However, when we reviewed the same graph on a cash basis (booking revenues only when cash is received) the graph looked a lot different. As you can see below the erratic ups and downs still indicate a seasonal trend but it's harder to identify given the inconsistent nature of the graph.
If you think about it, the problem with this particular business is very obvious. What is this business owner's biggest problem? What keeps him awake at night? It's cash flow. There are huge swings in cash basis revenue every month. That's not exactly rocket science. Most businesses that are struggling have problems with cash flow. But in this case I was able to nail down the specific issue that was causing a cash crunch. Any guesses?
In this particular instance the business owner had a very poor process for managing receivables. In essence he would do the work like a mad man for a month, then spend the next month running around trying to collect. Then he was back at it...driving trucks, working jobs, doing whatever was necessary to get through the back log. Then a month later he's chasing collections again.
This proved to be a real eye opener for the owner. He FELT like he was on this constant roller coaster but he had never been able to quantify how inconsistent cash flow was affecting his operation. To see it in black and white was a real revelation. Cash vs. accrual analysis is very useful if done correctly.