Most small business owners start out using a cash basis for their accounting process. This means that you account for revenue and expenses when they are received or spent, not when they are earned or incurred. This method works well for small businesses that do complete transactions in a short period of time. However, if you keep inventory or you start invoicing customers and permitting delayed payment, you may want to change your accounting method to an accrual basis. Here’s a look at what you need to know about that change.
What is Accrual-Basis Accounting?
Instead of recognizing revenue and expenses when the physical transaction takes place, accrual-basis accounting permits you to recognize revenue at the time of the sale and expenses at the time they are incurred, not when the cash physically changes hands. That means you record the revenue from a large sale when the product is shipped and the expense from your raw materials when you recieve them. Sometimes this means that you’re recording revenue for a sale in one tax year even though you won’t actually receive the cash from the customer until the next tax year.
How Do You Switch To Accrual Accounting?
If you decide to switch to accrual accounting, you need to add a few things to your chart of accounts. First, you need a prepaid expense account. This account will list the expenses that you’ve paid in advance but haven’t received the full benefit of yet. This includes things like insurance policies and annual contracts that are paid up-front.
You’ll also need an accrued expense account. This account is used to track any expenses that you haven’t paid yet but have received the benefit of. For example, you would accrue the cost of the manufacturing supplies you ordered that you’ve already received but haven’t paid for yet.
Finally, you’ll need an accounts receivable record. This is your revenue recognition account where you post all of the sales revenue you’ve earned but haven’t yet been paid for. All customer invoices are logged here until they’re paid.
When something in an accrued or prepaid account is settled, that cost is then transferred to the proper expense or revenue account in the ledger and the accrual is reversed.
One of the most important parts of transitioning to an accrual method of accounting is ensuring that your revenue recognition is accurate and timely. If you’re not sure about how each step should be done or which invoices need to be recognized, talk with a revenue recognition specialist or an accounting professional right away. This may help you prevent mistakes that could be costly in an audit.
The old adage that when you fail to plan, you plan to fail can apply to estate planning. While the state you live in will have a process in place to deal with your property after you die, the best way to make sure that your family members are protected is to engage in some sort of estate planning. At the bare minimum, you need to take steps to handle probate law in your state and county and write a will that will ensure the estate you leave behind is handled as you would wish.
The term probate law applies to all of the laws that govern what to do with the estate a person leaves behind after death. While some states have adopted a uniform probate law, in most cases, probate laws vary from state to state. Laws also change over time, so not only is it important to research probate law in your state, but it is important to note how these laws change as time goes by. Having taken steps to understand probate law in your state, you will be prepared to write a will that will ensure that your property is dealt with according to your wishes upon your death.
While writing a will may seem like a morbid thing to do, you should look at it as an act of love. If you don’t have a will, it is up to the court and your surviving family members to decide what to do with your property. Families have been torn apart by fighting over inheritances. While a will may not lay all arguments to rest, it will at least dictate to your family what you want to have done with your belongings. Once you have a will in place, it is important to update it as you make changes to your property. When you die, you want to have the most up-to-date will possible.
It is easy to put off estate planning for another day, but in truth, it is never too early to start. After all, you never know when death will come knocking. While you may not directly benefit from the effort you put into planning your estate, you family will. If you are having a hard time understanding the probate laws in your state or writing a will, then you should work with an estate-planning organizer, such as one from Plan My Affairs, who can guide you through the process.
For some entrepreneurs, the thrill of starting a business from scratch is the best part and plodding along with the same business after it’s established is less exciting. If this sounds like you, you may want to find a private equity firm to take your current business off your hands and continue developing it while you move on to exciting new startups. But before you start looking for a buyer, make sure your business is at the right stage to take this next step. Here are four signs you can look for to help you decide if you and your business are ready to get in touch with a private equity firm and make that deal.
1. You’ve saved up enough documentation to prove that your business is profitable
When you start entering into negotiations for the sale of your business, you need to have all the financial documentation sorted out. If you’ve hired good tax preparers, accountants, and financial planning professionals, your papers should be in good order. Having documentation that’s well-prepared and well-organized and clearly shows that your business has been successful so far can go a long way toward attracting potential buyers who want to invest in low-risk businesses.
2. You have the right professionals working for you
Just because you’ve grown a successful business from scratch doesn’t mean you know all the ins and outs of selling one. Having professional help during this period will help protect you from getting the short end of the stick when you make the deal. Be sure to find a qualified accountant, financial advisor, and attorney before you even start looking for a business broker.
3. Your business is growing but stable
You don’t want to sell your business while it’s still in its infancy and needs you to nurse it along. If it’s still growing but mature enough to remain stable through a change of ownership, now is the perfect time to sell it. Don’t make the mistake of waiting too long, because if sales start to go down, so will the market value of your business.
4. The market is in a good place
Just like the housing market, the private equity market fluctuates considerably over time. You’ll want to keep an eye on these fluctuations and start the process only when you’re sure the market will allow you the best chance of getting a good price for your startup.
These four signs will help you discern when you’re ready to start looking for a private equity firm to take your burgeoning business off your hands so you can move on to your next great business idea. For more information, contact RLS Associates or a similar organization.