A Case Study on How We Helped a New Jersey Based Client Upgrade from Cash Basis Accounting

Introduction

Our client is a New-Jersey-based mid-sized company that provides business consulting and business plan preparation services to growing enterprises. They approached us as they wanted to shift their books from cash to accrual basis. The company was growing and they realized that their current method of accounting no longer suited their needs. They were keen on switching to a more rigorous accounting approach that supported their growth and improved their financial reporting processes.

The Problem

The client’s accounting team followed a simple cash-basis accounting system in which they recorded transactions when cash was exchanged and not when services were provided. This system worked for a while but started causing problems as the company grew. They were not getting an accurate picture of the company’s finances, especially at the end of reporting periods. Some of the specific challenges faced by the client included:

1. Incorrect Revenue Recognition: The company recorded revenue only when cash was received and this often led to a mismatch between income and expenses. For example, if a large order was shipped at the end of December, it was not recorded as revenue until payments were received in January. This made the company’s financial results look misleading at the end of the fiscal year.
2. Inconsistent Expense Tracking: Expenses were logged only when payments were made, not when costs were incurred. This created periods of high expenses and low revenues and made financial analysis challenging.
3. Limited Financial Insight: The cash-basis method did not accurately predict cash flow and profitability, which affected the client's decision-making potential.
4. Difficulty in Securing Funding: Investors and lenders require more accurate financial reports, which the cash-basis system couldn’t provide. This limited the company’s access to financing options.

Decision to Transition

The client decided to move to accrual accounting to get a clearer view of business performance, improve decision making, and stay aligned with GAAP regulations. They understood that having more accurate records would also make it easier for them to obtain funding from banks and other sources. They partnered with KnowVisory’s Finance and Accounting team for a smooth transition.

The Challenge

There were several significant obstacles to the switch to accrual accounting:

• High Volume of Transactions: The company had a large number of transactions that needed to be carefully reviewed and adjusted. This required a lot of time and attention to detail.
• Data Accuracy: Ensuring the accuracy of these transactions was also important. The KVG team needed to ensure that revenues and expenses were correctly matched to the right periods. Any mistake could lead to inaccurate financial reports, so it was important to get everything right from the start.

The Solution

The KnowVisory’s accounting team got onto the job and created a smooth transition process, with clear objectives and milestones, and gave the client a definite timeline for the project. We made sure to complete the transition:

• within 6 months
• with minimal disruption to daily operations.
• And comprehensive staff training.

We created clear milestones for each month to ensure steady progress. The KnowVisory’s Accounting and Finance Team collaborated with the client's IT department to set up new accounting system that would support the shift from cash to accrual accounting. We phased the entire transition into the following steps:

1. Initial Assessment: We began by reviewing the client’s existing accounting practices to identify gaps and areas that required adjustment. This helped us set clear goals and map out a seamless transition process.
2. Data Cleanup: We cleaned the entire data and ensured all financial records were accurate and up-to-date. This involved a thorough review of the existing data and the removal of inconsistencies or errors that existed.
3. Re-categorizing Transactions: We reclassified transactions to reflect accruals basis the accounting principles and made sure that revenues were recorded when services were performed and expenses when they were incurred.
4. Adjusting Financial Statements: Our team adjusted the historical financial statements to align with the new method and provided a more accurate comparison for future reporting.
5. Software Setup and Training: The IT department set up new accounting software, which was designed to handle the demands of accrual accounting. KnowVisory’s team trained the client’s staff to use this software effectively, helping them adapt to the new way of managing their finances.
6. Continuous Monitoring and Adjustment: The transition did not end once the new system was in place. Regular reviews were conducted to monitor the client's financial records and address issues that came up. Regular check-ins allowed us to keep the system running smoothly.
7. Change Management: We ensured that all departments understood the benefits and changes associated with the new system. We conducted training sessions to ensure a smooth transition and provided ongoing support to help staff adapt to the new processes, making sure everyone was on the same page.

The Result

The new system provided a clearer, more accurate view of the business's financial health. Revenues and expenses were now matched to the correct periods and gave a true reflection of the company’s performance. The teams were able to better track trends and performances and make strategic adjustments quickly and effectively. With reliable and precise financial data, the management and stakeholders had a clearer understanding of cash flow, costs, and profitability. This helped them set realistic goals and strategically plan for future growth.

Conclusion

Transitioning to accrual accounting was a strategic move that helped our client gain a more accurate view of their financial health. As mentioned above, the new accounting system not only provided our client with better financial insights, it also amplified their ability to secure funding and support future growth. Struggling to manage your business finances, just like our client? It might be a time to make a move. Contact KnowVisory and get expert consultation to your needs. We can help you streamline your accounting processes for an enhanced and improved financial clarity.