Timely, accurate financial information is essential to running a successful business. There are a number of accounting methods you can use to record and track your business’s financial performance. Here’s an overview of cash, tax and accrual basis accounting to help you choose a method that’s appropriate for your situation.

Cash basis

Often startups and sole proprietorships default to the cash method of accounting because it’s simple and provides an immediate picture of available funds. This may suffice for small businesses with uncomplicated financial affairs.

Under cash-basis accounting, you record transactions only when money changes hands. While this record keeping is easy, it can be challenging to get an accurate picture of your business’s financial situation. This method also isn’t suitable for tax purposes.

Telltale signs that a company is using cash-basis accounting can be found on the balance sheet: The company won’t report any accrual-basis items, such as accounts receivable, prepaid assets, accounts payable or deferred expenses.

Tax basis

Another financial reporting option is to use the same accounting method for book and tax purposes. Under tax-basis accounting, you only record transactions when they relate to tax.

This method can be helpful for companies that want to minimize their tax liability. It can also be beneficial if your business doesn’t have complex financial affairs and you don’t need up-to-date information about your financial situation.

Accrual basis

As your business grows and has more sophisticated financial reporting needs, you may decide to transition to the accrual method of accounting. Businesses that issue financial statements under U.S. Generally Accepted Accounting Principles (GAAP) must use accrual-basis accounting. GAAP is considered by many to be the “gold standard” in financial reporting. Most lenders and investors prefer statements prepared using this method because it’s the most reliable for long-term financial planning and decision-making purposes.

Under accrual-basis accounting, revenue is recognized when earned (regardless of when it’s received), and expenses are recognized when incurred (not necessarily when they’re paid). This methodology matches revenue to the corresponding expenses in the proper period. Compared to the cash and tax methods, the accrual method helps you more accurately evaluate growth and profit margins over time and against competitors.

Using the accrual method also can help you manage cash flow. For example, with more timely financial data, you can negotiate payment terms with suppliers, plan for significant expenses and forecast future cash needs.

What’s right for your business?

Choosing the right accounting method for your business depends on your financial needs and accounting skills. Some businesses use a hybrid approach incorporating elements from two or more methods. The method you’ve used in the past may not be appropriate for your current situation. Contact us to help you find the optimal approach.

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What do Tesla cars, smart TVs and equipment used for making french fries have in common? The answer is embedded software, according to recent comments by Financial Accounting Standards Board (FASB) Vice Chair James Kroeker. He also told the Private Company Council that today’s mixed accounting model for software costs is outdated and should be modernized under one model.

Here’s an update on the FASB’s project to revamp the rules for recognizing, measuring, presenting and disclosing software costs. The project is based on feedback from companies that find the current rules complex and costly.

Applying the existing guidance

There are two main areas of U.S. Generally Accepted Accounting Principles (GAAP) that provide accounting guidance for software costs. To determine how to account for software costs, a company first must evaluate which area of GAAP applies. The guidance that a company must follow is largely dependent on how a company plans to use the software.

Specifically, when a company determines that it has a substantive plan to sell, lease or otherwise market software externally (including licensing), it’s required to account for the software costs as external use. In this situation, Accounting Standards Codification Subtopic 985-20, Software — Costs of Software to Be Sold, Leased, or Marketed, would be applied.

Conversely, if a company doesn’t have such a substantive plan in place when software is under development, it’s required to account for the software costs incurred to develop or purchase software as internal use. In this situation Subtopic 350-40, Intangibles — Goodwill and Other — Internal-Use Software, would be applied.

The guidance for internal-use software is generally applied to hosting arrangements by both the vendor that’s incurring costs to develop the hosting arrangement for customers (such as software-as-a-service) and the customer incurring costs to implement the hosting arrangement. However, Subtopic 985-20 applies to hosting arrangements in which 1) a customer has a contractual right to take possession of the software at any time during the hosting period without significant penalty, and 2) it’s feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software.

Designing a one-size-fits-all approach

The ultimate goal of the FASB’s project on reporting software is to align the differing accounting models for external and internal use. If the project takes shape as planned, companies will no longer have to distinguish between two sets of guidance. Instead, they’ll apply a single model for all software. That means everyone would follow the same model, regardless of whether they purchased software as a license, entered into a cloud computing arrangement, or developed internal software, licenses or cloud solutions.

