In our last post we looked at the differences between cash and accrual accounting and, although each has its own benefits and drawbacks, most insurance agencies tend to use an accrual accounting system. If you’re using a cash system you may find that, as your agency grows, you are outgrowing the cash accounting method. As you start to think about switching to accrual, you should take a step back and ask yourself a few questions.
1. Do I need to switch?
The IRS requires certain types of businesses to use accrual accounting, but It’s likely your agency isn’t required by law to switch. However, you should consider switching if:
- You are tracking your profitability over the long-term
- You have more than a handful of employees – salaries tend to operate better with an accrual system as there may be times you don’t physically have the cash to pay your staff
- You talked with other agencies in your management system’s user group and find many use the accrual system
If you identify with two or more of these criteria, switching to the accrual accounting system is the right move for your agency. Once you know you need to switch, start creating a plan by asking yourself the below questions.
2. When will I switch?
Start off by identifying when you can switch systems. The best time will be different for each individual agency. Think about your year: is there a time when things are a little slower? This is the right time to make the switch to a new system. If there isn’t an easily identifiable slow time, your best option is to change systems at the beginning of your fiscal year.
3. Who needs to know?
Your employees should definitely be in on your accounting system change. The best way to get the word out is to assign a small team to head up the switch. Have them create a timeline, document the new process, and organize training. Eventually everyone in your agency should be well versed on your new system and know their place in the process.
Another very important group that needs to know you’re changing accounting systems is the IRS. The IRS requires any company or organization switching accounting methods to fill out Form 3115 – Application for Change in Accounting Method. You MUST file this form within 180 days (about 6 months) of the end of the year in order to make your switch.
4. How will things change?
Take a look at the accounting system you’re using. Most agencies use Quickbooks or an integrated accounting system, but no matter what you’re using, things are going to change. Talk with your provider to find out what you need to do to prepare and start making adjustments sooner rather than later. As with anything new, you will have a learning curve. Take your time and make sure you know what you’re doing, and be patient with mistakes. Remember, you didn’t learn your current system overnight, either!
Whether you chose to move to accrual or stick with cash accounting, we suggest using an accounting system that is linked with your agency management system. Using an integrated system makes tracking and reporting easier because all of your agency data is in one place. SIS’ s Partner XE offers integrated accounting along with other great capabilities. To find out more about Partner XE can offer your agency, contact us at 800.747.9273 or firstname.lastname@example.org.