Keeping accurate financial records is fundamental to the efficient running and ultimate success of your business. Most business owners make use of accounting software and the support of a good bookkeeper to help keep them on track and ensure that all transactions are recorded in a timely manner. But what accounting approach should you use? Essentially there are two methods of accounting but what’s the difference between cash and accrual accounting?
The Difference Between Cash and Accrual Accounting
You might be wondering why choosing the right accounting method is so important for your business. The key to understanding the difference between cash and accrual accounting lies in the timing of when revenue and expenses appear in your financial reports.
Cash Accounting Explained
Typically cash-basis accounting is used by smaller businesses who prioritise simplicity. Using cash-basis accounting a company records expenses and income as the cash is actually paid out and received.
There are some advantages to using cash-basis accounting such as:
- It’s easier to keep a track of your cash flow
- It’s suited to smaller businesses that mostly handle transactions in cash
The major disadvantage of the cash method is that it doesn’t capture money owed to you or that you owe to others so it can be difficult to get an accurate picture of how the business is performing financially. Take a business which delivers training funded by various different governments and receives lump payments on a few occasions a year. Using cash-basis accounting it is extremely difficult to track the health of this business because they either have ample cash or have been incurring expenses for which they are yet to receive payment.
So What Is Accrual Accounting?
Accrual accounting, whilst a little more complicated, is much better suited to larger businesses or businesses who don’t get paid straight away.
Using accrual accounting you record expenses and sales when they take place as opposed to when cash is paid or received. For example using Accrual accounting our training business would apportion lump payments throughout the year depending on when the actual training was carried out. Now income and expenses are matched and the business has a true picture of their financial position.
A word of warning though, if you are using accrual accounting you need to keep an eye on your cash flow because any issues won’t necessarily appear in your financial statements.
How To Decide Which Accounting Method Is Right For Your Business
As we’ve highlighted the type of business you are running will be an important factor in deciding which is the most appropriate accounting method. While accrual accounting may require more work, technology and decent accounting software can make this far easier. This is also where the support of a well trained, experienced bookkeeper will pay dividends. As we highlighted in our last blog exploring how a bookkeeper can help your business, they will be able to help keep your records up to date and save you time and money. And if you want to introduce accrual accounting into your business, you simply need to ask your bookkeeper to start providing you with accrual accounting financial statements.
At Numera Bookkeeping Services, we provide more than most traditional bookkeepers. With significant experience across a wide range of industry sectors, our Brisbane bookkeepers are able to support you with all the standard bookkeeping services, including BAS preparation and lodgment, as well as advising on the most appropriate accounting method for your business. We can also support you in choosing the best accounting package for your business: Xero, MYOB, Quickbooks and Reckon.
Speak to the team at Numera Bookkeeping Services to make this happen. Work with the Brisbane bookkeepers you can trust. Give us a call today on 07 3002 4880 or email firstname.lastname@example.org to find out how we can help your business.
When you first started out in business you probably had all good intentions of managing as much of the business as possible by yourself. Maybe you were trying to keep your costs low or you felt that you needed to be in control of all of your financial information. Whatever the reason, generally there comes a time for all small business owners when they realise that they need assistance to keep things running smoothly, particularly when it comes to record-keeping and transactions. So why use a bookkeeper? We’ll outline 3 ways that they can help your business to thrive. There are many different professional support services available for business owners and, as we covered in our last blog post, there is a difference between bookkeeping and accounting. While they are different services, they are actually complementary and for your business to run smoothly you ideally need both. You may have already engaged a good accountant to help advise you on ways to grow your business, how to stay tax compliant and minimise business costs but why use a bookkeeper too?
Reasons To Use A Bookkeeper:
Reason #1: Saves You Time And Money
Most business owners are time-poor and the task of keeping accurate financial records, ensuring all transactions are recorded, usually gets deferred until it becomes absolutely necessary e.g. the BAS is due or it is tax time. Engaging a qualified bookkeeper saves you the time of having to review all your transactions, particularly if you have put off the task for a few months.
You will also save money in the longer term as a good bookkeeper will help ensure you pay bills on time, avoiding interest and late payment fees. They will also streamline your current business systems and processes, ensuring your financial records are in top shape and your business running as efficiently as it can be. Having accurate financial records can also help you get credit from banks or other lending organisations, should you need it AND it will help your accountant spend less time dissecting your data and more time using the data to offer valuable insights to help you grow your business.
Reason #2: Allows You To Focus On Growing The Business
As the business grows so does the paperwork and record-keeping. Most business owners reach a point where they realise that they are spending too much time every week chasing payments, reviewing supplier invoices or processing their payroll. A bookkeeper can take on all these tasks and more and free up your time to focus on the things that will help your business to grow.
How much time have you spent in the last week trying to keep track of your sales, payments, purchases and receipts? And if you haven’t been doing this regularly, it is obviously going to be a big job when you get around to doing it and take a substantial chunk of your time to reconcile all of your transactions. How much more effective would you be if you were focusing on the thing you really love: your business?
Reason #3: Gives You Peace Of Mind
You can’t be an expert in everything. Ensuring your business is complying with the latest tax regulations outlined by the ATO and ASIC, such as ongoing changes to superannuation law, is one area where you really should be engaging the services of professionals. Engaging a well-qualified bookkeeper will help you stay out of hot water with the ATO and give you the peace of mind that all monthly, quarterly and annual deadlines are met for BAS, tax, and superannuation and your business is compliant. And if you have fallen behind a bookkeeper can also help bring your lodgments up to date and work with the ATO to manage existing debt and get your business running efficiently again.