However, there’s little consensus now on how that model would work. Approaches currently being researched by FASB staff include:

• Requiring software costs to be capitalized based on a principle such as when there’s a present right to the economic benefit as a result of incurring the software costs,
• Requiring software costs to be capitalized if they’re undertaken during certain development activities, and
• Expensing all software costs, including cloud computing.

Members of the Private Company Council gave mixed views on which approach they favored, reflecting the difficulty the FASB could ultimately face on the topic. Some financial statement preparers prefer a principles-based approach, while others said they like the idea of expensing software costs as there’s no true prediction of its future useful life.

Stay tuned

This project is currently in the deliberation phase. No proposals have yet been issued, but the FASB plans to discuss this topic in the coming months.

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If you ask some business owners why they do things a certain way, they might answer, “Because we’ve always done it that way.” But with all the changes that have taken place in the financial and accounting realm, doing things the way you’ve always done them could be costing your business in terms of lost efficiency and profits. Here are four considerations to help modernize your accounting processes and systems.

1. Automate payables

If you’re using traditional paper-based processes to manage accounts payable, you could be wasting time and money. Automation technology solutions can help you streamline the payables process. The result is greater efficiency, lower cost, more security and the ability to capture early payment discounts that may be available.

With most AP systems, invoices are scanned in and posted automatically to the system based on the purchase or invoice number. The person responsible for reviewing the invoice (for example, the payables clerk) makes sure everything matches and approves it for payment if it does. The invoice is then paid electronically based on the payment terms negotiated with the vendor.

2. Accelerate monthly accounting tasks

There’s no reason to wait until month end to reconcile bank accounts. Daily reconciliation provides several benefits, such as catching payments in transit that have been cashed but not recorded. It also can help speed up monthly closings by eliminating the reconciliation “crush” at month end. Consider purchasing software that can read bank records daily, automatically match outstanding checks that have cleared and update the payables check file.

In addition, you don’t have to wait for standard monthly entries that remain the same, such as depreciation, prepaid expenses, and property tax or insurance accruals. Integrated software can shorten the monthly closing lag by feeding subsystems (such as accounts payable) into the general ledger. Starting your month-end closing process sooner puts less pressure on your accounting staff and improves the accuracy and timeliness of your financial statements.

3. Use corporate purchase cards

Corporate purchase cards (or p-cards) can be issued to at least one employee in each department to cover small items — say, those under $100 — as well as travel and entertainment expenses. This enables accounting to make a single payment for multiple small items, instead of processing a lot of small-dollar checks. As an added benefit, most p-cards offer points and cash-back rewards that can be used to pay expenses.

4. Go paperless

Many businesses have largely converted their paper processes to digital to help lower expenses, increase efficiency, meet compliance regulations and be more eco-friendly. Using an electronic document management system could save up to 50% of physical and digital storage space and up to 40% on document handling. It could also reduce the time needed to create and modify documents by up to 90%, according to Gartner, Inc., a research and advisory firm.

While it might not be possible to completely eliminate paper, plenty of documents can be digitized. These include contracts, invoices, payables, payroll documents and employee records. Several off-the-shelf document management solutions are available to help you convert from paper to digital.

Ready to update?

Just because you’ve always done things a certain way doesn’t mean it’s the best way. Talk with your management team about which accounting processes and systems might be due for a makeover. We can also do a complete assessment on the effectiveness of your accounting system and how you’re using it. Contact us for more information.

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A leadership departure in your accounting department can create turmoil, at least temporarily. However, it also provides an opportunity to assess the department’s performance and create a vision for how it should perform in the future. Here are four questions to address if your CFO or controller leaves.

1. Is the job description up to date? During the prior leader’s tenure, the needs of your organization may have changed. Take the time to scrutinize the existing job description and the predecessor’s resume. Then, identify the skills and experience that are essential for the role today.

For example, if you’ve recently taken on debt and need to satisfy lending covenants, make sure that’s a requirement detailed in the job description. Also, if you’ve expanded substantially, you may have outgrown the previous department head. For instance, you might need to replace a bookkeeper with a CPA who has the experience and skills to manage a larger accounting team.

