Significant Gap in Cash vs. Accrual Financials

April 23, 2025

by a searcher from The University of Michigan - Stephen M. Ross School of Business in Austin, TX, USA

I'm evaluating a commercial HVAC business that has provided both cash and accrual financials for 2022 and 2024 but that has only provided cash for###-###-#### The variance between the two methods is significant (Accrual SDE is roughly 4x that of cash). I'm having a difficult time 1) determining the overall health of the business and 2) which method I'd base an offer on. Any / all thoughts welcome.

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Reply by a searcher
from University of Notre Dame in Austin, TX, USA

Jeremiah, I live this every day in construction finance. What you really need is their WIP, which they should be using for proper revenue recognition. With that, you would have a much better picture of not only their profitability but their working capital. If they don't have a WIP or don't know what Percentage of Completion is, then there is a decent chance they don't actually understand their own SDE.

Reply by a professional
from University of Melbourne in Balmain NSW 2041, Australia

Depends on the Net Profit % they have. If it's tight, from a CFO side, we interrogate the cash basis as it gives us an indication if the company is cashflow positive or what their cashburn rate is (which you'll be inheriting moving forward). I'd also question the big difference in accounting methods - do they do large projects B2B? Check they are correctly accounting in accrual when the project milestone invoices are sent (and work is done) rather than putting in 100% invoice at contract acceptance which may take many months to then complete. Are you using an accountant or CFO to do the DD? As a heads up, I ensure that my costs are covered by savings thru the DD and negotiation process (usually as a multiple ROI as we can find holes in the numbers, business model, balance sheet which helps you negotiate a better offer).

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