Cash accounting deals

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by a searcher from IESE Business School
in Chicago, IL, USA

2yrs ago

Cash accounting deals

Hey all!
Anyone worked on or closed a deal that used cash accounting as opposed to accrual? Did you recast the financials, pay an accountant or just worked through the deal as-is? Curious to stories on how to move forward?

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reply by an intermediary 2yrs ago
from The University of Chicago in Chicago, IL, USA

1) Everyone agrees Accrual is preferred over Cash. However,
2) Many businesses are Cash basis. To convert Cash to Accrual, one needs a lot of data. Most businesses do not have that.
3) QoE can convert Cash to Accrual but that is often limited to a short period, often 1 year.
4) In general, Cash profit is lower than Accrual. This is especially true in a growing business. I am assuming A/P is normal.
5) Many businesses have hybrid Cash/Accrual.
6) Accrual does not mean all is great. Even if it is "all" Accrual, two CPA firms will have different profitability.
7) One must review 5 years of P&L and Balance Sheet. Depending on P&Ls alone w/o reviewing associated Balance Sheets is very, very risky.

There is a way to get "comfortable" with Cash financials for valuation. Each situation is unique. Happy to discuss. I cover this in many of my classes. DM me.

reply by a professional 2yrs ago
from Villanova University in New York, NY, USA

From an EBITDA perspective, one can't really take that question at face value. It really depends on the business model. Some businesses don't vary materially between cash and accrual. Take for example a grocery store that turns inventory quickly. There are no rev rec issues (actual sale date = when cash received), inventory likely steady month to month so this month's inventory purchases = this month's cogs, payroll can be paid on the 15th and 30th which would not necessitate a payroll accrual, etc etc. So the question is not as straight forward as it may seem. A business with customer deposits or long contracts and deferred revenue would not be a good candidate to purchase on the cash basis. Too much there can be gamed....and for these reasons we hire professionals.