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I often get pushback when I champion accrual accounting over cash accounting for small businesses. But if I can’t convince you to make the switch, at least do this one thing: 👉 Align your revenue and COGS in the same period. 👈 Whether you operate on a cash or accrual basis, it’s 𝘤𝘳𝘪𝘵𝘪𝘤𝘢𝘭 to capture the costs (COGS) associated with the revenue you’ve earned in the same period. Why? Because understanding your true gross margins isn’t optional—it’s essential if you want to build a successful, sustainable business. If your revenue and COGS don’t align, you’re not seeing the full picture of your business performance. And without that clarity, decision-making gets a lot harder.
Totally agree, Matt! Aligning revenue and COGS is like getting an X-ray of your business health. You get to see hidden patterns and potential pitfalls before they become big problems. I once worked with a small bakery that didn't align their costs and revenues—after making the switch, they discovered they were overstocking ingredients unnecessarily during off-peak seasons!
I think this is especially important for small businesses, where every decision can have a significant impact on the bottom line.
Tony Shafar
1w
I agree Matt. Accruals accounting gives you a true understanding of the business performance and helps you get clarity on what actions are needed to help improve the numbers.
Spot on! 👏 I often find that the pushback against accrual accounting comes from a lack of awareness about its impact on performance analysis. I explain like plotting a graph—cash accounting often creates a wobbly line, with income spiking one month and costs hitting the next. It’s messy and hard to interpret. Accrual accounting, on the other hand, smooths that line by matching revenue and costs in the same period, giving you a clearer picture of your true performance. Without this alignment, it’s like trying to make decisions with a blurry map—you’re navigating without seeing the full route. Which do you find best with helping to explain this to clients, a visual or an analogy?
Have you found a creative/visual way to explain it? Once most people start hearing accrual, COGS, and gross margin, its word salad but they may not want to confess they can’t follow you. An easy competitive edge is producing reporting and recommendations that can be understood by non financial folks. Think definitions embedded in reports to remind everyone what it means, red light yellow light green light indicators to draw attention to the right place, a one page summary of main indicators, and your comments in a so what, now what framework. We forget that we speak a somewhat inaccessible language otherwise.
Agreed; I’d take it a step further to advise that you also capture all variable selling costs in the same period so as to be able to properly report net margins. Gross margins are a great starting point for analysis, but the only thing that really matters is net margin. What do I mean by variable selling costs? These are costs you incur as a result of a sale. If you offer “free freight” to your customers, or if you pay commissions on a sale, or if you incur credit card fees as you accept payment, or if you incur other costs triggered by a sale, gather all these together in a pile and then do your profitability analysis. If you don’t you are just kidding yourself about how much $$ you make on a sale and you’ll have a hard time understanding your true break even point.
I couldn’t agree more—aligning revenue and COGS in the same period is absolutely critical for understanding your gross margins. That’s exactly why I prefer accrual accounting over cash accounting. Yes, it can create cash flow challenges, like reporting GST before receiving it, which is often the sticking point for businesses hesitant to make the switch. But the clarity it provides on actual profit is invaluable. Without it, you’re navigating your business decisions without a true picture of performance—and that’s a risk you just can’t afford to take. Accrual might feel like more work upfront, but in the long run, it’s an investment in better decision-making and sustainable growth.
Chris Reilly
1w
I find small business is reluctant to use accrual until they understand it, and then once they do, never go back.
A challenge I find with micro-solopreneurs is the difficulty they find between what’s in their bank account vs their accrual P&L. Heck, sometimes even their cash P&L (owner draws, loan repayments, & such). Ideas to help them understand beyond a full course in financial statement literacy?
Remote Fractional CFO - I Help £1mm-£15mm Established Companies Or Early Stage Tech Startups
1w10000000% The amount of times I see "Gross wages" posted under admin expenses when 80% of the staff are direct costs is insane lol