If you're planning to sell your business, few steps matter more than getting your financials in order. One of the biggest adjustments many owners face is moving from cash-basis to accrual-basis accounting. Done early, it supports a stronger valuation and a smoother deal.
Cash vs. accrual: the difference
Cash accounting records income when money comes in and expenses when money goes out. It's simple and shows what's in the bank, but it doesn't track what's owed to you or what you owe.
Accrual accounting records revenue when it's earned and expenses when they're incurred, regardless of when cash moves. It reflects what the business actually earned and spent in a given period.
Why many businesses start on cash
- It's simple and inexpensive. No receivables or payables to track.
- It shows liquidity at a glance. Owners see available cash immediately.
- It's allowed for many small businesses. The IRS lets businesses under a gross receipts threshold (about $30 million, indexed for inflation) use the cash method for tax.
- It fits limited resources. Early-stage teams rarely have the staff or systems for accrual books.
Why buyers, lenders, and investors expect accrual
- It shows true performance. Matching revenue and expenses to the right period reveals real profitability trends.
- It supports valuation. EBITDA and the quality of earnings work behind it depend on accrual results, not cash timing.
- It's the GAAP standard. Accrual is the common language of due diligence.
- It builds credibility. Clean accrual financials reduce red flags and speed up diligence.
What the conversion involves
- Recording accounts receivable and accounts payable
- Recognizing revenue in the period it's earned, including deferred revenue
- Accruing expenses like payroll, bonuses, and vendor costs
- Restating historical periods so buyers can compare trends
- Setting up a monthly close that keeps the books on accrual going forward
When to start
Buyers usually want two to three years of history. If you're thinking about selling in the next 12 to 24 months, start the conversion now. You'll go to market with cleaner records, more defensible numbers, and fewer surprises in diligence.
Cash-to-accrual conversion is part of FirmKey's transaction readiness work. Talk to us about your timeline.