Like most small businesses, we use the cash accounting method to keep our books. Why? Because it’s easy. But there are downsides to it, which has me wondering whether we should consider switching to accrual accounting.
What’s the difference? The cash accounting method is very straightforward: When cash comes in the door, we record it as revenue. When cash goes out the door, we record it as an expense. That level of simplicity is why we — and so many others — use this method. After all, when you’re running a small business, the last thing you want to worry about is maintaining an unnecessarily complex accounting system.
If we used accrual accounting, we would need to book revenue when we earned it. For example, let’s say someone pays us $30 today to monitor flights they have scheduled in July. Using the cash method, we would record that $30 as revenue in February. Using the accrual method, we wouldn’t record the revenue until July, when we actually did the work. The cash comes in at the same time either way, but how it’s booked differs.
So, why do I care about all this? Well, I was looking at January’s numbers and was pleasantly surprised by the amount of profit we earned. Then it dawned on me that, because of the holidays, we’d paid our concierges their commissions at the end of December instead of at the beginning of January (as we normally would). So our expenses were higher than they should’ve been in December and lower than they should’ve been in January. Using the accrual method would prompt us to record revenue when it was earned and expenses when incurred, giving us a more accurate picture of how we’re performing.
Is it hard to switch? Well, sort of. We use QuickBooks Online, which provides an easy way to just change our reporting method. But that requires us to have properly entered everything for that method, and I’m not sure that we have. (Accrual accounting gets more complicated than the example I gave above.)
So, at the moment, I’m not inclined to change methods. But I am going to be more cognizant of the downsides of the cash accounting when I’m looking at our financial data. And, eventually, our small business will become big enough that we’ll have to convert. I might as well start getting used to the idea now!