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You Have to Earn It to Recognize It

May 2014

I have a chance talk to many floor covering stores around the country who are potential QFloors customers. They usually talk to me when they want to know more about the accounting features and capabilities of QFloors. If they have been using an off-the-shelf accounting system, like Quickbooks, they are usually surprised to find that QFloors won’t operate on a cash basis. (QFloors will only do accrual accounting.)

Understanding our reason for designing an accounting system this way requires a basic understanding of cash vs. accrual accounting. Cash accounting recognizes revenue when cash is received from the customer. Expenses (CoGS) are recognized when bills/checks are paid.

Accrual accounting recognizes revenue when jobs are completed (installed). By the same token, Cost of Goods Sold (direct material costs and labor costs) are recognized when the jobs are completed or installed. Expenses are recognized when they are billed (not paid).

The cash method can work in an industry where you sell something in stock, the customer takes it that day, and they pay for it in full that day. We are not in that type of industry. In our industry—in most industries--it should be obvious which method is preferable and more accurate. Lets get ‘real’ here. Just because you get a big deposit from someone, doesn’t mean you have earned that money on that day. It simply means you have a chance to earn it sometime in the future when you deliver the materials and/or labor.

Some dealers want to continue with a cash basis because ‘that is how we have always done it’. I know, I know. But there is a reason you are on the phone with me talking about changing your software. It could be B2B features, Sales/Use tax accuracy, or our CRM (Leads) module (all of which are superior QFloors features). However, the most important reason for changing should be going from a cash to an accrual system, from premature/estimated sales to real/earned sales.

It's just smart business.