Accrual Accounting| Technology Changes Changed Our Business

This September we nearly hit our sales goal. Go Team! Unfortunately, when we closed the September books, we hadn’t yet reaped the rewards. The reason for the delay is uses the accrual accounting method of doing business. That means:

1) Sales are captured when the order is shipped and invoiced, not at the time of the sale.

2)  Cost-of-goods expenses are matched with the related invoices.

3) Operating expenses are reported at the time of the occurrence.

When I started trust was a big part of doing business. There was no internet, fax machines or Fed-Ex. The time between placing an order, fulfilling the order and receiving payment was about 3 months. Can you imagine?! Customers were given the payment terms of 2/10, net 30. That meant if you paid your invoice in 10 days of receipt you could deduct a 2% discount. If you didn’t, then the full amount was due by the end of 30 days (which usually stretched to 60). If you looked at my balance sheet then, Accounts Receivable was the biggest number of all my Quick Assets.

That has all shifted since the inception of the internet and the wide spread use of credit and debit cards. Businesses, like people, use cards in their daily purchasing. Gone are the days of trust and lending credit. Gone are the stigmas of bankruptcy.

What was once a 3-month billing cycle has been reduced to 2 weeks. This is much better on a business’s cash flow, but it’s still not completely even. In an effort to shorten the gap even more and minimize the risk of a customer not paying, we’ve adopted a 100% down policy for all custom-made orders.

The new millennial hires are fine with that rule.  It’s really the only way they have experienced consumerism.

Moving the old guard into the new way of doing business is a bit harder. They feel it is friendlier to offer 50% down and 50% at the time of shipping. So, to give them incentive, we’ve reminded all salespeople that their earned commissions are also on an accrual basis. You don’t get paid till Mama gets paid. Go Team!