Accurate accounting is vital for a landscaping business. It helps business owners and their teams have clear sight-lines into the business’s health and profitability. This enables better decision-making and better cash flow.
There are two main approaches to accounting – on a cash basis or accrual basis. This decision impacts how you track and report your finances. This blog will help you understand the basics of this decision so that you can decide what best suits your business.
What is Cash Accounting?
Cash accounting is when a business recognizes income when it’s received and recognizes expenses when they’re paid.
For example, you will record the payment when the client pays, regardless when the work was completed.
Pros:
- It’s simple to track
- It’s easy to understand
- It helps you analyze cash flow trends
Cons:
- It can give an incomplete picture of financial health – there’s a story behind the numbers that isn’t accurately represented in the ledger
- It may complicate financial planning and forecasting
What is Accrual Accounting?
Accrual accounting is the alternative to cash accounting. In accrual, you record income when it’s earned and expenses when they’re incurred, regardless of when payments are made.
For example, you record the value of the services when the contract is signed, even if the payment isn’t due until the project is finished.
Pros:
- Helps seasonal businesses by having access to sales data that shows when a sale was made or when the service was provided.
- Helps your budgeting because the timing of sales and costs of delivering sales are clear.
- You plan for growth with visibility into when to expect sales so you can ramp up when you need to.
Cons:
- It’s a more complex system that requires more record-keeping
- This approach usually requires a professional bookkeeper or accountant to manage effectively
Bonus: But also, if a business looks at cash AND accrual statements, they can see the difference between them and make adjustments to get them more closely aligned. If they are not closely aligned, that is an indication of cash flow issues.
Which Method is Best for Your Landscaping Business?
Now that you know the general differences between the two, you may be scratching your head. There’s not quite enough information in a pros and cons list to make an informed decision.
As you weigh your options and talk with your team, here are some key factors to consider:
Business Size: Smaller businesses may prefer cash accounting while larger or growing businesses may choose accrual.
Nature of your Contracts: If large projects are completed over the course of several months, accrual may be better so that you can recognize the revenue upon contract signature.
Tax Liability: Cash accounting can delay taxes until income is received, while accrual could mean paying taxes before you’ve received the payment. Very few of our clients do accrual basis for taxes, so make sure you speak with an expert before deciding this for your business.
In the end, we highly recommend consulting with a financial advisor or accounting team to choose the method of accounting that’s right for your business in this current stage of growth. Every business that records money going in and out is doing cash accounting. And there may be a point in your business where you decide to add accrual accounting in the future.
No matter which you choose, keeping accurate and timely records of your income and expenses is paramount to a successful business. Not only does it keep you out of trouble, but it acts as a gas gauge for your business – telling you how much “in the tank” you have and how fast (or slow) you can go!
If you’d like to learn more about what other decisions weigh in on the financial health of your business, schedule a call with us today.
