Beyond cash basis: The case for accrual accounting

By Dino DiVito, O'Hara's Son Roofing.

What cash basis accounting really costs a roofing company at sale time.

Every quality of earnings review I run on a commercial roofing company begins the same way: pulling the general ledger to determine whether the company operates on a cash or accrual basis. More often than not, particularly among smaller and mid-size contractors, the answer is cash. That single choice shapes nearly everything that follows in the diligence process because cash basis numbers rarely reflect what actually happened on a given job in a given month. 

This is not a technical accounting lecture. It is a practical case for making the switch well before an owner is sitting across from a buyer or a bank and for what that switch delivers beyond a cleaner looking income statement. 

What shows up in diligence 

The accounting picture at a smaller or mid-size roofing company tends to look remarkably consistent from one acquisition to the next: monthly, quarterly and annual results that must be restated before they can be relied upon; no percentage-of-completion revenue recognition at the project level and job profitability that lives in the owner's head rather than in the books. 

None of this reflects poorly on the owner. It is simply the natural result of a company that has optimized its accounting for tax efficiency and simplicity rather than reporting accuracy. But it is also precisely what turns a two-week diligence process into a two-month one, and every additional week is an opportunity for deal terms to move against the seller. 

Why owners run their business this way 

I frequently ask owners and founders how they track project performance given the volatility inherent in cost and revenue. The answer is almost always a version of the same response: they know every job inside and out and can tell whether it is profitable without reviewing a detail job costing report. Their attention is focused on cash flow, minimizing taxes and limiting administrative resources. Winning and executing the work comes first. Investing in the back office rarely rises to the level of a priority. 

Most are operating on simple accounting software that was never designed for job costing with a bookkeeper rather than a controller. When there is a controller, that person often began in a much smaller role within the company and grew into the title using the same original processes and accounting standards. This arrangement works well enough as long as the owner continues to run the business day to day with no intention of expanding. The difficulty surfaces the moment the owner decides to either scale or sell the company. 

The benefits of accrual beyond the sale 

A higher purchase price is not the only reason to make the switch and it may not even be the most important one. 

Accrual accounting matches revenue and costs to the period in which the work was actually performed, which is what makes an accurate work-in-progress schedule possible. For a contractor, the WIP schedule functions as an early-warning system. It identifies overbilled and underbilled jobs before they develop into a cash flow problem, something cash basis records cannot do, since they reflect only what has moved through the bank account rather than what has actually been earned or is owed. 

The choice also affects capacity not just valuation. Sureties generally require accrual or GAAP-basis financial statements to evaluate a contractor's true working capital and net worth and bonding capacity determines the size of the projects a contractor can pursue in the first place. Lenders extending a line of credit or an equipment loan typically ask for the same standard. Cash basis statements do not meet GAAP requirements, so a contractor operating on a cash basis is often leaving bonding capacity and financing on the table long before a sale is ever contemplated. 

Why the investment pays for itself 

Beyond capacity and compliance there remains a straightforward return on investment case. Clean, accurate books give a buyer genuine clarity on what is being acquired and that clarity is what supports a higher multiple. If the buyer intends to integrate the company into a larger platform, having the systems, processes and reporting already in place removes a significant point of friction from that transition. 

The change also alters the owner's day-to-day role well before any sale conversation begins. With the right systems, processes and project managers in place, an owner can manage through the team using clean job costing data rather than carrying every job in his or her head, which is what ultimately creates the time needed to grow the business. 

AI has made this easier 

Advances in AI, including tools such as Lovable and Claude, have made the move from cash to accrual accounting considerably more accessible than it once was. Without a substantial investment, a contractor can now adapt or extend existing accounting software to support real job costing and accrual reporting, rather than replacing the system entirely. 

The bottom line 

For a single location contractor who plans to keep running the business day to day with no intention of scaling or selling, cash basis accounting is not a problem. For owners who want to scale or sell, it’s a ceiling. It limits how much bonding a contractor can carry, how much a bank will lend against the business, how a buyer will ultimately value it and eventually the ability of the owner to grow the business. Owners who address it early are not merely preparing for a sale that may or may not occur, they are removing a constraint on the business itself.