At some point, every small business owner will need to make an important decision: should they use cash or accrual budgeting for their company? Businesses use both the cash basis and full accrual basis of accounting and budgeting in their operations. There are advantages and disadvantages to both of these options, and you should consider talking with an accountant to learn about how these methods will impact your business.
What is a Cash Budget?
Cash basis accounting identifies the the cash inflows and outflows of a business. In other words, revenues and expenses are managed to look at the facts: how much money are you bringing in and where is it going? By estimating the outflows and inflows of the company - using cash flow projections - you can determine if the money is being used productively. You will be able to make business decisions based on the cash position of your company. Implementing a cash budgeting system for your company will allow you to determine the amount of available credit before you begin running into liquidity problems. An adequate amount of cash on hand allows a company to extend credit or make purchases that will be paid for in the future.
How Is a Full Accrual Budget Different?
A full accrual budget and a cash budget will not match numerically. In accrual budgeting, revenue is reported when earned, not when received. For example, wages and salaries are reported when the employee works, not when they are paid. The accrual budget is used to estimate the income and expenses of a given period, to try to determine the amount of a business's expected profit. U.S. Generally Accepted Accounting Principles require that an organization report its financial statements on a full accrual basis.
Benefits to Cash Flow Management
When you implement cash budgeting for your company, you will experience many benefits in your business:
- Managing cash flow will give you an overview of expenditures so that you can determine if the money is being spent in the best way possible.
- Cash budgeting creates more financial awareness in the company. Many business owners find that they can make better financial decisions with they have the information available about the inflows and outflows of cash in their company.
- A CPA can help you with cash flow projections and forecasts to identify how much is available. Cutting unnecessary costs allows you to save money that would be spent on frivolous things.
One of the best things that you can do is contract your accounting services. A small business accounting firm can providing quality, personalized financial guidance your small business needs to run smoothly and productively.
If you want to achieve long-term financial success with your small business, contact us to learn more about the small business accounting services that are available. We work with clients located in the Washington DC area, and we also offer virtual business services for clients located anywhere. Contact us today to learn more: (202) 789-8898