Proactive bookkeeping saves business owners time, something that this old-fashioned clock in downtown Loveland, Colo., isn’t doing since it has stopped working on one side, followed by the other.
By Shelley Widhalm
There are two types of bookkeeping, and despite common misperceptions, both are valid and in fact can be combined to scale up business performance.
Many business owners believe accrual bookkeeping is outdated and that cash bookkeeping is the only way to go. But together they can provide proactive instead of the reactive bookkeeping inherent in a cash method.
“I really think that people have lost track of the value of proactive bookkeeping because it helps you forecast cash flow,” said Debbi Allison, owner of Open Book Consulting in Loveland and an advanced certified QuickBooks Online ProAdvisor. “If you can’t plan cash flow, how can you know what your budget should be and how to stay within your budget?”
Accrual vs. Cash Bookkeeping
The cash method of bookkeeping counts income the day the funds are received and expenditures the day the funds leave. The accrual method counts income the day the invoice is created and expenditures the day the bill is received.
Bookkeeping systems like QuickBooks Online use bank feeds for those in-the-moment payments and expenses, and users enter their information reactively when it hits the bank account instead of proactively accounting for future cash flow.
“In order to plan our cash flow, we use accrual bookkeeping on a cash system to be able to see what’s going to happen in the future,” Allison said.
A cash flow statement looks at how money moves through a business considering both income and expenses, not just a profit and loss statement that is only historically accurate. It is a proactive entry of invoices and bills to account for future cash flow and predict any cash shortages. This helps with budgeting and identifying when to employ tactics to cut back on expenses and increase sales and revenue.
“We use accrual bookkeeping in the cash bookkeeping world to give ourselves an edge, That edge is what most small business owners don’t know to use,” Allison said.
Business owners who engage in proactive bookkeeping will be thankful with the results they achieve by planning ahead.
Proactive vs. Reactive Bookkeeping
Planning cash flow is part of proactive bookkeeping, versus reactive bookkeeping that involves entering data off bank feeds and making business decisions based on historical data. Proactive bookkeeping involves not only considering the past but looking toward the future.
“When we’re using proactive bookkeeping, we’re able to keep ahead of the curve and ride the wave instead of being behind it,” Allison said. “Let’s use historical data to modify our behavior and look forward and do a better job.”
Allison finds that with her clients, they do not realize the full potential of proactive bookkeeping and how planning ahead will increase their odds for success. She helps them update their books and establish historical analytical data and plan out what’s due and what will be received and then helps them create a budget and set key performance indicators, or KPIs.
“We use that historical analytics and predictive cash flow to drive toward those performance goals and stay within the budget,” Allison said.