Both of these methods are useful for small businesses trying to optimize cash flow
Small business accounting is one of the biggest headaches for entrepreneurs and business owners. You must stay in compliance while managing many other aspects of the business, from hiring to operations to customer management to budgeting.
Sometimes accounting can get placed on the back burner, but it’s a crucial component of maintaining business success. That’s why 71% of companies outsource tax preparation accounting services to ensure that they are taking all necessary steps while staying focused on those other aspects of the business. The same survey found that accountants were ranked as the most important professionals to those businesses.
Before deciding on your approach to accounting, it’s first important to understand a couple types of accounting: tax accounting and operational accounting. Let’s walk through what each of these methods entails and when you might use each of them.
What is tax accounting?
This method is called tax accounting because it’s primarily concerned with tax planning, including preparing tax returns and making tax payments. For businesses, tax accounting focuses on the way money is being spent and what kinds of expenses are taxable.
The IRS has many regulations that businesses must comply with, and tax accounting ensures those are met. It also helps business owners understand what kinds of credits and deductions they qualify for to limit their tax burden. This takes an expert who understands all the changing laws and regulations related to business taxes, which can be complex.
Tax accounting is sometimes referred to as cash-based accounting, focusing on actual cash receipts and payments. Cash-based accounting is not always as concerned about the transactions that brought in the cash, and the transaction isn’t recorded until the cash is received. This method allows smaller businesses to have a better understanding of their cash position at a given point in time. Items that will be considered include income, deductions, investments, or other business transactions.
What is operational accounting?
Operational accounting helps your business measure the real impact of all the activities that keep it running. It is all about planning, directing, and controlling finances. This method focuses on operations that generate revenue for the business, asking: What is the financial performance of the primary activity of the business?
Accountants that focus on this method will track and analyze data about how much customers order, how fast and in what way products are produced, the hours necessary to create the products, and similar considerations. They look at the materials needed to make the products and the costs of those materials.
Operational accountants can then make projections for the future based on information about actual operational revenues and expenses. They can take actuals and create detailed financial reports for planned activities.
Cost accounting is a type of operational or managerial accounting that focuses on the total production costs, assessing both variable and fixed costs for a business. This helps some businesses optimize profits by looking at where they can cut back on spending.
When each accounting method might be used
Both of these accounting methods are important in recording financial information, preparing statements, and understanding the business’s economic position. Put simply, tax accounting focuses on managing your tax return, and operational accounting is concerned with the day-to-day of your business.
Businesses in industries like manufacturing, merchandising, service and repair, and others will benefit from having that operational-level view so they can understand how their financial performance is directly linked to their primary operations.
Tax accounting is important for all businesses to stay on top of tax requirements and reporting, even if it’s just a one-person operation. In this case, for example, a sole proprietor would have to pay estimated taxes throughout the year, which requires continuous planning and saving.
This is why most businesses need to hire an accountant or outsource accounting services. All of these moving parts can be nearly impossible to manage alone, yet they are crucial components of building long-term success.
Why work with the Franco Blueprint team?
Whatever your financial or accounting needs may be, it is wise to meet with a financial professional who will get you pointed in the right direction. You never want to leave these considerations by the wayside and get into compliance trouble or face IRS penalties. You need the right accounting advice to avoid these mistakes and continue growing your business into the future.
The Franco Blueprint team helps small businesses set up the right business structure, manage their taxes, manage payment structure, and automate their accounting process. We help reduce your financial risk and maintain a healthy bottom line. When you need an extra hand with tax or operational accounting, we’re here to guide you every step of the way.
We work with startups, small businesses, general contractors, developers, real estate professionals, and more. Get in touch with Franco Blueprint to schedule a free consultation.