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So I got an email this morning from one of my customers.  He is a SaaS startup and doing quite well in the early growth stage. He looked at the income statement I sent him and had a heart attack. How could his business be doing this bad? He had a bunch of cash in the bank, cash he was hoping to pay himself in salary.  So why was his income showing up with a loss for the year?

When you change from cash to accrual basis in a software startup, it can hurt. Especially if you are collecting payments for a year in advance.  

The solution? Get to know how your business is really doing.  By going with accrual accounting.

This particular customer was thinking about the cash in his bank account.  He was ready to pay himself a nice salary every month, a salary that would have broke his new company in about 6 months.  Changing his SaaS startup to accrual accounting gave him a clear vision of where his company was really at. See below a simple example of how using cash accounting can throw you way off.

Cash Accounting

Total Cash Received: 50,000

Total Revenue for Month: 50,000

Accrual Accounting

Total Cash Received: 50,000

Total Revenue for Month: 30,000

Total Cash Received for future months revenue: 20,000

Under the top example, you are counting all cash received as revenue.  Under the bottom example, you are reserving a portion of it for future months after you’ve performed the work for the customer.  (ie: they used your software) The reality is, you haven’t earned that cash just yet, so you gotta wait to count it in revenue.

Discovering this in his business completely changed how he is approaching the next several months.  It wasn’t fun to discover, but it was very helpful to make sure he maintained a strong growing business.

Had any experiences like that?