Small businesses have the luxury of choosing either the cash or accrual methods of accounting, but switching between the two requires special notice to the IRS. Because of this, choosing the best method for you when you set up your business is best, and switching between the two methods once you do have your business up and running may seem foolhardy. However, there are advantages to using the accrual method, and depending on how your business is set up, it may be to your benefit to go through the process of changing, even if it means contacting the IRS.
Bare Bones and Cash
If you're a truly small business, like an independent contractor or freelancer who is paid on a contract basis, cash is best. You pay taxes on that income only when the cash is in your hot little hands. The accrual method would require you to pay taxes on income that might not yet have materialized in your account, which can be a strain if you don't have much in the way of cash resources.
However, if you work on a regular billing cycle, like with lawn care companies that have recurring clients and that bill each month, accrual may be a better method. With accrual, the amount you're owed is counted as paid (for reporting purposes) when you bill. If your business has to show steady performance over time, the accrual accounting method will show how active you really have been.
Cash method accounting can make your business seem very unsteady. Even if you're working every day and billing for lots of money, if all that money comes in at once several months later and isn't considered paid until that later date, your business is going to look extremely unproductive. That could affect your ability to get financing for business expansion, for example.
One issue busy businesses often have with the accrual method is that it can take more attention. After all, you're keeping track of not only the actual payment but the accrued payment that is on the books but not yet in your account. For sole proprietors or small businesses that don't have their own payroll or accounting departments, this can be time-consuming.
If you do think that making the switch to the accrual from the cash method of accounting would be better, you may want to look into hiring a bookkeeping service, like GCA Services. While you should understand how your books are being kept, the actual work can go out to a third-party service that is dedicated to just this type of work. That frees up your time to concentrate on your business. The bookkeepers can also handle other financial record-keeping, so ask around and see which services would help you the most.