Accounting is central to the success of your business. You need to be aware of your company’s expenses, as well as how much money is being brought in, to calculate your ROI and determine whether your business is a success. If you’re spending too much and not taking in enough, it’s a sure sign that something needs to change. But how do you know what changes to make? How can you identify the steps that will best help your business to succeed?
The three concepts discussed here will help you remedy issues in a struggling business, and can also take a successful business to the next level.
There are two ways to keep track of the revenue your business brings in—cash or accruals. Cash accounting tracks how much money has been paid to you, in a very literal sense. Accruals accounting is a system of tracking how much money is owed to you in addition to how much has been paid. In this way, you keep a record of how much money you have earned as opposed to how much you have collected. It’s an excellent way to compensate for late payments from your clients. Accruals accounting gives you a much more accurate picture of how your business is doing.
Let’s say you settle on accruals accounting. Once you have done so, it’s important to stick with your decision. If you change the way you’re tracking your revenue and expenses, you’re going to lose track of where you are as a business. Do not switch up your accounting method unless you have a sound and compelling reason to do so. You’re either dealing in actual cash revenue and expenses, or you’re dealing in accruals—but you can’t deal in both.
This concept deals with what’s included on your business’ balance sheet, which you may wish to share with an accounting firm. Specifically, you need to use good judgment about when a bit of revenue or expense is added. Prudence dictates that profits should be included in your balance sheet only when they are either realized or when there is a reasonable certainty of realizing them. When it comes to expenses and liabilities, however, you should go ahead and include them in your balance sheet when there’s a possibility of their being realized.
Follow these concepts as you build out your business’ accounting plan, and you’ll be sure to see greater success.