The ‘shoe box’ accounting method has its pitfalls

As I stated in a column several weeks ago, with a good accounting system in place, you’ll know how much cash you have in the bank at any given time and whether you can meet your expected expenses. You’ll also be able to measure your progress toward profitability. As a business, you also need accounting, bookkeeping, and financial recordkeeping systems to meet regulatory requirements such as paying your business taxes.

Carefully consider the following:

  • Decide who will handle your accounting activities.
  • Choose your accounting method.
  • Choose your accounting software.

Who will handle your accounting activities? You have three choices: do it yourself, hire an employee to do it, or to outsource to a bookkeeper and/or accountant.

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If you aren’t ready to hire an in-house bookkeeper right away, you might be able to handle your accounting and bookkeeping yourself. However, unless financial services is your field, this might not be the best use of your time. Instead, you can outsource to a financial professional.

There are two types of financial professionals to choose from.

A bookkeeper keeps track of day-to-day transactions — the money that goes in and out of your business — and maintains your financial records. For example, they would submit purchase orders for you to pay, collect customer payments, gather employee timesheets and handle payroll.

A certified public accountant (CPA) must meet their state’s legal requirements and pass an exam by a certifying board. While bookkeepers handle the day-to-day, CPAs focus on the long term. They look at your financial data to help you see the big picture and make smart financial decisions.

Choose your accounting method. You have two options: Cash basis and accrual basis.

  • Cash basis accounting is simple. Money earned is recognized as revenue on the date it is earned and recognized as an expense on the date when you spend it.
  • In accrual basis accounting, income is recognized when it is earned (not on the date you receive it) and expenses are recognized when they are incurred (not on the date you actually spend the money).

Your choice of accounting method affects your tax bill. If you operate on an accrual basis and send out $20,000 in invoices on Dec. 31, that $20,000 is taxable in the current year (even though you haven’t received the payment yet). If your business is a cash basis company and invoices $20,000 on Dec. 31, the income isn’t taxable until you receive the money the following year.

Businesses that maintain inventory often chose the accrual basis. However, in general, you can select whichever method you want; you just have to stay with it once you’ve made your choice. Talk to your SCORE mentor or your accountant to make the right decision depending on your industry, projected sales, and other factors.

Choose your accounting software. Unless you’re very knowledgeable about accounting and feel confident you can handle your bookkeeping yourself, it’s best to choose a bookkeeper and/or accountant first and ask them for software recommendations. This ensures the software has the features that will help them do the best job for your business.

Today’s accounting software eliminates much of the need for data entry that bookkeepers used to handle. For example, accounting software that syncs with your business bank account ensures you always have current transaction data in real-time and no one has to reconcile that data. This makes it much easier to handle bookkeeping yourself if you choose to.

Most small business accounting software includes these features:

  • Accounts receivable/invoicing: Track incoming revenue, create and print invoices, print shipping labels and track shipments.
  • Accounts payable: Track payments due, print checks, pay vendors and create purchase orders.
  • Payroll/employee management: Track employee hours and create checks. Some programs let you make automatic or electronic payments (this may require subscribing to an additional service).
  • Project/job management: Track project/job deliverables and budgets.
  • Reports: Most accounting software allows you to create a variety of standard and custom reports to track specific financial measures for your company.
  • Inventory management: Enter inventory information and keep track of stock and sales.

I have found that it is also important to consider whether the software is easy enough for you to use. Even if someone else is in charge of your accounting and bookkeeping on a day-to-day basis, it’s ultimately your responsibility. You must understand the basics of accounting and bookkeeping (and how to use your software) so you can keep an eye on your finances.

When choosing accounting software, consider these questions:

  • What features do you need?
  • Do you need industry-specific software?
  • Can the product grow with your business?
  • How compatible is the software?
  • Do you want desktop or cloud-based accounting software?
  • What restrictions does the software allow?
  • What type of support does the provider offer?
  • Does the software offer a free trial?

Dean Swanson is a volunteer Certified SCORE Mentor and former SCORE chapter chairman, district director and regional vice president for the North West Region.

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