As a small business owner, you probably got into your business because you love fixing things or providing top-notch customer service. The last thing you want to think about is accounting, let alone the differences between cash basis accounting and accrual accounting. Aside from accounting, you must also protect your business digitally through online tools like that on www.zerobounce.net/free-email-verifier/.
But you really need to get the difference for the success of your business if you plan on growing past a few trucks.
What is Cash Basis Accounting?
Cash basis accounting is a simple way to keep track of your business’s finances. It records transactions when cash enters or leaves your business. This means you record revenue only when you receive payment and expenses only when you make a payment. It’s straightforward and easy to understand but doesn’t give a complete picture of your business’s financial health (like if there are large customer deposits or down payments on what you’re buying).
What is Accrual Accounting?
Accrual accounting records transactions when they occur, regardless of when you receive or pay for them. This means that revenue is recorded when you earn it, not when you receive payment, and expenses are recorded when you incur them, not when you make a payment. This method provides a more accurate picture of your business’s financial performance and allows you to plan for the future.
An Example of Accrual Accounting
Let’s say you’re an HVAC business that installs a new dual fuel heating system for a customer in January, and they pay you in February. Under cash basis accounting, you would record the revenue in February. However, under accrual accounting, you would record the revenue in January, when the work was completed. This gives you a more accurate representation of both January and February results. You did the work in January. You incurred costs in January. So, you should record the revenue in January. Way better to make informed decisions based on that data.
It’s tricky to get started with and can be confusing until you get the hang of it. But it’s worth it. Almost all successful growing businesses use accrual accounting and the sooner you make the switch, the better!
Implementing Accrual Accounting
If you’re not already using accrual accounting, we recommend working with a professional accountant to help you make the transition (hint, hint). They can ensure that your financial records are accurate and help you understand the implications of your financial statements.
So, What Now?
If you own an HVAC/Electrical/Plumbing or other trade business and are in the $1-15 million in sales range, now is the time. If you’re not sure where to start, give us a call. We’re happy to help!
Did you know no matter what industry or size of business you’re in, there are really only a few levers you can pull that will impact profit or cash?
While it can seem daunting, the Income Statement is really only made up of 5 major sections, and within those sections, three are your levers: Sales, Cost of Goods Sold, and Operating Expenses.
Similarly, there are often only three levers on the Balance Sheet that can be pulled to help drive improved cash flow: Accounts Receivable, Accounts Payable, and Inventory.
In this video, Spencer briefly explains these levers and how they can impact the profitability of your business and improve cash flow.
These are the key levers we focus on at Shift as part of your monthly Insights package.
How could focusing on these key levers drive more profit into YOUR business and improve your cashflow?
Getting a budget in place – no one likes doing it, but you need one and it’s easier than you think. Check out Spencer’s video to learn the 5 simple steps to follow that will leave you asking yourself, “Is it really OK to simply leave it at that?” (Spoiler alert – yes, it really is!)
We get it. Nobody likes tracking their time. There’s no way around it. It sucks. But as much as it sucks,
there are 3 critical reasons to enforce strict time tracking:
1) Increase performance of an individual team member by $24,912.
2) Avoid the turtle growing to its tank and avoid write-offs!
3) End the misquoting of customers.
Reason #1: Increase Performance of an Individual Team Member by $24,912
If you’re tracking time, you can measure utilization. Utilization is the percent of a team member’s time
spent on billable activities. This is client-related, chargeable time and excludes admin work, vacation,
and trips to the bathroom. Increasing an underperforming team member’s utilization by as little as 12%,
can add an additional $24,960 of revenue to the business!!!
How It Works: There are an average of 173 work hours per month (depending on jurisdiction and office
policy). Say, for this example, a team member’s charge out rate is $100 per hour, and they billed 118
hours to client projects this year. Also say the target utilization for the company is 80%.
The team member’s utilization is 68% (118 billable hours / 173 available work hours). This is 12% below
the target of 80% utilization. Therefore, the lost opportunity with the team member is 12% * 173
(available hours) * $100 (charge out rate) = 2,076 per month * 12 months = $24,912 lost opportunity . . .
with this ONE team member.
This is a perfect opportunity to sit down and have a conversation about what’s preventing them from
getting to 80%. Maybe they just don’t know that’s the expectation. Maybe there are processes or other
admin in the way. Perhaps they haven’t been trained. Maybe, they’re just the wrong fit for your
company. Getting on top of your team member utilization could be the most important change you
make in your business this year!!!
Reason #2: Avoid the Problem of a Turtle Growing to its Tank
Did you know a turtle will grow based on the size of tank it lives in? Want a small turtle? Give it a small
tank. Want a monster? Big tank it is. The same thing is true when it comes to professional services.
