Small businesses shouldn’t be intimidated at getting their finances in check.
A good way to keep the financial health of the business is to get a good grasp of basic accounting and bookkeeping so you can get a better understanding of the strengths and weaknesses of your business.
It’s most important to get into the habit of using accounting and bookkeeping as a springboard to track your business growth.
It’s highly recommended to hire an accountant and a bookkeeper. The reason is very simple.
It helps you save time.
You entrust your financial record to a financial expert
You teach yourself along the way through the professionals you’ve hired.
Entrepreneurs may think it’s intimidating to do this especially when they’re starting small, but it’s an effective way to help you uplift your expertise on your business, credibility, and growth. A business owner has also the advantage when they decide whether to use cash-based accounting or accrual accounting.
Definitely talk to your accountant about this, if you may want to hire one. But let’s break down this important choice, with a quick explanation of what each of these reporting methods is all about, plus some thoughts from various accounting experts.
What is accrual accounting?
According to accounting experts, “Accrual accounting requires businesses to report income when the revenue is earned rather than when the cash is received. Additionally, under the accrual account, expenses are recorded when incurred, not when paid."
When do you use accrual accounting?
Accrual may be suitable for businesses that:
Are larger
Have inventory
Have shareholders and investors
Have more complex structures
What is cash accounting and when do you use it?
In lieu of accrual accounting, cash accounting
is the cash method that allows business owners to report revenue when cash is received and then report expenses when actually paid.
Having control over the timing of revenue and expenses provides small businesses with tax planning opportunities at the end of the year.
Cash accounting may be suitable for businesses that:
Are smaller
Do not have inventory
Sell services, not products
Before you set on more complex matters with accounting, better decide first which of these two would fit with you best. With Start It Up Mentoring, we'd love to hear from you! You may comment on the comment section for any business tips you may have!
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