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Why accrual accounting is key for a successful exit
In short
If you plan to sell your business, your accounts should be on an accrual basis. Cash accounting records money when it moves; accrual accounting records revenue when you earn it and costs when you incur them. Buyers judge your business on its real margins and how steady they are, and cash accounting can make them look erratic, or worse than they are. That can cost you money in a sale.
Here at Nextoria, we spend most of our waking hours helping founders sell their companies for the best possible price. One of the first questions we ask every new client is: "What type of accounting does your company use?"
If you want to sell your business, the answer should be accrual accounting. Before your eyes glaze over, know that every buyer we work with cares about this, and you should too.
Cash vs accrual accounting: what's the difference?
Your financial statements are like an X-ray of your company. They capture your financial health in an image that lets someone else spot issues without knowing the business as well as you do. Cash and accrual accounting show the same information from different angles, mainly because they record transactions at different times.
Cash accounting
When the money moves
Income is recorded when it's received, and expenses when they're paid.
Accrual accounting
When it's earned or incurred
Income and expenses are recorded when they happen, regardless of when the money comes in or goes out.
This may seem like a small difference, but the impact on your valuation can be huge.
Both have their pros and cons. Cash accounting is simpler. If you run a small, cash-intensive business and have no plans to sell, cash accounting with a few well-built spreadsheets can be fine. Accrual accounting is more complex, but it captures details cash accounting misses, and it's widely regarded as a more accurate picture of a business's finances.
Wherever you do business, you should be using accrual accounting. It's what the main reporting standards are built on. In the United States, public companies must follow Generally Accepted Accounting Principles (GAAP), which use accrual accounting, and most investors and lenders expect the same from private companies. Outside the US, the International Financial Reporting Standards (IFRS), required in more than 140 jurisdictions including the EU, also use accrual accounting.
The risks of cash accounting in a sale
Cash accounting can cause real confusion about how profitable your business is. Accrual accounting is the only way to track your costs properly and compare one period with another like for like. Recording income when it's earned and costs when they're incurred gives you a clear view of your margins at all times. Without it, you're flying blind.
And when you fly blind, sometimes you get lucky, but often you crash something very expensive: in this case, your business. Without an accurate view of your margins, you're likely to leave money on the table when you sell.
Buyers will also look closely at your working capital: the money tied up in stock, unpaid customer invoices and bills you still owe. Many also commission a quality of earnings review, an accountant's check that your profits are real and repeatable. Both are built on accrual accounts, so if yours are on a cash basis, they will have to be rebuilt first.
A simple example: same business, different margins
Take two companies, A and B. They're virtually the same business: the same monthly sales, and the same costs. Each pays £15,000 every three months, in advance, for something it needs to run the business: say, its cloud hosting bill (AWS or similar).
Company A uses cash accounting. It records the full £15,000 in the month it pays, even though the bill covers the next three months. Its costs land in big chunks, which distorts its profit.
Company B uses accrual accounting. It spreads each bill over the three months it covers, rather than recording it when it pays. Its costs land in the months they belong to, and its profit reflects how the business actually performs.
The hosting bills paid in January and April each cover three months, but cash accounting records them in full in the month they're paid. So the margin looks lower than it really is.
Each bill is spread over the three months it covers, £5k a month, so each month shows what the business really earns.
On paper, Company A makes a 31.8% gross margin, and two of its four months are loss-making. Company B, the same business, makes 54.5%. Guess which one a buyer would pay more for.
Where it shows up, by sector
The same thing happens in every sector, just in different places.
Software
Annual plans paid upfront
Cash accounting shows a year of revenue in one month. Accrual spreads it over the twelve months of the subscription.
Services
Work billed later
Cash accounting shows revenue when the invoice is paid, not when the work was delivered.
Product businesses
Stock paid upfront
Cash accounting books the whole order when it's paid, not as the products sell.
In each case, cash accounting makes some months look much better or much worse than they really were. Buyers look at trends and margins month by month, so that noise makes your business harder to read, and harder to value.
Build your financials on strong foundations
We regularly see businesses where clean, accurate financials make the difference between a smooth exit and a long, painful one. We've also seen companies whose financials were such a mess that the business was virtually unsellable.
We suggest working with accountants who specialise in your sector. They can review your financial statements, convert your accounts from cash to accrual if needed, prepare monthly P&Ls, and fill any gaps that would otherwise get in the way of a sale.
Tip
Most of our clients need some help from an accountant to be ready for an exit. The earlier you switch to accrual accounting, the more months of clean history you'll have to show buyers.
Thinking about an exit?
Let's talk about your business.
Ready to sell or still years away, the earlier we talk, the better.
Last updated October 2026 · Written by Aïda Aït-Ahmed, Co-Founder, Nextoria