I’ve often been accused of being too direct, which has caused strain in some of my personal relationships. Fortunately for me, my natural inclination to honestly assess situations, despite the feelings of others, has served me well in my professional career. So I’ll cut straight to the point: if you are using cash accounting instead of accrual accounting for your business, you are making a huge mistake. And this mistake is likely costing you a tremendous amount of money in ways you probably don’t fully comprehend.
And I know all your excuses:
- Doing it by cash let’s me know the real position of my business.
- I look at my bank account to know where I stand.
- Making monthly accruals will be too time consuming.
- Accrual accounting is too complicated.
- I know when my three payroll month is.
- I need these phantom entries to create a cash buffer so I don’t overspend.
And the worst, and most common of them all:
- We’ve always done it this way.
It’s not that I don’t understand where you’re coming from. Maybe your bookkeeper is a family member just lending a hand. The business grew fast and the accounting department wasn’t able to scale with the operation. Or you keep a tight grip on the purse strings and paying for professional finance/accounting services seems like a poor investment. It all makes sense intuitively. Unfortunately for you, you’re making a huge and costly mistake every day that you refuse to address this problem.
The fact of the matter is using accrual accounting is the only way you’ll ever have your head fully wrapped around the performance of your business. It’s the only way your financial statements will properly match the information in your operating system. And most importantly, it is the only way you will ever be able to perform in depths analysis to increase the profitability of your business. And if you’re not trying to increase your profitability, why are you reading this blog?
And beyond that, there are benefits to accrual accounting you probably haven’t thought of. You’ll have controls around important aspects of spending that often slip away like license renewals, dues, and bonuses. And surprising to most slow adopters, it dramatically enhances your ability to manage cash.
In this series, I will explain to you the real-life benefits of accrual accounting and how its application will make your business more profitable.