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