As a small business owner, you have two choices when it comes to your bookkeeping system: Cash-Based and Accrual. Here are some pros and cons of each, with tips to help streamline your bookkeeping system.
Cash-Based Accounting Method
Cash-based accounting records your income as it is received and expenses as they are paid. It is a simple bookkeeping system that ensures you always understand how much money you have on hand.
Pros:
- Easy to record transactions
- Relatively simple for businesses to understand, execute, and manage
- No need to record unpaid income and expenses
- No need to keep records of the unearned revenue or the expenses that have been incurred but not yet paid
- Easy to reconcile
Cons:
- Does not accurately match revenue and expenses, making it hard to measure true profit
- Revenue is only recognized when money is received, making it difficult to assess profit
- Hard to keep track of liabilities, which could lead to cash shortages
- The obligations of your company are not shown, which can lead to overdrawn accounts
- Not ideal for growing businesses
Accrual Accounting Method
As a general rule, the accrual accounting method provides a clearer picture of your finances. Income is recorded when billed and expenses are recorded when incurred, without concerns over when money is actually received or spent.
Pros:
- You have better views of long-term finances
- Shows the money that is spent within a short time frame
- Provides a clear vision of busy and slow periods
- Follows national accounting standards ideal for keeping your business scalable
- Allows you to anticipate future income and expenses for informed long-term projections and smarter financial planning
Cons:
- More complex than other accounting methods, requiring accounting knowledge to understand balance sheets that include cash, equity, accounts payable and receivable, fixed assets, current assets, and long-term liabilities
- Provides an inaccurate short-term view, so you often misjudge your cash flow
What Is The Best Bookkeeping System For Small Businesses?
The key factors to consider when choosing an accounting method are the size of your business and growth projections or goals. Because the cash-based method lacks foresight and scalability, if your plans or growth projections are ambitious, the cash-based method won’t work.
You’ll either have to transition to the accrual method or struggle to meet your future accounting needs. If you manage complex transactions and accounts and are focused on an effective accounting system to grow your business, the accrual method is best.
What Is A Double-Entry System Of Bookkeeping?
A double-entry accounting system requires a balance between debits and credits. It follows two basic rules to keep the books balanced:
1. Every transaction is recorded in two or more accounts, and
2. The total amount debited must equal the total amount credited.
For example, if you pay a vendor $10,000 for materials to manufacture your product, you have to record an increase to “material supplies” and a decrease to “cash.”
Can a double-entry system be used with cash-based accounting?
Yes, double-entry bookkeeping can be applied to cash-based accounting.
How To Streamline Your Bookkeeping System
You can streamline your bookkeeping system using the following best practices:
Automate
The best bookkeeping system is an automated bookkeeping system that ensures you can maintain an efficient bookkeeping workflow. Automated tools manage time-consuming, error-prone tasks such as data entry, invoicing, expense tracking, and reconciling invoices and payments. A good accounting system will also automatically:
- Import bank transactions
- Create recurring invoices
- Categorize expenses
- Track spending and scan/save receipts
As a result, you save time and reduce errors.
Create Formal Processes
Ensuring everyone follows the same steps when performing bookkeeping tasks keeps your books organized. Providing a checklist or template for people to follow ensures every task, whether it is processing invoices, payroll, or bank reconciliation, is performed exactly the same way to avoid errors and missed steps. You can look for ways to improve the process so you continuously reduce errors and keep bookkeeping as efficient as possible.
Capture Expense Tracking In Real Time
Using digital tools to capture expenses in real time streamlines the process so you keep track of every penny spent with less effort. Capturing paper receipts using mobile apps makes it easy to not only track expenses but then also integrate them into your accounting software. You can take advantage of tax deductions and credits and be prepared for audits should they arise.
You also improve accountability for spending across your enterprise by reviewing expenses quickly to spot discrepancies and possible fraudulent activity. Finally, you keep your budget on track, identifying areas where you are spending more and adjusting budget allotments to areas where you tend to spend less.
Review Your Books
Scheduled reviews to go over the books ensure errors are caught early and you understand your financial health, which helps inform your business decisions and improve accountability. Monitoring cash flow is critical for small businesses, made all the easier using a cash-basis accounting method.
Delegate
Delegating or outsourcing to trusted bookkeepers frees up your time to focus on business-critical tasks. You can prioritize your work and ensure bookkeeping tasks are performed by the most qualified team members.
Digitize Records
Reduce disorganized paper that takes up valuable office space by digitizing records. Using cloud-based storage to organize files makes it easy to find the information you need using indexing and categorization. Categories might include:
- Invoices
- Expenses
- Income
- Taxes
- Payroll
- Purchase orders
You can then create subfolders that include client account numbers, purchase dates, vendor names, etc. The trick is to use standardized naming conventions across your entire enterprise so everything is consistent and easy to search.
Improve Communication Methods
Using tools that help facilitate real-time communication avoids delays that can hold up tasks. Leveraging automated systems that use triggers to ensure invoices and POs are routed to the necessary stakeholders streamlines approvals and ensures expectations are met. Regular meetings provide an opportunity to address challenges and keep all team members informed. Communication methods are more important than ever to meet the unique needs of hybrid workforces and remote workers.
Leverage Technology And Integrate Systems
Small businesses often add innovative technology and software on a needs basis without considering how it will integrate with current systems. Leveraging technology to utilize digital data storage, improve security, accounting software, workflow automation, communication platforms, and other considerations such as point-of-sale systems or e-commerce platforms only works when you can synchronize everything together for complete integration.
By choosing the best accounting and bookkeeping system and using these tips, you can streamline your workflows and maintain accurate, real-time financial records.
To improve bookkeeping efficiency, speak to the bookkeeping experts at Intrepidium. Call today at 778-800-7976 or click here to schedule a consultation.