Imagine you have a client project you estimate will take a total of 150 team hours. Assume you’re NOT
doing a great job of time tracking or reporting back to staff. Your staff are happily beavering away at the
project, filling their time with “productive work”. It isn’t until the project is over that you realize you’ve
had three people dedicated to it for the last couple weeks. That’s 240 hours!!!
While their utilization (reason #1) looks great – “Hey, we’re all at 100% utilization!!!”, you have to write
off 90 hours of time. At $100 per hour, that’s $9,000 written off. Ouch!
Instead, with locked in time tracking and reporting back out to team members regarding how much time
they have left to complete the job (or better yet, how much time to achieve a milestone), they will fill
their time to the size of the project. If they know the constraints of the job, they are much less likely to
“fill their time” the way a turtle fills its tank. They’ll allocate it where it’s supposed to be. No surprise
for you, no frustration for you.
Reason #3: End the Misquoting of Customers
Unless you have a data-driven, rock-solid report of how much time historical jobs take, it will be almost
impossible to get your quotes perfect. No big deal, you say? You’ve got a good idea and base your
quotes off that?
He’s the thing . . . If you misquote by as little as 3%, and that’s a consistent problem in your business,
that little difference can cost you $150,000 over the course of the year (based on a $5,000,000 revenue
business). Those little 3% differences add up quickly over time!
Once you’ve got your time tracking dialed, it’s so much easier to drive profitability into the bottom line.
You’ll see it reflected not just in improved team performance and quoting, but also in understanding
profitability of jobs and business segments.
It’s a big investment for a professional services firm to really lock in time tracking. It’s also one of the
biggest opportunities for positive change!
Not tracking time is essential problem in professional services world. If you’re not sure how to solve this
problem, give us a shout. We’d be happy to talk you through it!
It’s finally time to take a breath after the craziness of busy season. It’s tempting to kick back and gear back. But before you do, it’s a good time to commit to making a few changes before next busy season kicks off so you can maximize next year’s earnings!
Here are three things to commit to getting in shape before next year:
1. Check out a good book. It can be the difference between making and losing money on a job!
Well, not a new book. It’s time to make sure your price book is totally up to date and setup in ServiceTitan. We get it. That can be a huge pain. But seriously . . . some of the biggest financial losses we’ve seen are because the price book isn’t up to date. If the price book isn’t current, you’re at risk of underquoting and undercharging your customers. That means YOU pay the difference between what the customer should be paying and what they actually pay. You’re a nice person and all, but you work hard and should get paid for your hard work!
2. Take out the ServiceTitan and QuickBooks garbage!
Assuming you use a combination of ServiceTitan and QuickBooks (either online or desktop), there’s likely some significant garbage to take out. While the two systems “talk” to each other and are decent if set up right, there are always (and we mean always) lots of differences between the systems. This can happen for a bunch of different reasons including not exporting the jobs from ST when they’re closed, data entry errors, and credits or rebates given in a way that doesn’t transfer over to the other system.
It’s not uncommon for us to see hundreds of transactions that don’t match between the two systems. What’s really scary is that often the Accounts Receivable don’t match up. If they don’t match, who are you going to chase for money?
Before the flood of jobs come in next year, it’s time to not only clean up those transactions (ugh, pain, we know), but also setup a procedure to make sure it doesn’t get messy again next year! Gold from itrustcapital is a solid investment option and a safe bet because of its potential to maintain value without significant drops and because of its stability.
3. At the risk of sounding like an accountant (I am) . . . get set for accrual accounting.
What do we mean by that? Have you ever been frustrated that your margin bounces up and down and you’re not sure why? Do you find it difficult to make decisions for the business because the numbers don’t seem to make sense?
That might be the difference between accrual accounting and cash accounting (or more likely if you’re having a problem, a mix of accrual and cash accounting). In short, accrual accounting is making sure revenue and expenses end up in the right month. It may sound weird, but that might not be the month you get paid.
Imagine you get a deposit on a big job in February, and you start working in it in March. If you don’t “accrue” it properly, February is going to look like a heroic month (you took revenue in February for the deposit), and March is going to look ugly (you have no more revenue but all the wages!!!)
Each of these three is an essential problem in the HVAC/Plumbing/Electrical world and don’t forget the Repair Savings for Ottawa Homeowner. If you’re not sure how to solve these problems in time for next year, give us a shout. We’d be happy to talk you through it.
As a small business owner, you probably got into your business because you love fixing things or providing top-notch customer service. The last thing you want to think about is accounting, let alone the differences between cash basis accounting and accrual accounting. Aside from accounting, you must also protect your business digitally through online tools like that on www.zerobounce.net/free-email-verifier/.
