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! 

Russell from Tropic:

In the same exact year that Back to the Future came out, also came a movie called The Breakfast Club. It has become quite a classic and part of the fun was always thinking about which of the stereotypes you best fit into or identified with. There was a wrestler, a princess, a criminal, a crazy person and a nerd. They were all approaching detention differently but all confined to the same space and fate. So let’s start by acknowledging that combining different entities into one aggregate rule of 40 makes for good theater but has its fallacies. 

I’ll make the point even more germane. I have often used this analogy with my teams. Averages are fickle and misleading (part of why I am partial to histograms). It would be like having one foot in boiling water and one foot in ice water and telling someone that my average foot temperature was lukewarm. Ignoring the fact that one foot has third degree burns and the other one has frost bite is the point that granularity matters. I too often hear to oversimplify content for the Board because they won’t be able to process complexity, variation or nuance. It’s a pet peeve of mine. Why do we treat investors like they have a fourth grade education? That has always struck me as odd since most Boards are composed of more advanced, experienced and seasoned professionals that have many years of experience looking at complex situations. 

Let’s use an illustration to further clarify the point:

The blended company looks good on a slide but is hiding the fact that the business is actually made up of a rocket ship, a cash cow and a growth anchor. Don’t lump everyone in detention into the same category. Don’t ignore the temperature of each of your feet. The specifics matter here. Help your Board see that.

Ryan from Zapier:

Stop reporting a blended number without context. A blended Rule of 40 across three segments with different margin profiles tells the board almost nothing, and leaves you in the awkward position of either defending a misleading aggregate or apologizing for something that looks worse than it is in aggregate.

The better move is to report all three segments individually with the blend as a summary line. Show them the growth rate and margin profile for each business, explain why the profiles differ, and use that breakdown to drive a real resource allocation conversation.

If you want to give the board a north star, chart them a path to a blended Rule of 40 over time, or if one of the segments is close, put a stake in the ground on that one specifically. Either way, your job is to educate the board, not hand them a single opaque number and let them draw their own conclusions. The segmented view actually gives you more control over the narrative, not less.

Nigel from Masterworks:

I’ll be honest, SaaS business metrics aren’t my native tongue, so to me a "Rule of 40" sounds like something that happened in college in 2002. Kidding. Sort of.

Investors will naturally ask for metrics that tie back to the ones they presented to their committees and LPs deal, which may or may not actually tie to what you showed them in the fundraise or even how you manage the business day-to-day. Everyone loves a pet metric, including your investors.

There are moments when conforming to standard metrics makes sense, like when you're raising and trying to find common language with investors. And there are moments where those standard metrics don't fit the unique shape of your business and how you want to communicate financial goals internally. Both are fair.

But I’ll take a stab at this and maybe fresh eyes will help: the Rule of 40 is a compound metric that illustrates the tradeoff between growth and profitability. Works for a single-line SaaS business with similar margin profiles. Messy for a multi-segment business with different margin profiles. A blended number might even be meaningless, hiding strengths and weaknesses.

When in doubt, split it out (and footnotes). Present growth and margin at the business segment level with each one's contribution to the whole. The board will be less focused on a single number. They want to see what's driving the business and what's dragging it. 

Remember these metrics are just tools in the service of providing feedback to the stakeholders in the business. The real question being asked is: “Are we efficient?” Answer that question, not the metric. Rule of 40 started out as someone’s pet metric after all.

Russell from Tropic:

A lot of people know the Karate Kid franchise because of the Cobra Kai Netflix series. I even became a big fan of Johnny Lawrence. How does a villain become a hero anyway? Talk about context guiding perception!

Well back in 1984, the first Karate Kid movie found Daniel fired up ready to kick Johnny in the teeth. But inevitably Mr. Miyagi’s methods were very different. We got to experience scenes of Daniel waxing cars, painting fences and the movie does a great job making the audience feel like this stuff is meaningless. But when Mr. Miyagi shows Daniel how all of the planning and preparation led to his ability to do the fighting skills needed to defend and win, it all clicked. 

That’s where your department heads are right now. They are ready to fight for that headcount. But right now? Your job is to hand them the sponge to wash the car. Here’s why. Budgets don’t drive strategy. Strategy drives budgets. You don’t begin with declaring headcount is going to double. You start with the plan. I am partial to the Playing to Win framework and have used it many times.