2. Were you happy with your previous level of service? The accounting department is critical to the success of your organization. The department should provide accurate, relevant reports in a timely manner. If not, you may need to consider upgrading your in-house accounting staff and training any remaining employees on the latest tax and accounting rules.

3. Does the department’s technology align with your current needs? Sometimes, organizations can rely less on a key internal person and more on accounting software and their external CPA. If this is the case, ensure you have the latest-and-greatest technology to support your accounting functions and in-house personnel.

Also consider whether you’re maximizing the functionality of your current accounting software. Set up a meeting with a vendor rep to discuss what’s working and what’s not and see how they respond. A worthy provider will address issues, provide training and offer ongoing customer support. If your vendor doesn’t provide adequate support, we can also do a complete assessment on the effectiveness of your accounting system and how you’re using it.

4. How will the demands on the department change in the next two to five years? In-house personnel will need to adapt to new challenges as your organization grows and evolves. For example, if your department intends to acquire or merge with a competitor — or pursue another major strategic investment opportunity — your new CFO or controller will need to have sufficient knowledge to support the effort. Streamlining the department’s policies and procedures can also help to improve its performance and position it for the future.

Finding skilled accounting and finance professionals is difficult for many organizations, especially smaller ones. An interim or outsourced CFO can provide an objective, flexible, and cost-effective approach to running the accounting department on a temporary or permanent basis. With the right professional in place, you can ensure that your accounting department continues to operate at a high level, despite the challenges posed by a leadership change. Contact us for more information.

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Financial reporting isn’t all about profits. Not-for-profit entities can also benefit from implementing formal accounting processes. From preparing budgets and monitoring financial results to paying invoices and handling payroll tax, there’s a lot that falls under the accounting umbrella. Are these tasks, and others, being managed as efficiently at your organization as they could be?

Start with invoicing

A good first step toward accounting function improvement is creating policies and procedures for the monthly cutoff of recording vendor invoices and expenses. For instance, you could require all invoices to be submitted to the accounting department within one week after the end of each month. Too many adjustments — or waiting for employees or departments to weigh in — can waste time and delay the completion of your financial statements.

Another tip about invoices: It’s generally best not to enter only one invoice or cut only one check at a time. Set aside a block of time to do the job when you have multiple items to process.

You also may be able to save time at the end of the year by reconciling your balance sheet accounts each month. It’s a lot easier to correct errors when you catch them early. Also, reconcile accounts payable and accounts receivable subsidiary ledgers to your statements of financial position.

Think through data collection

Designing a coding cover sheet or stamp is another way to boost efficiency. An accounting clerk or bookkeeper needs a variety of information to enter vendor bills and donor gifts into your accounting system. You can speed up the process by collecting all the information on the invoice or donor check copy using a stamp. Route invoices for approval in a folder that lists your not-for-profit’s general ledger account numbers so that the employee entering data doesn’t have to look them up each time.

The cover sheet or stamp also should provide a place for the appropriate person to approve the invoice for payment. Use multiple-choice boxes to indicate which cost centers the amounts should be allocated to. Documentation of the invoice’s payment should also be recorded for reference. And your development staff should provide the details for any donor gifts prior to your staff recording them in the accounting system.

Optimize accounting software

Many organizations underuse the accounting software package they’ve purchased because they haven’t invested enough time to learn its full functionality. If needed, hire a trainer to review the software’s basic functions with staff and teach time-saving tricks and shortcuts.

Standardize the financial reports coming from your accounting software to meet your needs with no modification. This not only will reduce input errors but also will provide helpful financial information at any point, not just at month’s end.

Consider performing standard journal entries and payroll allocations automatically within your accounting software. Many systems have the ability to automate, for example, payroll allocations to various programs or vacation accrual reports. But review any estimates against actual figures periodically, and always adjust to the actual amount before closing your books at year end.

Ongoing review

Accounting processes can become inefficient over time if they aren’t monitored. Look for labor-intensive steps that could be automated or steps that don’t add value and could be eliminated. Also make sure that the individual or group that’s responsible for the organization’s financial oversight (for example, your CFO, treasurer or finance committee) promptly reviews monthly bank statements and financial statements for obvious errors or unexpected amounts. Contact us for more tips on how to improve the accounting function at your nonprofit.

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