Cash vs. Accrual AccountingIn your day to day, you may not think much about the on-going processes of your agency. As we mentioned in a previous post , it is important to know your agency’s systems, and to make sure you’re getting things done in the most efficient and effective ways. One of the major processes you should evaluate is your accounting system. Especially as your agency grows, it is important to look at how you handle your income and expenses.

In the accounting world, there are two primary ways to handle your agency’s finances. The first is cash accounting, which tracks income and expenditures only when money actually comes in and out of your agency. The second, accrual accounting, records expenses and sales when they take place, regardless of whether or not invoices have been paid or funds have been received.  These two methods have their pros and cons, and you should examine both to see which is a better fit for your agency.

Cash Accounting

  • Shows a clear record of your agency’s cash flow
  • Takes less time to learn and explain
  • Gives clear picture of funds in your accounts
  • Makes it difficult to keep track of open invoices
  • Shows misleading picture of your profitability month to month
  • Poses problems when cash flow is low

Accrual Accounting

  • Shows true finances as it captures money owed, not just money in the bank
  • Providers clearer view of long-term profitability
  • Makes it easy to follow up on receivables
  • Takes more time to learn and understand
  • Gives false picture of cash flow
  • Requires professional input to set up and run

Before making a decision, talk things through with your agency’s accountant or accounting team. Keep in mind, if you are changing from one method to another you will need approval from the IRS before proceeding.

Regardless of whether you use cash or accrual accounting, we highly recommend using an agency management system with integrated accounting. Integrated accounting means all your agency’s data is stored in one place, making tracking and reporting on finances that much easier.

If you’re using an agency management system with integrated accounting, another great place to go for advice is the system’s user groups. You can hear from others about how their agency chose their current accounting system and how it integrated with their agency management system.

PartnerNet , Partner XE’s user group interface, is a great resource for talking through accounting system changes and how they will affect your agency. Partner XE ‘s integrated accounting easily adapts to a cash or accrual accounting system, making it that much easier to change systems if needed.

To find out more about our other Partner XE resources, contact us at 800.747.9273 or [email protected].

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