What is Accrual Accounting? (See The #1 Decision Startups Need to Make TODAY)

About this video

Dan Martell, who says he is not an accountant but has reviewed many SaaS financial statements, argues accrual accounting is a must for SaaS because cash accounting distorts the picture. Under accrual, income is recognised when the service is delivered, so an upfront annual payment is deferred and recognised monthly rather than counted at once, and expenses are recorded on the day of service rather than when invoiced or paid. He gives four reasons: clearer cashflow for better decisions — otherwise founders can mistake prepaid customer money for profit and overspend while still owing years of delivery; accurate MRR tracking, noting MRR is ARR divided by 12 and monthly movement is easier to act on; spotting business trends faster, citing a client whose pricing change had cut monetisation by 20% but took three months to identify without monthly accrual views; and correct financial implementation of deferred revenue and service-date expenses. He directs founders to have their accountant implement it and promotes his Precision Scorecard for weekly and monthly tracking.

Key takeaways

• Use accrual accounting for SaaS: recognise revenue when the service is delivered and defer upfront annual payments instead of treating the cash as profit
• Record expenses on the day the service is delivered, regardless of when the invoice arrives or is paid
• Track MRR accurately — derived from ARR divided by 12 — and review it monthly or weekly so small changes are visible and actionable
• Reviewing on an accrual, monthly basis helps identify trends quickly, such as a pricing change’s negative effect, instead of mistaking it for seasonality for months
• Have your accountant do the implementation; the founder’s job is to direct them to accrual reporting and monitor cashflow, revenue, and profit with a scorecard

Episode details: published November 16, 2020 · 10:04 long. Summary written by Self Growth Videos from the episode itself. Business results and any income figures mentioned are Dan Martell’s own claims, shared for education — they are not typical or guaranteed.

← Previous: 3 Cutting Edge SaaS Marketing Strategies That Work In 2021 · Next: Investing In SaaS Enabled Marketplaces with Christoph @ PointNine.com - Escape Velocity Show #41 →

All Dan Martell videos · Dan Martell profile · Dan Martell (official site)