Tracking the incomings and outgoings of your accounts is essential to your business. It ensures all the right people get paid, shows where your business is growing, and helps manage spending within your teams when investing in your future. So, when choosing your method of accounting, it becomes crucial to know how it works, the benefits it brings, and how it aligns with your goals and growth targets.
Accrual accounting is one of the main methods used to track revenue and manage payments within larger businesses. However, at first glance, it can seem confusing and overly complex for start-ups or smaller companies. Nonetheless, with some explanation, companies of all sizes can easily use this method of accounting to justify and evaluate measures taken to grow the business.
If you are wondering where to start, you're in the right place. This article provides an in-depth description of what accrual accounting means and how it benefits you and your business. So, let's get started!
What is accrual accounting?
When keeping track of business revenue using accrual accounting records, businesses have to look into incoming transactions and outgoing business costs as and when they are invoiced.
This method of accounting does not consider when the payments go through or the money lands in the relevant account. Instead, it focuses on when decisions were made, even if it takes time for clients and businesses to make payments.
Thus, it is safe to say; that accrual accounting anticipates being paid and paying others after agreement.
For example, when a supplier invoices your business, the accrual accounting record would show the outgoing expense on that same day. However, you may not carry through with the transaction on the same day. The same happens when a payment is due on your business.
The accural accounting format records when payments and revenue are accrued instead of marking when money transfers happen.
Key Features of Accrual Accounting
What sets accrual accounting apart from other business accounting models is its salient features and the way it is structured. These features help businesses make sense of incoming and outgoing expenses in a way that is useful to businesses and aligns with their other processes. It includes anticipating repeat payments for bills or suppliers without needing recurring emails to remind your finance team. Below, we look at some of the main features more closely.
- Records as revenue is earned
Tracking revenue and payments can be a complicated process. Thus, many businesses have recognized that recording these costs as earned or owed to the company simplifies the process. When recorded instantly, companies can bypass remembering which payments are associated with which services or projects until completion. In addition, it provides businesses with an accurate overview of their finances at any point, noting when purchases and sales happened.
- Matches payments to invoices
Once the payments come through, these are matched with previous invoices to ensure there is an account of everything. This is where fraud or such issues are likely to occur if someone isn't keeping track of unpaid invoices. However, when receipts are managed and organized, all projects and work completed will be paid for by matching them to the relevant incoming revenue, helping your finances be ready for audits.
- Acknowledges ongoing payments
Keeping accounts for large businesses can be difficult if you try to balance the account at the end of every month. Often, what is due to be paid wouldn't have gone through, even after completing projects or purchase. Acknowledging accrued payments helps tracking all the unpaid services in the month they were invoiced when balancing the account.
- Measures expenses against specific time periods
Particularly when wanting to see the impact of a new campaign or change you have made to your services, accrual accounting helps show the immediate response from customers and clients. Although the money reaching your account may take longer, these purchases are shown to be made in a specific period. It can then be associated with other actions happening across your business in the same period, recognizing how they relate to one another.
Benefits of accrual accounting for business growth
Although it may take some getting used to, using accrual accounting for your business can be beneficial. Depending on the needs and preferences of your business, it can also aid with your strategies and support you in planning and executing your accounting goals. Additionally, you can amplify your efforts by using an expense management software that suits your business.
- Makes it easier to track KPIs
Having records of your accounts where payments are associated with when they were initially made rather than when the transfer of money happened can help track key performance indicators. Accrual accounting can show how successful you were with these metrics if you are measuring the success of your campaign based on overall revenue during that period or looking to increase your customer's average order value.
Being able to track your KPIs perhaps witth azure data lake analytics, easily shows what you’re doing well and highlights when your business needs changes. It can also suggest areas of your business to invest in and expand on to create further growth. Likewise, noticing issues from your KPIs can emphasize where improvements are necessary, working to improve customer experiences. Paying attention to these can direct how you grow your business, ensuring business success.
- Helps your business prepare
Knowing what payments are due to come in and leave your accounts can help anticipate the cash flow of your business in later months. Also, this, coupled with impeccable communication among team members, keeps everyone in the loop and prevents significant drops in overall savings. Accrual accounting also anticipates bills, wages, and repeated expenses.
Predicting and preparing future cash flow helps your business act on new strategies or invest in growth measures. For example, you may know that your income will significantly increase in the current month due to large purchases in the previous month. With this information, you can determine when it would be good to introduce new features or spend more on tools to grow your e-commerce.
- Aligns with GAAP
As your business grows, you have to meet more financial standards and regulations. Accrual accounting models are required by Generally Accepted Accounting Principles (GAAP), so having this format in place early on can reduce financial challenges to your business growth. In addition, it saves having to change your accounting style as your business grows, so you can continue using your accrual accounting methods instead.
With free contract management software in place, following GAAP requirements will help your business to grow by removing regulatory limitations. As you plan for different campaigns and strategies to expand your business, you can focus on your customers and revenue without adapting to a new accounting style.
- Works with budgeting
By monitoring expenses and income using accrual accounting, you can easily keep within your budgets. In addition, it ensures your projects are affordable and eliminates overspending from unanticipated costs.
On the other hand, as you receive more incoming revenue, your business can increase budgets to encourage growth. This gives your departments an idea of possible strategies, helping them prioritize and evaluate their actions to create sustainable growth.
Accrual accounting: The next step for business growth
Accrual accounting can be the solution if your business is looking to the future and searching for an accounting method that works for you. Accrual accounting provides accurate timelines of purchases and sales with features that help your financial records align with your business processes. It also allows your business to initiate and support growth according to your accounts.
Although accrual accounting can look daunting from the outside, it becomes intuitive to use once you transfer your accounts to this new style. With more practice matching invoices with incoming money and keeping track of outgoing spending in later months, your business can benefit from important information for its successful running. Along with your vision and strategies, this can lead to business growth.