Why Should Your Business Use Accruals Based Accounting….

As a business owner one of the tasks at hand is to promote and package your business is a stable business entity that is credit worthy and an attractive investment.

To do this you need to continually monitor your business results in a consistent and accurate way.  With cash basis accounting revenues are booked when you get paid, and expenses are recorded when they are paid.  When accrual basis accounting is used the revenues are booked when you earn them and expenses are matched to the period in which the benefit is derived.

Though the cash basis is the easiest to implement, it is really just a check register for the most part.  This basis of accounting provides very distorted and misleading information.  For example if you provide consulting services and you receive payment at the end of the project.  As the project progresses costs are recorded and revenue is not, then at the end of the engagement an invoice is prepared and sent to the client.  Under cash basis the revenue will be recorded when the invoice is paid.  Therefore the business would look like it is not doing well during the months where the work is done and then will look unrealistically good in the month the revenue is recorded because it is not matched with the costs.  Not only does not matching the expenses with the derived benefit give the business owner a false picture of the business results it gives potential lenders or investors a false picture. 

When an owner is packaging the business to potential lenders demonstrating a good understanding of the business is very important.  Being able to understand trends and explain them will be an indication to the lender that your business is credit worthy.  With cash basis financials it becomes very difficult to understand, explain and predict business trends which make it harder to run your business and get good results.

Accrual basis accounting is more expensive, because it requires business accounting software and a person capable of using it.  The expense is worth it because it will help the business owner plan and overt cash shortages, keep costs under control because over spending is more visible, and will make it easier to obtain terms with vendors and banks.   Getting favorable terms with vendors and banks can save a company a lot of money.  If using credit cards is the only way a business has to get financing the cost of this will be much more costly than with vendor terms or a bank line.  Also, when an owner demonstrates a strong business acumen and understanding of the business demonstrated by good accrual based financial statements a bank lending officer would rightly consider that business less risky thereby getting more favorable loan terms.

Since your goal as a business owner is to grow your business in the most profitable way possible, it should make sense that it is a sound decision to invest in accrual based accounting from the start.  Being able to display an accurate picture of your business on a consistent ongoing basis not only provides the information necessary to run your business better but also improves the cost of obtaining the cash flow necessary to grow your business cost effectively.

e-Bookkeeping provides affordable virtual accounting department services. If you have questions about these services contact Diane Perusse @877-292-9684 ext 3, or diane@e-bookkeepingonline.com

Are Internal Controls Too Expensive?

When inquiring with small business owners about Internal Controls the answer is almost always, “we can’t afford the staff to have Internal Controls” or “we are too small to need Internal Controls”.


At the highest level Internal Control is defined as:

Systematic measures (such as reviews, checks and balances, methods and procedures) instituted by an organization to (1) conduct its business in an orderly and efficient manner, (2) safeguard its assets and resources, (3) deter and detect errors, fraud, and theft, (4) ensure accuracy and completeness of its accounting data, (5) produce reliable and timely financial and management information, and (6) ensure adherence to its policies and plans.

Very boring to the average small business owner who is occupied everyday with the demands of running a business. Because small businesses usually have active and involved management, “trusted” staff and uncomplicated procedures, the small business owner often feels as though Internal Controls are not necessary. Well tell me if you feel that way after this story.

A few months ago a friend that I work with on a Non-Profit Board called needing help. His Accountant had been out for three weeks due to a breakdown. The company experienced impressive year over year growth in this rough economy, which I thought was impressive and made me look forward to working with them.

When inquiring about the Accountants duties, trying to find the right place to jump in and get the most important things done first I became concerned. This person had complete responsibility over everything in the accounting department. She invoiced the customers, entered the bills, made the deposits, wrote the checks, “reconciled” the bank statements and credit cards and was virtually the only interface with the tax accountant. She also had the entire bank and credit card logins, as well as the ability to send eft’s. This is always concerning and unfortunately way too common.

It was not long, less than 24 hours when my concern became founded. First we found that the Accountant was paying her personal SDG&E bills along with the Company’s. Then we found that the credit card bills were not really reconciled in months, the steps were followed but entries were made to force the balance to reconcile. Next, the eft’s used to process payroll did not in fact equal the actual payroll and Petty Cash was missing. Everywhere we looked we found signs of theft and were able to accumulate over $30,000 of misappropriated funds. There was more to be found as we only went back a few months, but the owner did not want us to look anymore as they found that their insurance did not cover the employee fraud. Their Attorney also advised them that it was difficult and expensive to prosecute these cases and since the Accountant had nothing of value they would never recoup the cost.

So I ask, can you NOT afford internal controls?

e-Bookkeeping provides affordable wrap-around services to support your company’s Internal Control function. If you have questions about these services contact Diane Perusse @877-292-9684 ext 3, or diane@e-bookkeepingonline.com