One of the first recordkeeping problems faced by entrepreneurs is, "What do we do with all this paper that's accumulating?".
With the increasing capacity and decreasing prices of computer mass memory, it's just a matter of time until all these "papers" will be stored as digital images in your computer — filing cabinets and their associated supplies will go the way of the buggy whip.
However, in the meantime — and for those not at the leading-edge — filing cabinets remain a necessary fact of life. When we go to computer storage, the mechanics will change — but the principles will remain the same.
The perennial filing question is "by-subject or by-date (i.e., chronological)?".
My recommendation — err on the side of chronological! The major "gotcha" of filing systems is purging the system of records no longer needed. Because that won't become a problem until some time in the future, it's all too easy to overlook when setting up the system.
My recommendation is to set up an absolute minimum of subject categories — and file strictly chronological within them. A consideration in selecting the categories is how long their contents need to be retained.
For example, corporate records — articles of incorporation, by-laws, employer-ID, corporate minutes, etc. — need to be retained "forever", and is therefore a good subject category.
I recommend including in this file any papers that can (and should) be referenced in the corporate minutes — bank account and money market applications, facility and equipment leases, real property purchases, intellectual property documents, corporate income tax returns, etc.
Note: Just because your attorney may have given you a "corporate minutes" book holding your initial records doesn't mean you have to keep them that way. Re-binding them into a chronological Manila folder is often more convenient.
Another major subject category is accounting records — the hard-copy purchase, sales, payroll, etc. records that backup your accounting transactions. We'll deal with these in detail in later columns.
All other "paper" falls into the categories vendor, customer, employee, government, and, if applicable, shareholder. This "paper" includes correspondence, contact reports and any data that doesn't fit into the categories previously mentioned — e.g., vendor literature and price lists, employee applications and performance reviews, government non-income-tax returns and census reports, etc.
Whether to file this paper into the categories mentioned depends primarily on volume. If a years-worth of it fits into a few (thick) Manila folders, I'd argue it wasn't necessary.
If/when it doesn't fit, then start breaking it out. If, for example, the bulk is vendor data, break out vendor data as a major subject category. And if/when a years-worth of vendor data doesn't fit into a few (thick) Manila folders, break out those vendors that constitute the bulk into their own folders.
There are cases where the volume rule doesn't apply. For example, if you're a manufacturer and have several people handling customer calls (and you're not keeping contact reports on computer), you'll need a contact-report folder for each customer to provide some continuity in what's being said to the customer regardless of who takes the call. Of course, the "right" way to handle this problem is with a networked computer system (or computer with terminals).
It can be argued that government data ought to be broken out early-on because that stuff's subject to audit and should be retained longer than, say, customer correspondence. But that's a subjective choice.
A piece of customer correspondence from 5 years ago that settles a current lawsuit can be just as important. In general, records should be retained as long as "practical" — which relates somewhat to how much storage space you have. There's some "risk" in pitching any document — and all that can be said with certainty is that the risk decreases with time.
I like having the current year and last years' records readily available — preferably in filing cabinets. Prior years can just go in boxes for retrieval "if/when needed".
Filing Mechanics
In my (admittedly subjective) view, Manila folders, Acco binders, and a 2-hole punch are fundamental fling supplies.
I recommend binding all paper records into Manila folders — because then they don't get lost or out-of-order. When you bind a few hundred records into a folder, you then have only the folder to deal with — otherwise you have the few hundred individual records, each of which is much easier to lose or misplace. When you only have a few hundred records it probably doesn't make much difference — but when you have a few hundred a week, it makes a big difference.
The tab on the Manila folder is labeled with subject (if applicable), starting date (i.e., the date applicable to the first record in the folder) and, later, ending date (i.e., the date applicable to the last record in the folder) Whether you type this data onto a file folder label or just write it onto the tab is a matter of taste — and legibility. If multiple people will be using the folder, the file folder label is recommended.
The records should go into the folder in real-time, i.e., as soon as received or, at least, after initial processing. The folder contents then end up in reverse chronological order, i.e., oldest at the bottom, newest at top — but at least they're chronological. If you're looking for something from about 6 months ago, you know where to look and you'll know if you don't find it, you didn't save it.
Now opening and closing those Acco binders every time you add papers to the folder sounds like a real hassle. It is — I've done it several hundred thousand times. But it's a case where the end justifies the means. If you want to remove the uncertainty of "where" your records are, it's a foolproof way of doing so. The way to eliminate the hassle is to make it "habit" — it just becomes the thing you do when you go to store paper records.
OK, so now instead of having a bunch of papers laying around, we have a bunch of folders. What do we do with the folders? Another set of filing supplies — filing cabinets, Pendaflex folders and tabs, and record storage boxes.
Set up a Pendaflex folder for each Manila folder — and make the label on the Pendaflex tab identical to the label on the Manila folder tab. That way when you've removed a few folders and go to put them back, there is no question where they go. If you have one cabinet and you're the only one using it, this is probably overkill. But if you have multiple cabinets and several people using them, it's the only way to go.
When folders in the file cabinet(s) are no longer "active", i.e., not frequently referred to and not likely to be, simply transfer them to record storage boxes, label the boxes with what they contain, and stack them in (dry) storage. If/when you need access to them, for audit or otherwise, you'll know how to find them.
Some are likely thinking, "OK, that takes care of 8-1/2x11" records — but everything isn't 8-1/2x11". If they're bigger either fold them or reduce them (with a cheap reducing copier) — highly recommended for legal-size documents. (And insist that your attorney do your work only on letter-size.)
If the records are smaller than 8-1/2x11, simply tack them onto a sheet of 8-1/2x11 scrap paper with rubber cement. (Be careful of the stick-um pencils that are being sold as rubber-cement replacements. Rubber cement holds "forever". I haven't yet found a pencil that will hold for more than a couple of years. Obviously, if your small records can come loose and fall out of the folder, you haven't achieved the certainty of record retention you were shooting for.)
Postscript 05/08
With the plunging costs of computer memory (both hard disk & DVDs), filing cabinets and folders have become obsolete. It really is practical (and preferable) these days to go "paperless" with your recordkeeping. I've been paperless for a couple of years now (using a Fujitsu scanner and storing the records in PDF format) — and I wouldn't consider reverting back. Once you get used to filing your records as computer images, they become so much easier (and faster) to store, retrieve and use. The basic filing principles outlined above are still applicable — the filing cabinet becomes a computer folder and the records folders, computer folders in that folder. Of course, a good backup system (and policy) becomes essential — but that's a small price to pay for the added efficiency. (I'm currently using a Mac, letting Time Machine handle the backup automatically — and that's been working flawlessly.)