It is, of course, impossible for an entrepreneur or a businessman not to hear about cash flow. But what is a cash basis after all? Shortly, it is one of the main approaches to financial management within any enterprise.
So, understanding its mechanism and all the major benefits may be strategic for any firm to achieve a favorable financial position. In this article, we will unroll what it is, how it works, and talk about the main benefits and challenges of this regime.
We will also let you know the details on how to successfully implement this regime in your own business.
Ready to further improve the financial management of your business? Enjoy reading!
What is cash basis?
You may have already asked yourself what cash basis is, right? It is nothing more than an accounting method that records financial transactions at the time they are actually received or paid, regardless of the period in which they were generated.
In other words, it considers the real flow of money, providing an immediate view of a company’s financial situation. This differentiations with gathering bookkeeping, which records exchanges at the time they are completed, without relying upon when cash is really traded.
In other words, the cash basis provides a more immediate view of the company’s liquidity, allowing a more direct analysis of cash flow and financial resources.
How the cash basis works
Subsequent to seeing more about what income is, it is important to see more about how it functions.
The revenues are recorded when the money enters the cash flow of the company, while expenses are recorded at the time of making payments. In other words, accounting directly reflects the company’s liquidity, giving a clear view of the availability of financial resources at a given time.
A good comparison to better understand what cash flow is and how it works is to think of the company as a moving car. In this scenario, revenues function as the fuel that fills the vehicle’s tank, providing the energy necessary to move forward.
In this way, recording these receipts the moment the money enters the register is similar to checking the fuel gauge when you stop at a gas station.
Therefore, this simplicity in approach makes cash accounting particularly useful for small businesses and individual micro-entrepreneurs, as it provides a direct understanding of the impact of transactions on daily cash flow.
Main advantages and challenges of the cash basis
You already understand how it works and what cash flow is, right? Excellent! So the next step is to analyze the advantages and challenges of this modality for your company’s day-to-day operations.
Follow:
Main advantages of the cash basis
First, we will present the main advantages of the cash basis for your company’s financial organization.
Simplicity
Cash accounting is easy to understand and implement, making it an affordable choice for small businesses.
Cash flow control
By recording transactions as they occur, the cash basis provides an accurate view of cash flow, allowing for better financial management.
No financial surprises
As this modality focuses on real money transactions, companies can avoid unpleasant surprises, such as forgotten payables or unreceived revenue.
Better negotiation
Having effective cash flow control allows the company to negotiate more efficiently with suppliers and customers, as it can offer realistic payment terms and obtain discounts for early payments.
Immediate decision making
As information is available in real time, the company can make faster and more informed financial decisions, as it has immediate knowledge of cash inflows and outflows.
Challenges faced in the cash basis
However, despite the benefits listed above, there are some challenges that companies may face:
Limitations in financial projection
The cash basis has limitations when it comes to projecting future financial performance, as it does not consider transactions that have not yet been effectively paid or received.
Complexity in large companies
Larger companies may find it difficult to handle the massive volume of daily transactions, making it less practical compared to accrual accounting .
Risks of inadequate planning
Finally, the simplicity of the cash basis can lead to less strategic management, as managers may be tempted to not fully consider the long-term implications of their financial decisions.
How to implement the cash basis in your business
Implementing the cash basis in your business can be relatively simple, but it requires organization and discipline. Follow the steps to put it into practice effectively in your company’s financial management:
Conscious choice
First, evaluate the size and nature of your business to determine whether a cash basis is the best option. This is because smaller companies and those with more direct financial transactions generally benefit more from this approach.
Efficient accounting system
Use a robust business management system that allows for easy recording and tracking of cash transactions. In other words, prioritize the use of specialized software and hire experienced professionals.
Team training
Additionally, make sure your staff understands the cash basis and is trained to record transactions effectively.
Regular monitoring
Finally, regularly monitor your cash flow to ensure that the information is always up to date and to make informed financial decisions.