What is Accrual Accounting？ (See The #1 Decision Startups Need to Make TODAY)
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Summary
In this episode, Dan Martell talks about the difference between accrual accounting and cash accounting, why it's important to understand your numbers, and why you need to know your numbers to make better decisions and decisions.
Transcript
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serial entrepreneur, investor, and creator of SaaS Academy.
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what is accrual accounting, accrual versus cash.
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And I've had to teach dozens of SaaS founders specifically,
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It's not as complicated as the frigging accountants
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wanna make it seem, but be sure to stay at the end
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my precision scorecard, a framework to help you understand
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and other things we're gonna talk about in this video
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so that you get a weekly report to keep your eye on,
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I had done two other companies prior to that point
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they say you really need to understand your numbers.
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And I was just like, man, I know how to make money,
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Like I can't tell you how to read an income statement
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or a cashflow statement or a balance sheet, et cetera.
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I had them and I had to sign off at the end of the year
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to make sure they were accurate because if, you know
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I could go to jail if I didn't pay my taxes, et cetera.
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He owned a shipping company, a dry cleaning company,
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and he was probably about 14 years older than me.
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hey, Dave, I was wondering if you could teach me
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And he was kind enough, like knowing what I know now,
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He replied and he's like, hey, Dan, I'd love to meet up.
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But the truth is, is that's what accountants are for.
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the accountants should do all the heavy lifting,
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Number one, clearer cashflow in better decisions.
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the income is collected when the service is delivered, okay?
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So if somebody pays you for an annual contract upfront,
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So what ends up happening is that check for 100 grand,
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owed on a future date versus cash versus saying in my account, which is look, the truth is small
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businesses all around the world. They do cash accounting. I get it. It's simple. They're like,
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am I doing good? How much money is in my bank account? But that's not a true understanding of
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how your business is doing. Because the last thing you want to do is have all these customers,
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you're doing three year annual contracts and they give you all the money upfront and you're
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sitting on millions of dollars of, of what you think is profit. But the truth is, is you still
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have to operate. If you just think about you got expenses for three years into the future that's
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coming from that pot of money. And if you don't look at the reporting from an accrual point of
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view, you're going to think that you're rich. You're going to go buy yourself a new Lamborghini
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and then you're going to have customers pissed off because you don't have any developers,
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no money for the servers, no money for customer support, and they're going to leave and then ask
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you for their money back, et cetera, et cetera. So, I mean, that's the real reason is you want
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clear cashflow understanding so you can make better business decisions about should you hire
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Should you buy or change CRM solutions, et cetera?
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to understand what your cashflow is gonna look like,
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it's gonna make it harder to make good decisions.
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Number two is we wanna track MRR with accuracy.
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if you know your annual reoccurring revenue divided by 12
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your 2 million ARR and you wanna go to 4 million
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is the incremental change on a monthly basis for ARR
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It might look, you know, if you're getting 7, 8% a month
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and are we growing it on a month over month basis?
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maybe we have customers that are not gonna renew,
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or maybe you have different changes in your prices.
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you won't see those big shifts to give you feedback.
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So tracking MRR accurately is the biggest reason
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for you to move to an accrual-based accounting process.
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So I remember one time I was working with another client,
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Emrick, he had made a big pricing change in their software.
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But the first month that had a negative effect,
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they just assumed, oh, you know, it's that time of year,
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oh, maybe there's something going on, blah, blah, blah.
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It took three months, 90 days for them to realize,
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holy moly, that change we made back three months ago
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of business trends, both support tickets, costs.
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so that we can get a, ideally reduce the distortion.
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That's what it's called is distortion in your numbers, okay?
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of business trends so you can make better decisions.
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That's easy because they're just gonna pay their credit card.
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you wanna defer that income as deferred revenue
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and it shows up as a receivable in your books, okay?
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but every month you might have a deferred revenue line,
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but they don't invoice you until 30 days later.
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you want to record the expense on the day of service delivered. That's how this whole thing
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gets cleaned up. That's why people are like, what if people pay me up front? I just answer the
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question. You defer it as a receivable that they owe you every month. And if you get a service,
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you need to expense it on the day they delivered the service. It has nothing to do with when you
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paid it or when the invoice was given to you. So that is accrual accounting. You need to do it as
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a SaaS founder just cleans up everything. Number one, it clears up your cashflow. Number two,
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it helps you track MRR accurately. Number three, identify your business trends. Number four,
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most important is the financial implementation of it all. And the good news is you ask your
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accountant to do it. You don't need to do it. Now, I mentioned at the beginning of this episode,
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I want to share with you my precision scorecard. It is a framework and a template that you can
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implement into your business to track your revenue,
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track your expenses, track your profit on a monthly basis.
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because that dollar reinvested could have helped you grow
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And the valuation on average for a SaaS company,
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if they're doing about, you know, 3 million plus
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is about between four to seven X their top line MRR.
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the Precision Scorecard will help you track that
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help your team get focused on quarterly outcomes,
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just click the link below to download your copy