accounting

Accrual vs. Cash Basis Accounting

When it comes to accounting models for your small business, you have two basic options: cash basis and accrual accounting. At their core, these accounting models represent two fundamentally different ways to think about revenue and expenses at your business.

Cash basis accounting is the type of accounting that you typically use in your everyday life – simply checking the balance of your bank account or the inside your wallet. The basic principle of cash basis accounting is that, until any cash changes hands, nothing needs to be recorded.

Accrual basis accounting, though, is what most small businesses use to present a more accurate view of the way they operate. It recognizes that, even if no cash changes hands, the operational status of the business has changed. Using the accrual accounting method, your business records revenue and expenses when they’re earned or owed.

While cash accounting is easier and more intuitive, you’re literally just tracking the cash that your business spends and receives. Most businesses require a more powerful, sophisticated form of accounting that takes into account how they match their revenues and expenses. As a result, accrual and cash accounting can present very different views of your business.

Here’s just one example: let’s say you are a medical equipment supplier. As part of running your business, you must maintain an inventory of various medical equipment, pay the rent and utilities of the facility and also pay the staff. You may be paying for these items on a daily, weekly or monthly basis. In return for incurring all these expenses, you also have your customers who pay for repairs on their purchased equipment.

Using cash basis accounting, you would simply record any cash that you spend for auto parts or rent or salaries. And then you would record any cash that you receive from customers when the repairs are completed.

But is that really an accurate view of your business? The truth is that many different variables and factors comprise the overall condition of any small business. Using cash basis accounting, your business would appear to undergo sharp swings in its performance. Some days, it may lose a lot of money, but a few days later, it may make a lot of money.

And what about all that equipment kept in inventory? You’re not using them immediately, but you are treating them as if they are a one-time expense. And what about your customers? What if they are paying using credit or some method other than cash?

That’s where accrual accounting comes to the rescue. It provides a system to match revenue and expenses, so that they are spread out over the time period in which they occur. It provides a system for depreciating assets held in inventory over their entire lifetime. And it makes it possible for a business to truly understand where it stands at any point in time. The core principle is something called the “matching principle” – it recognizes the fact that every expense has some amount of revenue associated with it.

That’s why so many small businesses use an integrated accounting and inventory management software like Spire — it helps a small business owner move to the accrual system of accounting and ties into tax filings as well, which makes things a lot easier every year. So if you still believe that “cash is king,” it’s time to take a different look at your business. Accrual basis accounting gives you a far better view of the underlying fundamentals of your business.

Are You Taking Full Advantage of Your Business Software?

One of the most important concepts in the business world is return on investment (ROI), and that concept can be applied to business software as well. In short, there are costs and benefits to any business software package, and it’s up to the organization to prove that the benefits far outweigh the negatives over the long term.

ROI is one simple number that expresses just how much of a boost you are getting from your new business software. Some of these results may be tangible,such as increased sales, and some of them may be intangible—such as increased productivity or improved worker satisfaction. So how do you go about taking full advantage of your business software and maximizing ROI?

Make Sure You Are Updating Old Processes in Addition to Old Software

There’s one big problem with old legacy software that doesn’t work—it also leads to a lot of convoluted workarounds that no longer make sense. These workaround have often become so ingrained in how we do business that employees will cling to them, even when there’s a new business software that has been implemented. The easiest cure for this problem is a comprehensive training program that teaches employees how to use the software properly, and that also helps to educate them how it can make their lives easier.

Make Sure Employees are Using the Software Efficiently

There’s something about physical paper that makes employees feel more comfortable than trusting a digital stream of 1’s and 0’s on the computer screen. But that leads to a lot of bad habits, like using printed reports and handwritten notes in lieu of software. Software can run optimally when all the necessary information is available. In addition, make sure that employees are entering information to the system as efficiently as possible. Sometimes, the manual keying in of data may not be required.

Make Sure All Software is Fully Integrated

Within any organization, it’s common to think of silos—where data may languish without being shared throughout the organization. That’s one problem that modern business software is meant to address. And that’s also one reason why Spire offers a fully integrated set of features—everything from accounting to inventory management.

Whenever possible, try to avoid using external, non-integrated solutions. Often, your new business management software has a lot of functionality that just hasn’t been tapped yet. The goal is seamless integration.

The best advice, when it comes to maximizing the value of your new business management software, is to figure out all the triggers and pain points for the organization. That’s where you’ll want to focus as you search for a new business software solution. And then, two to three months after you go live, you can follow up again. The key is to schedule regular check-ups and follow-ups so that the software is always performing at its peak capabilities. When that happens, you’ll have found out a way to maximize your software’s ROI, and that’s a rewarding win that you can share with all the stakeholders of the organization!

Managing Accounts Receivable and Accounts Payable

For any small business, keeping a close eye on accounts payable and accounts receivable can be a challenging process. However, this is one key to helping your business run optimally, especially if your company handles hundreds or thousands of transactions on a regular basis. That’s because the gap between “what you owe” and “what you’re owed” helps to determine your cash flow, and the more cash your business has, the easier things are for you as the business owner.

In order to manage your accounts payable (AP) and accounts receivable (AR) more effectively, establish your credit terms upfront. This lets your customers know exactly how much time they have to make payments. For your best customers, the ones with good credit ratings or with a track record of paying on time, you can offer them more flexible payment terms. For other customers, you may want to limit payment terms to 15-30 days. Any more than that, and it could be hard to collect later.

