A common mistake many business owners make is underestimating the power of real-time accounting. If you only deal with accounting at the end of the month, or worse, when something goes wrong, you’re doing what we call “bank balance accounting.” 

Real-time accounting, on the other hand, provides day-to-day optics so you always understand your company’s finances. As a result, you become more proactive in your business strategy. You gain valuable insight to spot opportunities and overcome shortfalls. Here’s your small business accounting road map to help you transition your business to real-time accounting. 

In “Profit First”, author Mike Michalowicz says bank balance accounting depends on using the account balance as the only determinant to drive business decisions. In other words, when the balance is low, it triggers a reaction to start collecting outstanding bills. When it is high, it is a sign to expand or invest in more equipment. It is a very reactive, gut-reaction-based, small business accounting model. 

When the balance is high, you might spend without considering how else to invest that money in areas to grow profit. If you have some leftover money at the end of the month, it could feel like success. The lack of cues to help you become strategic and truly successful, unfortunately, adapted the business into what Michalowicz calls a money-eating monster. He’s not wrong. We’ve seen it in action – up close and personal. And we’ve seen it tamed.

It may seem like business is running fine while using the bank balance accounting method. What is often missed is that a profit is not being made, but spent. As a result, these downfalls become unavoidable: 

• It’s difficult to tell what’s owed or what’s coming in – in other words, there’s not a good handle on cash flow
• Without a plan, everything gets lumped together – so long-term thinking about how to make a positive impact on profits is not top-of-mind
• It’s unclear if you’ll need cash for ongoing expenses, so opportunities for big purchases that drive real change to profits can be missed
• Every year, taxes creep up. Suddenly you’re faced with a bill you have to pay, without the cash available to cover it
• While in the habit of making gut-driven decisions, there’s not enough time to look at the real numbers and make profit-driving smarter decisions 
• A lot of effort is spent on scrambling to keep cash coming in, yet as soon as it’s there, it’s pushed right back out again

These are all signs your bank balance accounting methods might not be the best option. Thankfully, if you’re using this method, it just takes a few enhancements to transition to real-time accounting. Once you transition, the simplicity of the new business accounting method will quickly start to generate higher, intentional profits.

Let’s look at a typical small business scenario to depict how the new business accounting method can work for you. 

Your current, traditional bank balance accounting method is painting a pretty picture of your current financial health. You see your customers are happy, you’re generating profits, and your bank account is full. After seeing your bank account so full, you decide to spend all of your cash on expansion. Suddenly, you’re faced with a tax bill that’s a lot higher than expected. Now, there’s no cash to cover it. 

Maybe it’s not taxes. Maybe you’ve sat on an unpaid invoice from a major sale too long and find you don’t have enough money to cover payroll. The common thread to these scenarios is not having cash to cover your needs. 

Real-Time Accounting changes these scenarios forever.

Gone is the time for making gut decisions when seeing high or low cash balances. Instead, you can routinely allocate a percentage of your sales to the biggest expenses every business owner has, including:

• Operating expenses: When using real-time accounting, you operate your business with more efficiencies in order to stay within your operating budget. You always have what you need to cover expenses, including payroll.
• Owner’s compensation: Instead of only taking in hard-earned cash when the bank account is full, you pay yourself regularly for taking on the risk of owning your business.
• Taxes: You know the old adage the only two certainties in life are death and taxes. Real-time accounting considers the certainty of taxes, so you’re always prepared for the inevitable.
• Profit: You now have the time and opportunity to plan for how to best optimize your profit and expand your business accordingly.

When you handle profit proactively, there’s no more guessing or hoping. It’s all based on the facts that show you how to spend, where to save, and where you’ll see your profits work best for you.

So how does a real-time accounting system look? It’s a relief to hear you can still use your bank balance accounting, but in an entirely new and more profitable way. You’ll have three accounts set up to allow you to allot your revenue to the areas that will benefit you the most:

1. Operating Expenses: To pay your bills.
2. Payroll Account: To allot a percentage of your sales in order to have a cash reserve to always make payroll.
3. Savings Account: To start building up a cash reserve so costly surprises become a thing of the past.

You start with your three foundational business accounts. Then, twice a month, you disperse a percentage of your sales into each account to begin building some cash flow stability. Voila, you no longer worry about costly surprises. After this profit-building system is in place and you’ve formed habits, you can then add two more accounts to cover all your bases:

1. Tax: Don’t et a tax liability take you unaware again with the money saved for tax time.
2. Profit: Guarantee you prioritize profit moving forward with your new real-time accounting setup.

While five accounts might seem a bit much, it makes short work of your accounting needs and actually frees up time while opening growth opportunities.

Your real-time accounts take out the guesswork and introduce fact-driven decision-making. An operating expense account drives your business decisions because you more easily find efficiencies. You only make purchases you can afford and know when expansion makes financial sense. With your business accounts in place, you separate your day-to-day operating funds and leave the rest of your accounts untouched. They will build over time as you work your new system. With Real-Time Accounting you always have the cash you need and profit to enjoy.

Contact our Accounting Advisors at Tolbert CPA to learn more about setting up your Real-Time Accounting system. As part of our Business Compass Program, we’ll teach you the percentages you should be allocating to each account. 

If you’re not ready for the full program, consider our 90-day Foundations Program, where we strengthen your business financials and ensure every financial business decision is moving you closer to your goals. Sign up for an initial Foundations Program conversation with us here. 

As accountants for small businesses, we partner with our clients to set their financial foundation. Creating an ongoing system will ultimately decrease your operating account percentage and increase your profit percentage. It’ll also create clarity, confidence, and control of your business financials.

For more resources to get your Financial Foundations working for you, visit our Complete Guide to Strengthening Your Financial Foundation.