There’s an epidemic in small business of fly by night owners who are afraid of their numbers. This can effect loans, interest rates, lines of credit, and more when you don’t have things in order.
We hear so many entrepreneurs stuck in a technician mindset tell us that they are embarrassed and overwhelmed by the thought of facing what those numbers mean. Some don’t even know what financial statements they should be utilizing on a monthly basis to help them understand their businesses leverage.
What I mean by leverage is when you are able to create consistent numbers that don’t hold large fluctuations and show steady income it’s easy to go to a bank, an investor, or other institutions and leverage these numbers for lower interest rates and higher loan amounts.
Creating consistency in your numbers is a key to this and there are two types of methods to accomplish this consistency.
Cash based accounting and accrual based accounting.
Here at WinRate Consulting our main focus in on systemizing businesses in the home services and construction industry.
The best type of accounting for any business that is taking large payments and spreading a scope of work over an extended period of time is accrual accounting.
Accrual based accounting allows you to recognize revenue when the scope of work has been completed. This eliminates the large up and down swings shown when you use cash based accounting that recognizes revenue when the cash is collected.
In construction and professional services this can cause major issues from a tax perspective but also a lot of confusion of what has been done and not done.
Accrual based accounting levels out your books. It makes your business look more attractive to anyone looking at the business from a high level.
It can help you increase the value of your company too.
If you’re running a combined company of home services and construction then do yourself a favor and create separate bank accounts for each source of revenue.
Ask your accountant to make sure that he is breaking out each revenue stream with COGS (cost of good sold) for each revenue stream.
When you keep separate bank accounts, debit cards, and credit cards for each then it makes their life and yours a lot easier.
I would still keep accrual accounting as the basis of your accounting regardless if in home services or in professional services.
Make sure your keeping track of the jobs that you’re doing and the progress being made. Based on the terms of your contract and when billing is to occur then you’re able to recognize that revenue in the month the scope of work and services were completed.
Steady income means a strong income statement, cash flow, and clear balance sheet.
Have questions on exactly how to do this and get over the embarrassment of the math?
Schedule a call with us!
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