explains the direction

The business plan should not be a ceremonial document written once for the purpose of landing a bank loan. It should be a periodically updated record of management’s thinking. A useful plan explains the market the company serves, its competitive position, growth priorities, staffing and capital requirements, major risks, marketing efforts and the expected purpose of significant investments.

The plan provides context that financial statements cannot supply on their own. Suppose recent statements show weaker earnings because the company hired additional staff, opened another location or invested in infrastructure. The numbers reveal the decline in current profit, but the plan explains whether management expected it and what the investment was intended to accomplish. Without that explanation, a deliberate investment in future capacity may simply look like deteriorating performance.

A useful business plan also creates a benchmark. Management can compare what it expected with what later occurred. Were the projected sales realistic? Did the new employee produce the expected capacity? Did the marketing campaign reach the intended customers? The differences between the plan and the results are often where the most valuable lessons are found. The plan therefore serves as both a statement of intent and a record against which management’s judgment can be evaluated.

The bookkeeping records what happened

Good bookkeeping is the hub of a company’s financial operating system. It establishes what the company earned and spent, what it owns and owes, where its cash came from and where it went. It allows the owner to see whether performance is improving or deteriorating, and it supplies the foundation for tax reporting that can be supported after the fact.

Timely bookkeeping is especially important because it preserves details while they are still available. A transaction downloaded from a bank or credit card account, properly categorized and supported by an invoice or receipt, creates a better record than a year-end reconstruction based on memory. When the work is kept current, the financial statements can also guide decisions during the year instead of merely reporting history after the opportunities to act have passed.

Bookkeeping alone, however, has limits. A ledger may show that the company spent $75,000 on equipment, borrowed money or made a large payment to an owner. It may not explain the purpose of the equipment, the reasoning behind the loan or whether the payment was compensation, a reimbursement, a distribution or repayment of a shareholder loan. The books record the transaction. The business plan and supporting documents help explain it.

Corporate records establish authority

Corporate documents are the most overlooked part of the story I encounter in my work with business owners. They can also become vital when a transaction is questioned. A tax position may be weakened even when the underlying expense or strategy is otherwise permissible because the business never created the records needed to establish its purpose, terms or authorization.

Minutes, resolutions and written consents provide evidence that the owners or managers considered and approved important actions. Depending on the company, those actions might include officer appointments and compensation, major purchases, loans, retirement plan adoption, related-party leases, shareholder loans, distributions, acquisitions, changes in ownership and significant contracts.

These records also help demonstrate that the company was operated as a separate enterprise rather than as the owner’s personal checkbook. Consider a building owned personally by the business owner and leased to the operating company. The bookkeeping may show the rent payments, but it does not establish the terms of the arrangement. A written lease, appropriate approval and consistent payment history tell a much more complete story. The same principle applies to money advanced by an owner. Without a note, repayment terms and proper records, an intended loan may later be difficult to distinguish from a capital contribution or distribution.

The required documents and formalities vary according to the entity type and the law of the state in which it was formed. A corporation and a limited liability company may not have identical requirements. This is where a good business attorney earns a place on the company’s advisory team. The goal is not to manufacture paperwork after a question arises. It is to document important decisions when they are made.

Your company may face an audience without you

The eventual reader of this story may be a lender evaluating risk, an IRS examiner reviewing a tax return or a prospective buyer conducting due diligence. It may be a key employee assuming more responsibility, an executor settling an estate or a spouse forced to step into the business unexpectedly. Each will approach the company with different questions, but none should have to depend entirely upon the owner’s memory.

The quality of the record matters because unexplained activity invites assumptions. A buyer may discount the value of a company whose decisions and financial results cannot be reconstructed. A lender may view an undocumented obligation as added risk. A successor may repeat an old mistake because the reasoning behind an earlier decision disappeared with the person who made it. Clear records reduce that uncertainty.

A business that cannot explain itself without its owner remains dependent upon its owner. That dependence creates risk and limits transferability. Good bookkeeping, a living business plan and disciplined corporate records allow the company to speak with its own voice. They preserve its financial history, management’s reasoning and the authority behind major decisions. The objective is not paperwork for its own sake. It is to build an enterprise whose story remains coherent even when the founder is no longer in the room.

Every company has a story. In many small businesses, however, that story can be told only by the owner. The owner knows why money was borrowed, why equipment was purchased, why a key employee was hired and why the company changed direction. But what happens when the owner is not in the room? What happens when the owner must defend a past decision and has only memories and recollections to offer?

A company should not depend upon its owner to explain every important action. Its records should be capable of telling the story. Three components build that narrative: the business plan, the bookkeeping and the corporate records. Together, they explain where the company intended to go, what actually happened and who authorized the important decisions along the way.

The business plan explains the direction

The business plan should not be a ceremonial document written once for the purpose of landing a bank loan. It should be a periodically updated record of management’s thinking. A useful plan explains the market the company serves, its competitive position, growth priorities, staffing and capital requirements, major risks, marketing efforts and the expected purpose of significant investments.