How Long to Keep Bank Statements as a Small Business

Running a small business involves keeping track of many moving parts, from inventory to employees to taxes. One critical but often overlooked area is financial record keeping and retention, especially when it comes to bank statements. While it may seem tedious, properly retaining and organizing bank statements is extremely important for small business success.

Bank statements provide a monthly record of all transactions impacting a business's bank accounts. They serve as crucial supporting documents in case of audits, loan applications, or legal disputes. Bank statements also help small business owners track expenses, create financial reports, reconcile accounts, and gain insights into their company's financial health.

Determining the ideal retention period for bank statements involves weighing factors like legal requirements, the benefits of long-term retention, the hassles of storing paper records, and more. To make the most informed decision for your small business, continue reading for an in-depth look at bank statement retention best practices.

Recommendations on Bank Statement Retention

When it comes to retaining bank statements for a small business, there are a few factors to consider:

• Minimum legal requirements - Most experts recommend retaining statements for a minimum of 5-7 years in order to satisfy legal and tax requirements. However, some recommend keeping statements for as long as business tax returns are kept, which can be indefinitely.

• Benefits of longer retention - Keeping statements for longer (10+ years) can provide extra documentation in case of an audit or lawsuit. It also gives more historical data that may be useful for analysis.

• Challenges of longer retention - Retaining statements for longer periods takes up more storage space and makes records management more complex. The statements may not be frequently accessed beyond 7 years.

• Accounting body recommendations - Organizations like the AICPA recommend retaining bank statements for at least 5 years. However, they note most financial experts recommend 6-10 years.

• Customized retention - Consider a customized retention policy based on what's best for your business situation and industry. For example, keep records for key purchases longer.

Overall, most experts recommend 6-10 years as a good retention period to satisfy legal requirements while also utilizing historical records. Consider both minimums and maximums based on your specific needs.

Minimum Legal Requirements

There are several legal requirements that dictate the minimum length of time small businesses should keep bank statements, and it varies depending on location and jurisdiction.

In the United States, the Internal Revenue Service (IRS) requires bank statements be kept for at least 3 years from when you file the return, and up to 7 years if there is a loss reported.

In Canada, the Canada Revenue Agency (CRA) requires records like bank statements be kept for 6 years from the end of the last tax year they relate to.

In the UK, small businesses must keep records for 5 years from the 31 January submission deadline of the relevant tax year. This includes bank statements as proof of income and expenses.

In Australia, bank statements need to be kept for 5 years from when the tax return was lodged. The Australian Tax Office (ATO) requires bank statements as part of the records to support tax returns.

Checking the rules for your specific jurisdiction is important, as failing to keep the legally required records can lead to financial penalties in the case of an audit. At a minimum, small businesses should keep bank statements to cover the retention period required by their tax authority.

Benefits of Longer Retention

Retaining bank statements longer than legally required offers several advantages for small businesses.

Supporting Tax Returns and Audits

Keeping bank statements for at least 3 years allows small businesses to support figures on past tax returns if audited by the IRS. Having access to detailed statements makes it easier to prove and explain specific expenses, deductions, and calculations from previous years.

Reviewing Past Transactions

Extended bank statement history gives small business owners visibility into older transactions. This helps identify inconsistencies, errors, or fraudulent charges from years past that may have gone unnoticed. Being able to review granular transaction details can uncover accounting errors or questionable activities.

Documenting Business History

Maintaining a long history of bank statements essentially documents the financial progress and activities of a small business. It provides a way to retrospectively analyze performance over time, trace the impact of decisions, and derive operational insights from financial patterns. This level of visibility enables more strategic planning.

Challenges of Longer Retention

Retaining bank statements, especially paper copies, for longer periods can present some challenges:

• Storage space - Keeping years of paper bank statements takes up a lot of physical storage space in filing cabinets or boxes. Even digitized statements require substantial digital storage capacity.

• Costs - Related to storage needs are the potential costs of buying filing cabinets, offsite physical storage, or increased digital storage capacity in the cloud or on external hard drives.

• Finding statements - Organization is key with longer statement retention. Misfiled or disorganized statements from years past will be difficult and frustrating to locate when needed.

Proper labeling, categorization, and consistent filing are essential to keep years of statements accessible. Searchable digitized statements make finding past records easier.

Tips for Organizing Bank Statements

Keeping years of paper and digital bank statements organized can be a challenge. Here are some tips to make bank statement organization easier:

Naming and Folder Conventions for Digital Copies

• Store digital copies of statements in clearly named folders by year and month (e.g. 2022/January) or by statement period (e.g. Jan 1 - 31, 2022). This makes it easy to locate past statements.

• Name each statement file clearly (e.g. Jan 2022 Statement.pdf) so you can identify it at a glance. Include the year and month in the file name.

• Create a master "Bank Statements" folder and organize subfolders inside it by year and month or statement period.