It entails five key questions:

Headcount needs don’t even arrive on the scene until question four.

And now a personal confession. Too many of my Thanksgivings have been spent scrambling between smoking the turkey and running headcount models.

Set your calendar now. Your department heads can lick their chops but they have to cook up their part of the plan first. No shortcuts. You owe it to yourself and to them. Your superpower here, your Mr. Miyagi moment, won’t be running the models and spreadsheets. It will be the roadmap you set up, the cadence you establish, and the questions you ask.

Ryan from Zapier:

The horse trading you're anticipating is a symptom of a process where people are competing for a finite resource they can't see clearly. The antidote is radical transparency, with one critical addition I'll get to at the end.

Use the budget to back into the total headcount envelope first. Finance leads that call, not the department heads. Then use external benchmarking from multiple sources to set defensible allocations by function. When someone pushes back, you want to be pointing at market data, not your own judgment.

Once you have the envelope and allocations, build a system that gives every department head visibility into the full picture: their budget, what other teams are requesting, timing and the running burn against total available dollars. Be sure to ask for detailed information as part of the process - impact, urgency, dependencies, risks of not filling - anything to help make the process of prioritization easier. As people fill in requests, they can see in real time how their asks stack up against the total and against what peers are asking for. The conversation shifts from each department head lobbying finance privately to them explaining to their peers why their roles deserve priority. You're not the only one saying no anymore.

A few things that will save you pain: lock the envelope before you open the planning tool. If people can negotiate the total while also fighting for their piece of it, you'll have chaos. Build in an explicit exceptions process so there's a structured path for requests that don't fit benchmark allocations rather than a side channel. 

The thing I'd add that most people don't say explicitly: you need your CEO to hold the line on the total envelope and stay out of the process until it's done. The most common failure mode in a first real planning cycle is department heads going around the system to get informal commitments from the CEO before the exercise is complete. Once that happens, the transparency framework falls apart and you're back to horse trading. Get explicit alignment with your CEO on that before you launch the process, not after.

Nigel from Masterworks:

Welcome to the best part of leadership: managing other human beings. First, deep breath. 

Here's the thing I wish someone had told me earlier: an annual plan is fundamentally an accountability exercise, not a forecasting exercise.

I started out in investment banking toiling away at scores of forecast models. But when you're in the guts of a company with live human beings, you realize the budget is not a spreadsheet exercise. It's a project to identify not just the economic drivers of the company, but those specific levers that other human beings can directly influence to drive the business forward.

First, read CJ Gustafson's annual planning guide - seriously, I wish I'd had that years ago.

Then align with your CEO. What are the goals for the next 12 months? Set them at an extremely high level. Start decomposing those into the drivers to get there. There are a bunch of different frameworks on goal setting: OKRs, 4DX, whatever. (BTW - my favorite conspiracy theory is that OKR were a psyop by Google to slow down competitors) Just pick one. They all fundamentally converge on the same concept: cascading goals that roll up to your primary goal, usually some growth target and/or an earnings benchmark.

Your job is to communicate to each department what piece of that corporate goal they are accountable for. "We need your department to deliver X." Then the department head, given the right agency and authority, needs to come up with how they're going to resource their team to achieve that number.

Usually it's some activity level, some productivity metric, and resources (headcount tools). This is the part that's a negotiation (this is where that human being part comes in). In the age of AI, push people hard on hiring requirements, make sure roles are clearly defined and answer “the 8h test” - is there 8 hours a day of work for this person to do. Same goes for SaaS spend right now. 

First time is always ugly and you might be better off being more top down to begin with to start. Remember, annual budgets are a tool in service of the business, not tablets brought down from the mountain. Your role in finance is to drive the business forward by tightening the feedback loop so the company can make decisions faster and course correct in real time. That's it.

Russell from Tropic:

If I say "Inconceivable!" what comes to mind? Maybe nothing. Or maybe you are one of many people that immediately think about The Princess Bride. Vizzini and his crew are climbing up the Cliffs of Insanity and the Man in Black keeps coming after them. As he absorbs each attack Vizzini keeps saying, “Inconceivable!” Finally, Inigo Montoya turns to him and says, “You keep using that word. I do not think it means what you think it means.” Haha! I feel like we are in that situation right now with your question. 

