Why Going Paperless May be a Bad Idea for your Business

Is Going Paperless the Best Option for entrepreneurs? Read this before you decide

Business owners are being encouraged to switch to a paperless office and that bothers me because frankly, it’s a bad plan, a bad idea, and requires key elements that most small business owners don’t have or use.

Plus, having accurate, accessible, and organized business records are essential to running a business. And in the event of an IRS inquiry (which has happened to me twice), you need these records to support your claim that you do not owe them additional taxes and to be able to prove why.

This means you need access to all of your financial records from the tax year(s) in question and send them documentation that supports your assertion that you have paid your taxes and do not owe anything else. I’ll provide an example of my experience with this issue in this podcast because it has happened to me twice in the 15 years I have been an entrepreneur.

Listen to this episode of the Goals Profits and Soul Business Podcast below.

The decision to go paperless is not merely about saving a few trees by getting rid of all of the paper in your office. It must be supported by rigorous attention to safeguarding your financial records, continuous accessibility of your records, and the ability to produce them on demand.

The paperless office strategy requires a multi-level, redundant backup plan that provides secure, reliable storage of your business records on multiple platforms, as well as immediate access to them at all times. Most entrepreneurs, whether they have been in business a year or 10 years, do not have this kind of plan in place. You may be surprised to know that many business owners don’t regularly back up their hard drive or keep a separate backup of their computer’s hard drive.

In fact, not only do I not support the paperless office for the home based or small business owner, I think it’s a terrible and foolish idea, for reasons I’ll state here. If you are considering a paperless financial record keeping strategy for your business, please read this before you make that decision.

Here are the top 3 reasons I believe you should avoid going paperless:

  1. If you are not willing or unable to maintain a highly organized system of digital imaging and make copies of every single receipt and piece of financial documentation for your business, you are putting your business at risk by not having documentation to support what you put on your tax return.
  2. Most business owners do not have adequate backup to ensure the security of their digital, paperless record systems. And saving it to the cloud, which is neither secure nor reliable (as we have seen with multiple Amazon and Google fails), is inadequate. Saving documents to your hard drive is an option until your hard drive crashes and you lose all of your data. Multiple backup systems, including external hard drives, an off-line backup service, and other storage systems, are required to ensure data integrity, safety, and security, as well as future accessibility. You should be doing this anyway.
  3. If you are ever questioned by the IRS or taxing authority for anything about your business, you better have documentation to defend yourself. I have had issues with the IRS twice and I had to send dozens of copies of documentation, which I could access because I maintain meticulous paper records, to prove that they were wrong (which they were) and I did not owe them additional money. Without this documentation, I would have had to pay tens of thousands of dollars that I did not owe them, simply because they thought I did.

So while some ‘business coaches’ will gleefully announce that they have gone paperless and encourage you to do so as well, make that decision carefully. The IRS and most local and state tax authorities have strict record retention requirements that go beyond the seven years required for individual taxpayers. And if you ever need to justify your expenses or business deductions, you must have the receipts or justification available which means on a redundant, accessible backup system you can print from, or the paper which you have carefully organized and retained, and can access at a moment’s notice.

I have run a very successful, high profile home based business for 16 years, and unlike most small business owners in the motivational training and coaching field, I have a strong business education and expertise from a corporate background so I made the decision to avoid paperless for sound business reasons.

Unfortunately, the majority of small business owners do not have the organization skills, discipline, technical, and financial knowledge to go paperless and I encourage all of my business program students to maintain organized paper filing systems to protect themselves

My advice to my business students and coaching clients is to keep paper copies of everything and I show them my system which is so organized that my accountants have used my system as an example for their clients. It isn’t complicated and doesn’t require fancy equipment (which makes it easy to implement and maintain), it just needs a few hours of attention a month, and if you ever need to find something, you can find it very easily.

While you will do what is right for your business, I suggest that you maintain meticulous and organized paper records until the day when you have the ability to design a multiple tier redundant storage and retrieval system and have the ability to update on a regular basis. Until then, maintain paper records and file them carefully because you won’t appreciate them until you get the dreaded IRS demand letter that will require research and documentation to prove your innocence or support your tax return entries.

Get the best, expert business advice from a business expert. Jennifer Hoffman is the Cash Flow Profit Platform Expert and the Savvy Soul Coach who leverages business advice with an intuitive advantage.

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