• Back up your bank statements folder regularly to an external hard drive or cloud storage. This protects you in case your computer crashes.

Indexing and Filing Methods for Paper Copies

• Use file folders or binders to store paper statements. Label them clearly with the date range.

• File paper statements chronologically with the most recent statements on top. This makes retrieval easier.

• Write the date range on the tabs of file folders or binders holding statements. Include the year.

• Create a master index of which statements are in which file folders. Update it each time you add new folders.

• Store paper bank statements in a safe, dry location away from fire and water damage.

• Only keep 7 years of paper statements onsite. Move older ones to external protected storage.

• Shred and destroy paper statements after retention period ends.

When Statements Can Be Destroyed

You should only destroy bank statements after the required retention period has passed for your business. For most small businesses, this means keeping statements for at least 3 years. However, you may want to keep statements longer for your own records.

When you're ready to destroy old bank statements, it's important to do so securely. For paper copies, the best method is shredding. You'll want to use a cross-cut or confetti shredder, not a standard strip shredder. This will ensure the statements are shredded into tiny pieces and can't be put back together.

Some other tips for secure shredding:

• Shred statements as soon as the retention period is up. Don't let them pile up.
• Lock bank statements and other sensitive documents in a secure place until shredding.
• Consider hiring a professional shredding company for large amounts of documents.
• Watch as statements are shredded if using a third-party company.
• Shred credit card statements and other documents with account numbers.
• Destroy the shredded pieces when complete.

Proper shredding and disposal of old bank statements helps protect your business from potential identity theft or fraudulent activities if the statements were to fall into the wrong hands. It's a simple step you can take to maintain security.

Digitizing Paper Statements

Digitizing paper bank statements by scanning them offers several benefits over keeping stacks of paper records. Scanning statements not only saves storage space, but makes the records more secure, organized, searchable, and accessible.

When digitizing paper bank statements, it's recommended to use a document feeder scanner for efficiency. Flatbed scanners are also a good option, but can be more time consuming for large volumes. Look for a scanner with at least 300 dpi resolution to ensure legibility of scanned documents.

Once scanned, there are a few recommended file formats to save statements in for long-term digital storage. PDF/A is an ISO standardized version of PDF designed for archiving records long-term. TIFF is another common archival format. JPEG can work for storage as well, though some image quality may be lost with compression.

When naming the files, use a logical naming convention like "Bank Name_Statement Year_Month.pdf" for easy searching later. Organize digital statements by year and month into folders. Back up files to external drives or cloud storage for redundancy. With paper statements converted to organized digital copies, records will be accessible for taxes and accounting needs for years to come.

Bank Statement Management Software

With the rise of digital banking, it's easier than ever to download electronic copies of bank statements. However, organizing and managing those PDF statements can still be a challenge, especially when dealing with multiple bank accounts. This is where bank statement management software can help.

Software like LedgerBox allows you to extract transactions and other data from your PDF bank statements. This makes the statements searchable, and allows you to save the information in formats like Excel or CSV that integrate with accounting software.

Key benefits of using bank statement management software include:

• Automatically downloads bank statements from online banking
• Extracts transactions, descriptions, dates, amounts etc into a usable format
• Allows searching within bank statements to quickly find transactions
• Exports extracted statement data to Excel, CSV or other formats
• Integrates statement data with accounting systems like QuickBooks Online, Xero, Sage and more
• Provides a central hub to manage and organize statements from all your accounts
• Improves efficiency compared to manual data entry

With bank statement software, you eliminate the headaches of shuffling through paper statements or folder after folder of PDFs. The extracted data integrates seamlessly with your bookkeeping, and gives you quick access to past statement information for your records. This enables better cashflow management and transparency for your business.

Conclusion

In this article, we looked at several key considerations for how long small businesses should keep their bank statements. The minimum legal requirement is typically around 5-7 years, but there are benefits to keeping statements longer for tax purposes or in case of an audit. However, long term storage does present challenges like storage space and organizing all that paperwork.

We covered tips like scanning to digitize paper statements, using cloud storage, and leveraging bank statement management software. With the right organizational system, it's feasible to keep statements for 10 years or longer if desired.

To recap, here are some of the main takeaways:

• Check your jurisdiction's legal minimums, but consider keeping statements for at least 7 years.
• Weigh the pros and cons of longer retention periods like 10-20 years.
• Go paperless by scanning old statements and shredding originals.
• Use cloud storage, external drives, or software to organize digitized statements.
• Bank statement management software extracts key data and simplifies long-term storage.

For small business owners ready to get their bank statement filing under control, services like LedgerBox are worth exploring. Their automated data extraction saves time on manual entry and ensures the records you need are accessible.

With a thoughtful system for organizing and digitizing statements, you can store records securely for as long as needed. Just be sure to have a plan in place for when those old statements can finally be deleted.