As with all industries, sound accounting services, bookkeeping services, and financial management are imperative for any storage service to successfully navigate the waters of business and reach their potential. Conversely, improper accounting brings a plethora of risks that can harm your business such as fees, fines, and even criminal charges.
That is why proper, GAAP-compliant recordkeeping, accounting and bookkeeping are integral to the financial health and performance of any storage business. Skilled accountants can help your business find ways to reduce tax liabilities, effectively track expenses, manage cash flow, and inform business decisions with proper performance reporting.
READ MORE: Bookkeeping vs. Accounting
In accrual basis accounting, transactions are recorded at the time money is earned or an expense is incurred — not when the money is exchanged.
Accrual basis accounting can provide a more accurate overall picture of the business’s financial health. This will come in handy when you’re trying to inform big financial decisions that will significantly impact your business’s future.
The accrual method is great for medium or large businesses as it is great for keeping finances organized and accounted for. It accurately tracks inventory and accounts payable and receivable. Additionally, this method is much preferred by investors because they can get a better financial overview of your company. If you ever plan on selling your business at any point in the future, the accrual method is necessary for potential buyers to obtain a clear picture of past and future financial health.
Additionally, the accrual method adheres to GAAP (Generally Accepted Accounting Principles). Publicly traded businesses must adhere to GAAP, but all businesses can find advantages adhering to the principles. For instance, financial institutions are much more lenient when handing out credit to GAAP-compliant businesses.
The accrual method may fail small businesses, however. When using accrual basis accounting, you could potentially end up with a significant amount of revenue but very little cash on hand. While this certainly is a worst-case scenario and is contingent on your clients taking a long time to pay, it can happen and can throttle small businesses when it does. To counterbalance this potential challenge, you need to be diligent about monitoring your cash flow. Reviewing the cash you have on hand each week should be sufficient to help you take action to avoid that trouble.
The accrual method is also fairly complex. This can be a challenge for businesses with in-house accounting. Additionally, it is fairly farsighted and may not provide the clearest picture of short-term financial health as it doesn’t document hard cash flow.
The cash method of accounting records transactions at the time money is spent or received. Cash accounting doesn’t account for credit — the money needs to be on hand (hence the name “cash accounting”). Cash basis accounting gives you a good view of actual cash flow. However, it won’t give you an accurate report of your sales and inventory. It gives you a solid picture of how much cash you have available and can help you understand your short-term finances. Additionally, the cash method allows you to not pay taxes on income until it is received and on hand. This is especially useful when it comes to small business accounting services since these businesses operate on smaller budgets or with fine margins.
However, there are some instances in which the cash basis method of accounting falls short. For instance, this method doesn’t lend itself to any form of invoicing structure, as there are no accounts receivable or accounts payable to track outstanding bills and payments. Additionally, it can be difficult to project long-term business performance as the cash method can only really give a clear picture of the short-term.
Additionally, the cash method doesn’t meet GAAP. While this may not be a problem for small storage businesses (sales under $5 million per year), medium and larger companies will find it more difficult to obtain credit if they don’t meet GAAP.
For medium and large-sized storage businesses (sales of over $5 million per year), all accounting must follow the Generally Accepted Accounting Principles (GAAP) guidelines to avoid the aforementioned fees, fines, and criminal charges. GAAP refers to a common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB). GAAP-compliance is usually determined by an external audit.
There are ten main principles of GAAP:
– The Principle of Regularity: the adherence to GAAP rules and regulations as a standard.
– The Principle of Consistency: the application of the same standards throughout the reporting process to ensure financial comparability between periods.
– The Principle of Sincerity: the provision of an accurate and impartial depiction of a company’s financial situation.
– The Principle of Permanence of Methods: the commitment to using procedures used that are consistent, allowing comparison of the company’s financial information.
– The Principle of Non-Compensation: the reporting of both positives and negatives with full transparency and without the expectation of debt compensation.
– The Principle of Prudence: the commitment to using fact-based financial data representation without speculation.
– The Principle of Continuity: the commitment to operating a business while simultaneously valuing assets.
– The Principle of Periodicity: the reporting of revenue during the appropriate accounting period.
– The Principle of Materiality: the commitment to fully disclose all financial data and accounting information in financial reports.
– The Principle of Uberrimae Fidei (utmost good faith): the commitment to honesty in all transactions.
All publicly-traded companies must adhere to GAAP, per the Securities and Exchange Commission (SEC). While not required by law for non-publicly traded companies, GAAP compliance is critical for favorable views from creditors and lenders. Most banks and financial institutions require GAAP-compliant financial statements when issuing business loans.
As is the case with businesses in other sectors, it is highly recommended for storage companies to maintain financial reports and documentation indicating financial performance. These reports include cash flows, balance sheets, and statements of operations and changes in net assets. Performance reporting provides important information for senior management.
Having your accounts and books in order is imperative for the smooth running of any storage business. However, it can also be tedious, complicated, and time-consuming. Additionally, the IRS can be unforgiving when it comes to mistakes — for example, filing your payroll taxes just one day past the deadline incurs a 2% penalty. These penalties can add up, too — up to a hefty 15% of the initial amount owed.
Outsourcing accounting and bookkeeping to an expert firm is a fairly simple and rewarding process that allows you to spend less time worrying over books and more time on day-to-day operations. Every day, more and more small businesses make the switch to using outsourced bookkeeping, accounting, and payroll services with FinancePal.
Jacob Dayan is a true Chicagoan, born and raised in the Windy City. After starting his career as a financial analyst in New York City, Jacob returned to Chicago and co-founded FinancePal in 2015. He graduated Magna Cum Laude from Mitchell Hamline School of Law, and is a licensed attorney in Illinois.
Jacob has crafted articles covering a variety of tax and finance topics, including resolution strategy, financial planning, and more. He has been featured in an array of publications, including Accounting Web, Yahoo, and Business2Community.
Nick Charveron is a licensed tax practitioner, Co-Founder & Partner of Community Tax, LLC. His Enrolled Agent designation is the highest tax credential offered by the U.S Department of Treasury, providing unrestricted practice rights before the IRS.
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Jason Gabbard is a lawyer and the founder of JUSTLAW.
Andrew is an experienced CPA and has extensive executive leadership experience.
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