Cash vs. Accrual Accounting: Why It Matters Before You Sell a Business

Cash-basis books show when checks cleared, not how the business is doing. Accrual books give you a real monthly picture, and buyers will look at it that way anyway.

Not tax or legal advice. This article is general information based on my own experience selling a business. Every business and deal is different. Talk with your own CPA, attorney and financial advisor before acting on anything here.

The short answer

Cash-basis books record money when it comes in and goes out. They tell you when money moved, not when you earned it or owed it. Accrual books record revenue when it's earned and expenses when they're incurred, so each month shows how the business is actually doing. Most small businesses use cash accounting; buyers and their accountants will look at your business on an accrual basis. Many owners can keep monthly management reports on accrual while their CPA handles how they file taxes.

Our December problem

For most of the time I ran my company, our books were on a cash basis. A lot of our clients paid annually, so every December looked enormous. Then we spent the whole next year doing the work. On a cash basis, December said we were crushing it, and the rest of the year said we were struggling. Neither was true.

The same thing happened with big annual bills like insurance: one month takes the whole hit. We weren't looking at the health of the business. We were looking at the timing of checks.

What accrual gives you

With accrual reporting, each month answers real questions. Are we making money on this work? Are costs creeping up? Where are we headed? In hindsight it seems trivial. It wasn't. Real monthly numbers would have given me better forecasting and planning, years before anyone talked about buying us.

What I do differently now

In my current business, we set things up from day one:

A clean chart of accounts, so every dollar lands in a category that means something.
Tracking what matters, from time spent on each kind of work to which marketing actually brings in customers.
Contracts buttoned up from the start, not cleaned up later.

None of that is for a buyer. Good books are how you run the business instead of just getting through the month. A buyer just notices.

One thing to try this week

Ask your bookkeeper for monthly reports on an accrual basis, and ask your CPA how that fits with the way you file. Then look at the last six months and see what story they tell.

Are your books telling you the truth? Cash vs. accrual before a sale