How to Impress Your Banker

One of the decisions to be made as you start a business is whether to keep your records on a cash or accrual basis of accounting. The cash basis of accounting has the advantage of simplicity and almost everyone understands it. Under the cash basis of accounting, you record sales when you receive the money and account for expenses when you pay the bills. Under this method, the increase in your cash balance will generally tell you at the end of the month how much you made.

Unfortunately, the reality is that sales are made to customers on credit. Similarly, the business will incur liabilities on credit as payables and taxes maybe due even though the proceeds of the related sales have not been received. Recording sales and expenses as they are generated or incurred but prior to them being received or paid is the basis for accrual accounting. Most users of financial statements such as bankers and investors are accustomed to accrual basis statements and expect to see them. They provide the users of the statements, including the owners and taxing authorities with a better measuring device for the business operations than cash basis statements.


A Word About Accounting Software

Do you have the information you need to grow your business?

Managing an ever-increasing flow of information is one of the critical challenges in business today. The importance of timely and accurate information cannot be overstated. Effective record keeping can help you stay ahead of the competition by helping you stay on top of changes that affect your profitability. The computer is probably the single most valuable invention for bookkeeping and accounting since the advent of double entry bookkeeping.

An effective investment in information for a small business does not have to be expensive. There are a number of very good, easy to use accounting solutions commercially available off the shelf like MYOB, QuickBooks and Simply accounting which typically cost less than $400. These programs are designed generally for businesses generating less than $5m in annual sales and come with a remarkable list of features to assist the small business owner in growing their business. However, none of these software packages will solve the problems of inaccurate or poor quality financial records. All they will do is generate bad information faster. If you want to install a computer-based accounting package, either yourself or through your accountant, it is imperative that you provide accurate information to be entered into the system.

The general accounting software program that is installed should be able to handle the accounting records on an accrual basis. This means sales and receivable information should be readily available, (including an aging of accounts receivables, cash receipt information, past due customer balances). As well, accounts payable information, including access to information on all supplier accounts, printing of computer cheques, and monitoring of cash flows should be possible. Ideally, revenues and costs should be allocated to products and/or cost centers and/or projects or jobs to enable the user to understand what products or projects are most profitable.

Consider the advantages that a computer-based accounting package can provide over how you currently track the following:

• Sales by customer, product or territory
• Names, addresses and phone numbers of clients and suppliers
• Backorder information relating to purchases and/or sales
• Inventory over and under stock positions
• Actual expenses vs. budgeted expenses
• Aging of Accounts Receivable and Accounts Payable
• Payroll reporting to the government
• Tax reporting of GST and PST
• Profit and loss tracking by job or gross margin by product
• Production planning-for manufacturers to schedule labour and equipment based on current inventory levels
• Inventory-detailed cost and selling price data

The real value of the computer becomes apparent once it is running smoothly in your business. Your Accountant can then provide value-added functions, not just as a “number cruncher”, but also as a business advisor, consultant, and strategist. Together, the focus can be not on producing reports for various regulatory agencies but on analyzing your business to make it more profitable.