Significant Gap in Cash vs. Accrual Financials

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

1yr ago

Significant Gap in Cash vs. Accrual Financials

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 forredactedThe 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 1yr ago
from INSEAD in New York, New York, USA

Yes, under the new SOP issued yesterday, the SBA continues to require banks to use and verify tax returns filed with the IRS as part of their loan underwriting and approval process. While I am not a lender, my reading of the new SOP seems to suggest this guidance is part of SBA's fraud prevention and DD efforts.

reply by a searcher 1yr ago
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.