And, in terms of accounts payable, it’s good to get into the habit of paying suppliers as soon as items arrive. You may even be able to get payment discounts for paying quicker. Letting payments pile up is a dangerous strategy as it could lead to a cash flow squeeze later.

Also, think about ways to streamline your transaction cycles. The shorter the transaction cycle, the more streamlined your workflow. To avoid bottlenecks and other difficulties, establish shorter receivables timelines so that you can quickly deal with your accounts payable. Get departments into the habit of issuing invoices, purchase orders and other documentation on designated days of the week or month to create a routine you can work with.

Next, you need to make sure that the folks who handle accounts payable are communicating regularly with the folks who handle accounts receivable. This may be difficult when you’re trying to keep on top of a large volume of transactions, but is absolutely critical if you want to manage cash flow effectively. The left hand, as they say, needs to know what the right hand is doing. For example, if there’s a spike in consumer demand, the AR team can signal the AP team to order more items and be ready for a surge in activity.

In addition, keep a careful eye on accounts that are long past due. You want to make sure that not too many of your accounts are aging. This means looking at old accounts on a regular basis to make sure that everything is being taken care of on schedule. Along those lines, set up a policy indicating the maximum period it should take to clear a customer’s account.

Finally, take advantage of automation to track everything. This speeds up the process of creating and managing invoices, drawing up shipping orders, tracking financial statements and managing the flow of all documentation. This can be a logistical nightmare if it’s all handled manually. But if it’s automated, you have a real-time view at how the business is doing. Using Spire, you have a window into real-time financial flows. And it’s also easier to assemble documentation and reports, as well as flag delinquent accounts and bottlenecks within the business.

So, remember, to optimize cash flow for the business, you need to manage accounts receivable and accounts payable. When they are working in harmony, your company will experience improved financial performance and you will have a big-picture view of how the company is faring.

5 Accounting Mistakes to Avoid

For small business owners, it’s easy to assume that the accounting process will somehow run itself — as long as the business is making money, there’s not much to worry about, right? Wrong. There are 5 common accounting mistakes that small business owners typically make that could curtail the growth of your business or leave it in a vulnerable financial condition.

Here are the top five mistakes to avoid:

Mistake #1: Failing to track accounts receivable

In order to get paid on a timely basis, you have to track your receivables. This may be easy enough if you only have a few customers, or if most of your customers pay upfront using cash. But what if the payment terms drag on for 30, 60 or 90 days? You need to have a process in place to track the aging of those receivables.

That means you continually need to check your list of receivables to see which customer balances are still outstanding. As soon as any payment is received, you need to be applying this amount against the invoice, to show that it is being paid. At the end of every quarter or during tax season, this makes it easier to reconcile any customer deposits still sitting in your revenue account. This is where Spire can help, by automating the receivables process.

Mistake #2: Not keeping expense receipts

Failing to save expense receipts can lead to a series of tax and accounting problems later down the line. It’s especially an issue with smaller amounts — think less than $100 — since at the time, this amount may not seem like a lot. But these amounts really add up. Later, you’ll have a hard time figuring out whether the expense was related to, say, meals, supplies or equipment.

As a result, you should save a receipt of every purchase. You can also take other steps, such as only using a business bank or credit card to pay for business expenses. This makes it easier to draw up an itemized list of expenses.

Mistake #3: Failing to record cash expenses

Cash is king, but it can also be an accounting nightmare. While credit cards, debit cards, and cheques are easily linked into your accounting software, it’s easy to overlook expenses paid in cash. As a result, you need to develop a method for tracking cash expenditures.

Mistake #4: Doing your own taxes

Small business owners should really hire a professional to handle their taxes. You may not claim all the deductions you qualify for, or you might underpay your tax bill, all of which could result in penalties and other fees. The money you think you’re saving could disappear. Plus, tax professionals can keep you updated on changing tax laws, or help you find ways to reduce your tax burden.

Mistake #5: Failing to understand the business implications of accounting terms

Most business owners only carry about the profit and loss of the business. Thus, accounting terms like EBITDA and tax loss carry forwards may have very little meaning for you. But you have to understand the business implications of these accounting terms — how do they impact cash flow or profitability? If the jargon and buzzwords are too daunting, it may be time to switch to another accounting professional who can explain in plain, everyday terms how you can maximize financial success of your business.

Hiring an Accounting Consultant

Accounting consultants are critical to the business world. They help eliminate hang-ups and challenges that many businesses face. However, finding the right accounting consultant can be difficult if you`re not quite sure what to look for. We’ve gathered a few skills to lookout for throughout the process of hiring an accounting consultant.

Experience

Accounting consultants should have a significant record of accomplishment under their belt before you consider them for your business. Their experience should reflect skills in driving business improvements and system integrations.

Analytic & Validation Expertise

Analyzing data and utilizing financial information to the best of their ability is a key component for any accounting consultant. Seek out individuals who excel in analytic skills.

Innovative Solutions

Without creativity and efficiency in implementing strategies, an accounting consultant will not be able to truly assist your business. Seek out individuals who have a propensity and proven resume for enhancing client productivity.

Client Focused Strategy

Any consultant you choose to hire should be focused on building your business. However, their work and value is tied up within their knowledge and expertise. In other words, what they can offer your business is directly linked to solutions that they develop. Their solutions should also fit within your budget and guidelines.

Expect to see a proposal with a recommended solution. The proposal should include the scope of the project, timeline, desired goals and expectations, payment schedule and costs for scope change or canceling the project if necessary.

You can hire the right accountant by being proactive and considering the above tips. The result will be a better financial strategy for your business.