When should you switch from cash to accrual accounting?

This week we have the following CFOs answering your reader questions:

Today we’re tackling:

Let’s get into it!

Russell from Tropic:

I’ll begin as I always do with a little bit of a story. One of the very first movies I remember seeing in the theater (back when it was an iconic experience to go to one) was Back to the Future. Beyond it being crazy that Doc made a time machine out of a DeLorean was the tension that Marty had throughout the movie. Once the DeLorean hits 88 mph, time travel was possible thanks to the flux capacitor. So moving in time wasn’t the issue. The real issue was ensuring that you fix everything from the past that you might mess up without creating a paradox. The go-forward on an accrual basis is the easier part. The look back is all about making sure you don’t erase yourself from the investor decks. 

I think it’s important to first step back and understand why companies would go cash basis to begin with and what the problems are in doing so. The quick answer is that the cash basis is simpler and requires far less work. Accrual basis accounting requires a lot more rigor around AR, AP and adjusting journal entries which requires a more sophisticated accounting system.

So why exactly is that a problem? The main issue is one of timing imbalances. With cash basis, there is a mismatch between income and expense which can create large swings in presumed profitability that are more a function of timing than business performance. The obvious problem with accrual based approaches beyond the additional work is the potential that a company could look stronger financially on paper than its actual liquidity position. It makes sense why the Series B lead wants you to be accrual based and that’s really so that they can see your business health more clearly and comparably to include things like deferred revenue. 

Is it daunting? Maybe no more than Biff was in Back to the Future. Perception of his scariness was more than the reality - he was just a big bully. The forward-looking piece is not near as daunting as it used to be with modern ERP systems.

Your next step? Make sure your flux capacitor is working properly before you attempt to travel back in time.

Ryan from Zapier:

Honestly, the answer is probably that you should have done this sooner, but here you are. The real question is whether you have a choice.

If your Series B lead is conditioning close on it, you likely don't. But if there's any flexibility in the timeline, start by pressure-testing what's actually competing for your team's attention right now. Are there other high-priority projects in flight that would stall if you diverted your finance team to a restatement? Any risk of slowing down the top-line work that actually moves the needle on your valuation? This conversion is not revenue generation. It's a hygiene exercise, and an important one, but it doesn't justify trading off against things that compound your growth.

That said, the longer you wait, the messier it gets. Deferred revenue, prepaids and accrued liabilities only accumulate more history to unwind. If the Series B is contingent on it, stop deliberating and staff it properly. The cleanup feels daunting because you're staring at the whole thing at once. Break it into workstreams, assign clear ownership and give each area a hard deadline. The worst version of this is a half-finished restatement that drags into diligence.

One thing worth adding: make sure your audit or review firm is looped in early. If you're planning to use audited financials in your fundraise, they need to be aligned on your opening balance sheet adjustments before you're under the gun.

Nigel from Masterworks

Rip the band aid off.

Accrual accounting is like one of those teenage rites of passage - awkward, inevitable and you're a little embarrassed it took you this long. But you’re a Series B company now, not a banana stand. So unless you're running a perpetual lifestyle business (sounds nice), you were always going to end up here.

Yes: deferred revenue can be tricky depending on how your contracts are structured. The good news: prepaids and accrued liabilities are mechanical. Annoying, not hard.

The actual good news: it's 2026. You're probably imagining this process as it existed in the BC era (before Claude), manually reclassing journal entries and reconciling spreadsheets at midnight. Claude is pure magic for this kind of work. Depending on how your ERP is set up, the workflow looks something like:

AI is shockingly good at this. It almost makes me want to get in there and do it myself. 

Put the robot army to work!