At Numera Bookkeeping Services, we provide more than most traditional bookkeepers. With significant experience across a wide range of industry sectors, we are able to support you with all the standard bookkeeping services as well as BAS preparation and lodgment, accounting software support for packages including Xero, MYOB, Quickbooks and Reckon. If you need the services of a local accountant, our referral partners, MGI South Queensland are on hand to offer more detailed accounting advice. Work with the Brisbane bookkeepers you can trust. Give us a call today on 07 3002 4880 or email email@example.com to find out how we can help your business.
If there’s one question that we get asked more than any other, it is: what’s the difference between bookkeeping and accounting? Many business owners, particularly when they first start out, are unclear about the distinction and what role a bookkeeper can play in the business. There is however, quite a clear difference and the value that both professional services can bring to a growing business shouldn’t be underestimated.
By way of a simple definition, bookkeeping handles the recording and organisation of financial transactions and data. Bookkeepers are primarily focused on the day-to-day management of the financial data in a business including recording purchases, receipts and transactions. Accounting is the analysis and interpretation of that data. Accountants use this data to look at the bigger picture, analyse the overall financial situation and look at the impact on the business.
Traditionally bookkeeping generally takes care of:
- Data entry
- Bank reconciliations
Accounting is usually responsible for:
- Analysing business performance
- Taxation management
- Financial statements and reports
Essentially, accountants rely on the quality of data generated by bookkeepers to help business owners make critical decisions about the management of their business. It’s also true to say that the lines between bookkeeping and accounting are becoming a little more blurred. The development of online accounting and bookkeeping software packages means that some of the processes that may have been previously undertaken by an accountant may now be done by a qualified, experienced bookkeeper. This can include things like the generation of financial statements, which many software packages now facilitate.
Many business owners may start out trying to manage the day to day financial data for their businesses and come to realise, as the business grows, that it takes a considerable amount of time and focus to stay on top of this. A good bookkeeper will prove invaluable in taking this pressure off. As the business grows further most business owners recognise that the advice of a good accountant is needed to help them decide what the data is telling them.
At Numera Bookkeeping Services, we provide more than most traditional bookkeepers. With significant experience across a wide range of industry sectors, we are able to support you with all the standard bookkeeping services as well as BAS preparation and lodgment, payroll outsourcing services, advice on the selection of accounting packages and software training. If you need the services of a local accountant, our referral partners, MGI South Queensland are on hand to offer more detailed accounting advice. Work with the Brisbane bookkeepers you can trust. Give us a call today on 07 3002 4880 or email firstname.lastname@example.org to find out how we can help your business.
Fundamentally, there is only one reason that businesses go broke – they run out of cash.
So how do businesses (even listed ones) run out of cash and what can you do to make sure it doesn’t happen in your business?
There are three basic reasons business run out of cash
1. They are not profitable in the first place
They don’t have a cash flow problem; they’ve got a profitability problem. In other words, the lack of cash flow is a symptom of poor profitability (or even losses). If you have a profitability problem, unless you fix your business model and restore profitability, you’ll never get cash flow under control.
2. The second is that they use short-term working capital to fund the acquisition of long term assets
In other words, they use their working capital (short term funding) to purchase plant and equipment or property (long term assets). If your business is growing rapidly, this is a big no, no. You’ll need that working capital to fund your growth, particularly larger inventory holdings.
In most cases this issue can be fixed by sale and lease back of the assets (assuming funding is available). But the key is never to use your working capital to acquire long term assets unless you’re absolutely sure you have significant excess and know that you won’t need it in the near future.
3. The third reason that businesses run out of cash is that they grow too fast
Yes, businesses can grow too fast and it is a situation we see all too often. Make no mistake, a fast growing business is potentially in danger territory, particularly if it doesn’t have access to an endless supply of funds – and which businesses have that luxury?
For many fast growing businesses, this means holding more and more inventory. As the business (and sales) grows, more of the profits are required to be used to invest in more and more inventory to stock more and more stores. If you’re in a business where margins are tight – whammo! – you have lower profits to fund ever increasing inventory. Should inventory turnover slow you could also be in serious trouble.
If you also happen to have a business where you give credit terms to your customers, then not only do you have a build-up of inventory, but you also have a build-up of debtors. These have to be funded from somewhere. Unless the business is highly profitable, the profit alone may not be enough to fund that growth. This invariably means going to your friendly banker but at some point there will be a limit to which banks will be prepared to fund your growth.
How to avoid running into a cash flow problem?
There are three key measures every business should be checking on a regular basis, but particularly fast growing businesses, to make sure that they have a sound cash position. If you don’t currently know these you’re flying blind. Get a new accounts team!
Your Free Cash Flow
Your Free Cash Flow (or available cash) is simply that. It is the amount of cash you have left out of profit after funding the increase in size of your business. If you’re not measuring and monitoring this then you’re flying blind.
Your Working Capital Burn Rate
This is simply the amount of working capital (debtors plus stock less creditors) as a percentage of sales. If this is (say) 25%, then you know that for every additional $1m in sales, you’re going to need $250k in working capital to fund that growth.
Your Sustainable Growth Rate
This is simply the rate of growth the company can sustain without adversely affecting its proportion of debt to equity funding. It’s called “sustainable growth rate” for a reason.
There is a saying that goes ‘turnover is vanity, profit is sanity but cash flow is reality.’ We have worked with countless high growth businesses who have been stunned to learn that their financial position is unsound despite their growing sales.
It might sound crazy but at times it is essential to reign in your growth to ensure a sustainable journey in the long run. It might be painful to turn down opportunities at the time but trust me, you will be thankful when you come out with a sound business in the end.