As I review financial reports for agencies, I find that many are recorded on a cash basis. It’s very important to monitor your cash situation in the present and estimate it for the next few months. This is especially true during these challenging times.
Your financial reports, on the other hand, should always be viewed on an accrual basis. Management books are designed to evaluate how well a company is performing. Revenue and cost of goods sold (COGS) should be reported in the month the work is done and aligned with other expenses to determine actual financial performance.
If you register revenue when projects are billed, or invoices are collected, rather than when the work is done or if you record COGS months after the revenue is recognized you will have very large fluctuations month to month that are not reflective of the health of the agency.
Even if your taxes are done on a cash basis, you should insist that your reporting is accrual based. Revenue, COGS and other expenses must be aligned in the month the activity takes place.
– Darryl Salerno, Owner, Second Quadrant Solutions and Strategic Management Consultant
1 comment
Boy, you’ve just reminded me of my worst nightmares from the 8Os up to and through 1990. Glad those days are behind us—I thought! Hope agencies big and small take this to heart.