Challenge: Unsuitable Accounting Method
A rapidly growing internet travel company was using the cash basis method of accounting. This made their financial information challenging to interpret and financial institutions struggled to understand their margins. The company needed to switch to the accrual basis method of accounting to increase interest from investors.
The cash basis method of accounting can be hard to interpret since cash flow can be inconsistent. When customers pay for goods or services after the costs have already been incurred by the company–which is often the case for many businesses–it causes a misalignment of the related cash inflows and outflows.
Adjusted financials from cash to accrual. We revised the financial statements so the revenues generated were recorded in the same period as the costs incurred to fulfill such revenues. This provided a better visual of the overall business and made it easier to assess the company’s margins and seasonality.
ROI: Increased Investor Interest
Once the financials were converted into the accrual basis, investors were able to easily understand the typical margins of the business and identify the magnitude of the seasonality of the business. This provided investors with confidence in the investment they were considering. It also helped the company solicit additional interested investors which increased the overall value of the business.
Best Practices for Choosing the Right Accounting Method
- The accounting method your company uses can have an impact on the ability to make financial decisions.
- In general, the accrual method of accounting provides a better picture into the financial results of the company.
- The ability to “match” revenues and related expenses within the applicable periods allows companies to appropriately analyze profitability margins.
- Creating consistency as to when the revenues and the expenses are recorded allows for increased ease of budgeting and forecasting.
- If you’re looking for additional financing opportunities, banks and other investors/lenders usually ask for financial information in the accrual basis method of accounting.
- If your company forecasts growth in the future, especially if you plan to have revenues in excess of $5 million, it is important to begin accounting for the company’s transactions on an accrual basis as soon as possible.
Want to learn more?
If your company is currently using the cash basis method of accounting and feel it may be time to transition to an accrual method, we can help. Contact us today to schedule a free consultation with one of our CFOs.