Data integrity issues? Inconceivable! Implementation partner finger pointing? Inconceivable! Month-end close delayed? Inconceivable!

We might be looking at the ERP as the problem when it’s not the problem. We can’t keep climbing the Cliff of Insanity and expect a good outcome. We need to pause and start with the data. Why are there integrity issues? Is the underlying data problematic? 

Implementation partner issues? Did the partner under scope the work? Are they shouldering the data issues and can’t fight them off no matter how hard they try? Are they building processes that don’t actually even exist in that capacity in the current reality? If your processes aren’t properly mapped and you are wanting the ERP to fix a process that is not an implementation partner failure, it is a project scope problem. 

Later on in the movie, Vizzini sits down with the Man in Black for what is called the Battle of Wits. There are two goblets of wine and poison in one of them. Vizzini is brilliant and runs through every scenario in his head and plays out the logic, accounting for every variable (in what I must say is a hilariously iconic scene to watch). He picks up the proper choice cup with total confidence and is dead in seconds. Why? Both cups were poisoned and the Man in Black had built an immunity to the poison. The game was never what he thought it was.

If the data is dirty, the processes not mapped, the team stretched thin and/or the partner misaligned, it doesn’t matter how hard everyone fights… it won’t succeed. 

Ryan from Zapier:

Three months in with a longer close and active finger-pointing is more of a red flag than a yellow one. Most companies that push through a situation like this spend another 12 to 18 months in pain before either stabilizing or abandoning it anyway. The sunk cost logic cuts both ways: don't stay in a bad implementation just because you've already invested in it.

That said, diagnose it clearly before you decide. Start with first principles: Why did you make this switch? Whatever the original value drivers were, go assess those honestly right now. If the system is delivering on none of them and your close has gotten longer, that's a strong signal to exit.

Before you accept that conclusion, though, do one thing: verify whether the capability gap is the tool or the implementation partner. There's a pattern I've seen repeatedly where an implementation partner says "this system can't do X" when in reality it can, but it requires custom work outside their original statement of work and they don't want to scope it. Talk to the vendor's solutions team directly. Get a reference from another customer in a similar setup. Find out what's actually possible independent of what your partner is telling you.

If the tool has the capability and the partner is failing to deliver against original scope, give them a written timeline with specific deliverables and be explicit about recourse: withheld payment, references or legal action depending on what's left in the contract. Also consider evaluating other implementation partners to get you across the line as an alternative. If the tool really can't deliver what you were sold, exit. Your prior system working better is a real answer and not something to be embarrassed about.

Nigel from Masterworks:

Sounds about right.

ERP transition horror stories are virtually expected at cocktail parties I go to. Honestly, three months? Cut yourself some slack. That may have been aggressive depending on how complicated your business is.

Here's the reality: implementation partners are coming in cold to your business. Everyone has a uniquely shaped operation with all kinds of weird, janky ways they've implemented their books at the start. And often, when you're moving from QuickBooks into something more mature, it's not just an ERP transition. It's a transition of operational maturity. You were running some out-of-the-box chart of accounts. The business has grown, you've figured out what your actual financial architecture looks like. So sometimes the system migration is the easy part, and the painful part is that you're rearchitecting your data model, remapping to a new chart of accounts, rethinking your department structure, rebuilding your custom tags, getting the consolidation right.

On the "go back to QuickBooks" option: I've rarely seen it done, and I wouldn't advise it. The only time I'd bail on an implementation is if the system is architecturally broken, as in there's some facet of your business it simply cannot handle, and no amount of configuration will fix it. 

The real answer (that might sound equally torturous) is taking a hard look at the new AI-native challengers (Campfire, Rillet, Lightspeed, Evergreen), who are all hungry for new customers and putting serious resources around implementation. We wound up switching from NetSuite to Campfire, and let me put it this way: my team told me they were actually excited to do an ERP transition. I didn't know that was physically possible. We had also gone through the $100K implementation consultant rite of passage and we weren’t eager for the sequel.

