When to Convert from Cash to Accrual

There is no magic revenue number

Founders often ask "at what revenue do I have to switch to accrual?" It is a reasonable question with an unsatisfying answer: there isn't a single line. Nobody at a standards board is watching your revenue and sending a letter. What actually forces the switch is a relationship. Someone who matters to your school asks for statements in a form cash-basis books cannot produce. That someone is usually a lender, an authorizer, a major funder, or an auditor. Sometimes it is the IRS, through rules about which method your entity may use for tax. So the useful question is not "how big am I?" It is "who is about to ask, and what will they ask for?"

The five events that actually trigger it

1. You are applying for a loan. This is the most common trigger. Lenders read accrual statements because they need to see obligations you have committed to but not yet paid, and revenue you have earned but not yet collected. A cash-basis P&L hides both. You can often get through underwriting with cash-basis books plus a reconciliation, but ask before you apply, not after. 2. An authorizer or accrediting body requires it. Most charter authorizers require accrual-basis audited statements. Many accrediting bodies for private schools expect them too. This is usually spelled out in your charter contract or accreditation standards. 3. A funder makes it a condition. Larger foundations and most government grant programs require accrual reporting, because they need to see when you incurred a cost, not when the check cleared. If you are chasing a grant above roughly the size where a program officer gets involved, read the reporting requirements before you apply. 4. You now have real receivables or payables. This is the internal trigger, and the one founders notice on their own. If families are on payment plans, if you invoice for aftercare, if you carry vendor balances or a payroll that straddles month-end, cash-basis books have started actively misleading you. A month where three families pay late looks like a bad month, and it wasn't. 5. Your entity's tax method requires it. There are IRS rules about which entities and which sizes of business may use the cash method for tax purposes. They change, and they interact with your entity type. This one genuinely requires a professional answer. Notice what is not on this list: a round number of students, or a round number of dollars.

What actually changes

Less than founders fear. Converting to accrual does not change how much money you have, how much you owe, or whether the school works. It changes timing, and it adds two accounts. Under cash basis, September tuition paid on October 5 is October revenue. Under accrual, it is September revenue, because September is when you taught the child. The dollar is the same dollar. The two new accounts are the ones that make this possible:

• Accounts receivable - what families and funders owe you but have not paid.
• Accounts payable - what you owe vendors but have not paid.

Most schools also pick up deferred revenue, which is the honest name for summer-collected tuition that pays for a school year that has not happened yet. That money is in your bank account and it is not yours to spend freely, and accrual books say so on the page.

What it costs

Two things: a one-time setup and a modest ongoing increase in bookkeeping. The setup is a conversion entry. Someone has to look at the date you switch and record what was owed to you and what you owed, so the opening balances are right. For a small school this is a few hours of a CPA's time, not a project. The ongoing cost is that someone now has to record invoices when they are issued rather than when they are paid, and bills when they arrive rather than when they are paid. If you have a bookkeeper, this is a change in habit more than a change in hours. If you are doing it yourself in a spreadsheet, this is the point where most founders move to real accounting software.

Timing: switch at the start of a fiscal year

Convert on the first day of a fiscal year if you possibly can. Switching mid-year gives you a set of books with two different timing rules in them, which makes year-over-year comparisons awkward and makes your auditor's job harder, which is to say more expensive. If you know a loan application or an accreditation review is coming twelve months out, the fiscal year that starts now is the one to convert in. That gives you a full clean year on the new basis by the time anyone reads it.

What to ask your CPA

Bring these four questions, in this order:

1. "Are my books on cash or accrual right now, and is that still the right choice for where the school is heading?"
2. "Who is going to ask me for accrual statements in the next two years, and what would they need?"
3. "What would the conversion entry look like, and what would you charge to do it?"
4. "Does my entity type or size affect which method I can use for tax?"

The last one matters more than founders expect, because your book method and your tax method do not have to match, and an accountant will often keep them different on purpose.

A note on your budget

Your budget and your books are separate documents with separate jobs. SchoolStack Budget always projects on an accrual basis, because that is how a board, an authorizer, or a lender reads a plan. That stays true whichever basis your books are on. What matters is that you can say which is which. A budget presented on one basis next to books kept on another is completely normal and completely explainable, as long as somebody says so out loud. What raises questions is a set of numbers with no basis stated at all, because a reader will assume the more formal answer and then find figures that do not match. Say which basis your books use. It is one sentence, and it prevents a conversation you do not want to have in the middle of a loan application.