A key decision in small-business bookkeeping is whether to use accrual or cash basis accounting. The difference between these is in the timing of recognition of revenue and expenses. The cash method recognizes revenue and expenses immediately while the accrual method focuses on anticipated revenue and expenses.
Using the cash method, revenue recognition on the income statement only occurs when receiving cash. Similarly, expense recognition only occurs when paying out cash.
In contrast, the accrual method uses accounts receivable, and revenue is recorded when it is earned. This usually happens before any money changes hands. When delivering a product or service to a customer, revenue recognition takes place with the expectation of future payment. Accounts payable is used to record expenses in lieu of future payments.
The main advantage of the cash method for small-business bookkeeping is its simplicity. Tracking cash flow is easy because it focuses solely on cash received or paid.
The disadvantage of the cash method is that the amount of cash on the books bears little resemblance to how the business is actually performing. This is because there is no tracking of accounts receivable and payable. For example, a cash-rich company may have large sums of accounts payable. These accounts could far exceed the cash on the books and the company’s current revenue stream. This company might look like it is profitable when in fact it is losing money.
The main advantage of the accrual method is that it gives a more accurate picture of the financial health of a company. This is because is uses accounts receivable and payable. Accounts receivable records all revenues when earned and accounts payable records all expenses when incurred.
The disadvantage of the accrual method is that it is more complicated to implement.
In small-business bookkeeping, if a business owner really wants to understand how their business is performing, they must use the accrual method. The accrual method smooths out earnings over time and accounts for generated revenues and expenses immediately. The cash method recognizes earnings intermittently.
If you are the owner of a small business that generates its revenue through hourly billing, then you must understand your fully burdened labor costs in order to survive. The first thing you need to know is that your employees fall into two categories, namely direct employees and indirect employees.
Direct employees are those workers on the job site who bill their efforts at an hourly rate. They are the direct source of your company’s revenue.
Indirect employees support but are not directly involved on the job site. Examples are administrative positions such as purchasing, bookkeeping, accounting, and marketing.
In order for a contracting business, for example, to properly determine its billing rate for direct employees, it must first establish its labor burden rate, followed by the fully-burdened labor costs per hour worked. This can be extremely complicated but is vitally important to the success of your company, since your billing rate will determine whether your business is profitable, or whether you lose money every time you do a job. You billing rate is too critical to simply guess. Luckily, a Burdened Labor Costing Tool can take the guess work out of this process.
Labor burden rate is the total indirect costs as a percentage of the company’s direct labor. For every dollar of direct labor allocated, apply labor burden as a percentage of the direct labor. Break costs down into direct and indirect costs. Known expenditures directly associated with the project are direct costs. These include direct labor, materials and supplies, equipment rentals, bonds, and permits. These costs are obvious inclusions for job estimates. The indirect costs are not so obvious.
Indirect costs that need to be included in any job estimate include workers’ compensation, general liability and automobile insurance, motor vehicle and equipment repairs and maintenance, depreciation, employee benefits such as health, life, disability, profit sharing, bonuses and 401(k) match, and payroll taxes. It is also necessary to account for vacation time, holidays, sick days, training, and safety.
A Burdened Labor Costing Tool can track all direct labor costs in detail. It calculates burdened labor as the sum of direct labor (vehicle) costs including but not limited to payroll taxes, worker’s comp, benefits, and an adjusted percentage of your indirect labor and overhead costs. It then reports on these specific costs that tie directly to each direct employee. You can use the information to set flat-rate pricing, time-and-material pricing, job quotes, and labor estimates. The result is a clear understanding of the critical data needed for effective business decision making.
Small business owners wear many hats. Bookkeeping is an essential task for a smoothly-running business. However, for a busy business owner, it not a value-added activity that is contributing to the growth of the business. Simply put, this is time spent working in the business rather than working on the business. There are many compelling reasons to outsource bookkeeping for small business. This will remove an item from your to-do list, freeing some of your valuable time for business growth activities. Here are just three of the reasons to outsource your bookkeeping.
Most small business owners have no specific training in bookkeeping. You may not be familiar with all of the rules and regulations that apply to your business.
When you outsource bookkeeping for small business, you are trusting your books to an expert. They can take steps to make sure you are compliant. Additionally, this expertise may help you find ways to save your business money.
A good bookkeeper can often pay for the cost of their services by increasing the profitability of your business.
When you have a bookkeeper on staff, you are responsible for their payroll costs. If they are a new hire, you need to budget for the training costs to get them up to speed.
For most small businesses, bookkeeping is not a full-time task. However, you remain responsible for this employee’s salary even when things are slow. When you outsource bookkeeping for small business, you have the advantage of only paying for the services that you need.
Another benefit of outsourcing is that if your bookkeeper quits or is terminated, you don’t have to find a replacement. This can lead to substantial savings over time.
Trusting internal financial records to a company employee can be risky. In other words, business owners want this information kept private and secure. Finding an employee who will stay with the company long term and maintain confidentiality is not a simple task. In contrast, if you outsource bookkeeping for small business, you gain peace of mind. You know that nobody in your community can gain access to your financial records.
For any small business, keeping up to date bookkeeping records is essential. Outsourcing your bookkeeping is an easy solution.
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