For many small businesses, a lot of their financial mishaps stem from financial commitments that have been overlooked; the hidden cost of which can be devastating. When encumbrance accounting is neglected, it can be hard to stem the flow of leaking cash.
A powerful tool that accountants in Coral Springs can use to help businesses manage their finances with ease and clarity; encumbrance accounting is the tracking of financial commitments before they become expenses. While traditional accounting records paid expenses, encumbrance accounting follows funds that have been earmarked for use in the future. So, every dollar that you have committed to spending is already accounted for, helping to give you a much clearer picture of your finances as a whole, and avoid budget overruns.
Why your small business shouldn’t ignore encumbrance accounting
While neglecting this type of accounting might seem harmless, ignore it for long enough and you could soon find your business going under.
Here are a few ways in which ignoring encumbrance accounting can put a strain on your finances:
- Budget overruns
If your budget looks better on paper than it does in reality, it could be because of all those future expenses you haven’t accounted for.
Not accounting for money that has already been assigned somewhere can lead to overspending and a lack of funds when bills land on your doorstep.
- Problems with cashflow
Fail to set aside funds for expenses in the future, and you could soon see yourself struggling to find any money at all, taking on unnecessary debts, or putting off payments.
- Opportunities missed
Mismanaging your finances doesn’t just harm your budget, it can also lead to a lot of missed opportunities. Not having a clear picture of what capital is actually available to you, could mean that you don’t make investments when needed, due to what you believe to be a lack of funding.
What are the advantages of encumbrance accounting?
When you track your encumbrances, you can benefit from the following:
- Better financial planning
This method of accounting allows you to never be caught off guard by financial commitments, and gives you clarity when planning for the financial future of your business.
- Improved budget control
You can manage your small business budget with more accuracy when using encumbrance accounting, by making sure that every commitment you have from a financial perspective, is properly tracked and recorded.
- Enhanced decision making
While balancing your books is great and necessary, having a sound understanding of your encumbrances will help you make confident investment decisions that are well informed.
A brief guide to implementing encumbrance accounting
While the best way to set this up is to seek professional help from an accounting specialist, you can refer to the brief guide below to give you some ideas:
- Begin by educating your team
Make sure everyone on your team understands the importance of encumbrance accounting with a training session in which you explain how it helps you avoid surprises in terms of the budget, and enhances financial planning. Make sure training is continuous once it has been implemented.
- Pick the right tools
QuickBooks and similar programs that support this type of accounting can be immensely helpful, with the use of automation for mundane, time consuming tasks.
- Start small
Lastly, it may not be possible to carry out a total overhaul of your accounting system in one fell swoop, especially if you haven’t sought help from an accounting firm in Fort Lauderdale. Begin small by applying the method to a few vital expenses, before moving on to tracking of all expenses over time.
If you’re not already using encumbrance accounting, now is as good a time as any to begin, and you will likely reap the rewards far sooner than you think.
