Thursday, January 17, 2019

Your Business - Cash or Accrual

Many business owners don't understand the difference between a cash basis of accounting and an accrual basis.  This is one of the first things QuickBooks asks; are you cash or accrual basis.  The IRS asks this as well.  So lets define both.

On a cash basis, revenue is recorded when you receive money, and expenses are recorded when you pay out money.  A cash basis doesn't account for money owed to you or money you owe.  On the other hand, an accrual basis records revenue when you issue an invoice, and records expenses when the expense is incurred.  An accrual basis accounts for money owed and money you owe before a cash transaction takes place.

Bottom line is that an accrual basis gives you a much better, more timely view of your finances.  QuickBooks software handles all of the behind-the-scenes stuff associated with an accrual basis.  It tracks Accounts Receivable and Accounts Payable for you.  Setting things up correctly in the software is essential.

So lets talk about the operating side of your business and how this all relates.  If you offer credit terms to your customers, collecting monies on a timely basis is always an issue.  Every business needs liquid cash in order to operate, and "chasing you money" to keep cash flowing seems to be a problem for many businesses.  In that respect, some small business are reluctant to take debit or credit cards for sales due to the percentages charged by institutions for the service.  My advice?  Use whatever means possible to get money into your checking account sooner rather than later!  The cost of "chasing your money" generally exceeds the percentage charges of accepting cards.

Think of your business as a system.  If you don't have cash, you can't pay vendors.  Not paying vendors results in the inability to get product for sales.  Not having sales decreases your cash available.  The cycle of business activity requires cash in order to operate.  You can show a high amount of sales and net profit and can be cash-starved at the same time.

As easy as QuickBooks software makes it for you to set it up properly, you still need to understand some of the setup requirements and how they relate to your business.  Getting a business professional to help you can make the process easier.

No comments:

Post a Comment