My last column, titled "Keeping records returns benefits," talked about the necessity of having an organized way to create and maintain corporate records. As a follow-up to that article, we need to look at the state of the financial records.

Financial records include not only the income statement and balance sheet, but also information on assets, liabilities, contracts (to be covered in my next column), real estate, taxes and insurance. Whether you are acquiring bank financing, raising investor capital or selling your company will determine how detailed your records need to be for third-party due diligence.

Following is a basic list of items taken from a sampling of due diligence request forms. These forms are typically given to a company prior to the third party starting a review.

Financial statements

1. Monthly statements for the past two to three years
2. Audited statements for three years (you may be able to use review statements)
3. Accounting policy and procedure manual

Assets

1. Accounts receivable (with aging), reserve account analysis
2. Inventory analysis
3. Prepaid expense analysis
4. Fixed assets with accumulated depreciation

Liabilities

1. Accounts payable
2. Accrued expense analysis
3. Unearned revenue analysis

Real estate

1. Real property under lease

Taxes

1. State sales tax return
2. Federal and state payroll tax returns
3. Federal and state income tax returns (up to five years)
4. Correspondence relating to the above items

Insurance

1. Copies of all business and employee benefit policies.

Following are a few ideas on how to be better organized:

Acquire financial accounting software. The better accounting systems will include modules that will address most of the issues mentioned above. Too many companies stay with a simple system too long and fail to upgrade as the firm grows and becomes more complex. Do not wait too long — recovering needed data after the fact is difficult and sometimes impossible.

Accounting policy and procedures manuals already exist, do not start from scratch. Many companies are willing to share their procedures manuals, or you may be able to obtain a sample copy from your CPA firm.

Make document creation, organization and retention part of the job description for your lead accounting professional. Ask them to take a few minutes each quarter to show you what they have in their files. Don't compromise; demand that the records be well-maintained. If you plan to sell or merge your company in the future, consider having your company audited or reviewed by a qualified accounting firm. Request a management letter at the end of the audit, listing items that you need to correct to be in compliance with generally accepted standards.

Make the decision to organize your financial records. Delegate the responsibility if you are not inclined to follow through on a timely and regular basis. You will sleep better if you do!