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Small Business Accounting Cash vs Accrual Made Easy

Small business accounting

Cash Flow Made Easy

Small business accounting – Cash vs Accrual – Does it matter? Yes it Does.

It is not uncommon for us to receive financial information from business owners where for instance the tax returns are done on a cash basis and the financials are done on accrual basis. Often they are technically both correct but just looking at the numbers you’d think they were 2 different businesses.

Accrual accounting, done coreectly, usually presents a more accurate picture of the business. Accrual accounting simply attempts to match the revenue to the expenses when they are incurred or earned. Cash accounting simply accounts for the revenue or expenses when you recieve the cash or pay the bills.

In reality, cash accounting is almost never pure nor is accrual accounting.

Some (many) small business owners don’t understand the difference nor the effect on their financials. One way to sort out the difference is really easy. In QuickBooks and most other small business accounting packages there is a check box for reports. You can decide if you want accrual or cash. I suggest you run both on the same day and look at the differences. You might be surprised at what you learn.

 

Drop me a note below if you want me to take a shot at any other small business accounting or financing issues.

Also, look at Expense to profit Cash Conversion Process for more info on working capital and cash management.

Other Articles about Running a Small Business:



The best business planning tool?

If you plan to be in business you’d better have a Business Plan. If you plan to start a small business this tool can be the difference between success and losing everything. If you think this Business Plan tool is expensive wait til you see how expensive it is to NOT have a well thought out and written business plan.

If you are considering starting or buying a business it’s a good idea to have the best tools. It may cost you a few bucks but it could be a cost that saves you many, many thousands of dollars.

A good business planning tool will also allow you to compare options from a consistent platform.

I think the best Business Plan Software on the market today is Business Plan Pro . (Yes, this is an affiliate link and we get a few cents if you buy it but, hey, give us a break, we did the research).

The best part about this software is it’s intuitive and you don’t need an MBA to operate it. The Standard edition is all most people ever need. It’s a product that has been around for many years and it’s very practical and efficient to learn.

As you can see the layouts are clean and easy to understand.

Let the software do the math
If you are going to get into business you need a plan that is logical, well thought out and proven. Trust me, if you go to your banker with a professional business plan your odds of getting financing improve dramatically. A plan like the one Business Plan Pro produces will be a requirement for any SBA loans that you apply for or pursue.

Here’s a few fatal mistakes a good business plan can help you avoid.

The best time to have a business plan is before someone asks you to see it! Get ahead of the curve…get your plan.

Business Buyers 7 Deadly Sins

 

Buying a Business – The 7 Deadly Sins

Buying a business could be the best decision for you but you need to approach the task methodically and with a clear understanding of yourself as well as the businesses you consider. Here are the mistakes many business buyers make.

We call them the Business Buyer’s 7 Deadly Sins:

 

 

Buyer Sin #1

 

Buyer’s failure to seriously investigate and understand their personal financial situation before they begin the process of investigating businesses to buy. How much ready cash do you really have for a down payment? Where is it? Will your family and friends really back you? What are the tax consequences of accessing the cash (401k/IRA)?

 

Buyer Sin #2

 

A Buyer’s failure to understand how much money they need to live on, month-to-month. This is often called your “burn-rate”, which needs to be absolutely as accurate as possible, by month, for at least 1 year.

 

Buyer Sin #3

 

A Buyer’s failure to understand the difference between profits and cash flow. Profit is what the books say the business made. Cash flow is what cash, the owner, can actually use. You can’t spend profits, you can only spend cash. You can have a lot of profits and no cash.

 

 
 

 

 

Buyer Sin #4

 

A Buyer fall’s in love with a business that makes absolutely no sense for them. Buying a business is a lot like picking a spouse, what’s good for one person might not be good for the next. If you are working with Business Brokers or another intermediary first make sure you understand who they represent in the deal…you or the seller. Then consult with them about the skills required to operate the business and also discuss this in detail with the business seller.

 

Buyer Sin #5

 

Getting advice from people who don’t know what they’re talking about. When a business buyer seeks advice about how to buy a business they need to first check out the person giving the advice to see if they know what they are talking about. I don’t care, and neither should you, if your golf buddy the dentist has an opinion on a trucking company. You need to understand what you’re buying when you buy a business, not your neighbor, not your golf buddy but YOU!.

 

Buyer Sin #6

 

A Buyer sometimes crosses the line from skeptical to cynical. If you want to buy a good business from a good seller you need to start from a basis of trust but always verify. Also, here’s information about maintaining confidentiality during this process.

 

Buyer Sin #7

 

A Buyer sometimes fails to understand why they think they want to buy a business. Are you just worried about getting fired from your current job? Do you really want to make all the decisions? Should you make all the decisions? Are you prepared to have no one else to blame? Can you identify priorities and do you have the self-discipline to manage them?

 

The good news is you can, if you are honest with yourself, protect yourself from the Buyer’s 7 Deadly Sins above……..