But if you choose to grind it out: I find that night is darkest before the dawn on these things, and a lot of the headaches are somewhat self-imposed because you'd implemented the old system in a screwy way that you're now paying for.

Get your team some Claude Copilot accounts and a hot cup of coffee. You'll make it.

Russell from Tropic:

I feel like we need to answer the real question you are asking. “How do you clean up non-GAAP metrics before a fundraise?” 

Remember He-man? If not, everyone will soon because in June 2026 a new movie is dropping from this franchise. And yes, I am absolutely thrilled and pumped for it. Prince Adam looked like just an ordinary guy. Nobody takes him seriously. When he raises the Sword of Power and shouts “By the power of Grayskull, I have the power!” he transforms into the most powerful person in the universe. But the power was not just in the sword - it was just a catalyst. The real power is within Adam. Anyone can hold it up but not everyone can wield its power.

The CEO is holding up the burn multiple like it's the Sword of Power. But investors want to ultimately know, what is underneath and is there true power there? Your use of the word “clean up” tells me there is underlying mess or confusion there. That is the Prince Adam moment we find ourselves in. Before wielding any metric with power we need to do the work behind the scenes to build the substance behind it. 

Start by mapping every non-GAAP metric you quote today and your calculation methodology for each. This is your data dictionary. Then, compare that to the industry standard. There are tons of public sources like Bessemer, ICONIQ and how could we forget the Mostly Metrics benchmarks!? Then, determine if your method is aligned to industry standards. If not, is there a clean path to get there? 

This is when Skeletor enters the scene. His obsession is Castle Grayskull because he believes that is where the sword's power emanates. The diligence process is like Skeletor and the minions trying to ransack the castle. Pulling apart every metric to find inconsistencies. If the power is real, it will hold up. But don’t wait for Skeletor to show up.

Get the castle in order yourself. Proactively sharing means leading and guiding whereas waiting to be asked means responding and reacting. Only one puts you in a position of leverage. 

Oh and one last thing - be sure to align with your CEO before any investor meetings. Get on the same page. Agree on metric definitions. The last thing you want is the Sword of Power being lifted up with a misunderstanding of the entire premise.

Ryan from Zapier:

The real problem here isn't that you're excluding PS revenue. It's that your CEO is quoting a number in investor conversations without a locked, shared definition. That's the thing to fix. Get aligned on a single methodology, write it down and make sure you'd both be comfortable defending it to a skeptical LP who asks why. That should be part of your key metric hygiene - anything going to investors has a documented and agreed upon definition that doesn’t change without consensus. 

On whether to proactively share methodology: from my perspective, yes, almost always. Any metric where there's a legitimate choice in how it's calculated should have a clear definition attached to it. A brief definitions page or footnoted methodology in your data room is not a sign of weakness. It signals you understand your business and aren't hiding anything. The asymmetry matters: a slightly less impressive number with a clear definition will always beat a great-looking one that an investor starts pulling on. The second scenario ends with someone feeling misled, even if that wasn't the intent. 

One more thing on the PS exclusion specifically: as the finance leader, you should have an opinionated, documented view on whether that's the right call, not just a convenient one. Research how comparable companies treat professional services in their burn multiple, validate your reasoning, and then lock arms with your CEO on it. Once you've done that work, you can defend the methodology confidently rather than just hoping no one asks.

Nigel from Masterworks:

Two separate issues here: consistency (with “market” and internally) and what information you're actually trying to convey.

On consistency: there is no GAAP definition of a burn multiple. Non-GAAP metrics are always a bit of a wild west. What matters is that you're very clear on how you calculate it and footnote liberally, generally try to stay consistent between reporting periods. Always trying to tie your pet version number to somebody else's definition (market or otherwise) can drive you crazy. Investors often will make their own adjustments to get apples-to-apples anyway. When in doubt, footnote.

We don't want to get into the community-based EBITDA problem of WeWork fame. Non-GAAP metrics have definitely gotten looser on Wall Street as they tend to do with the cycle. But at a pre-IPO stage, you have space to present the metrics that best convey the specific dynamics of your business. Use it honestly. 

Remember, burn multiple was a made up pet metric to begin with anyway.

Wishing you a burn multiple with ample footnotes,

CJ