These days there are a lot of demands on marketers and organizations expect them to have multiple skillsets. To be successful, today’s marketer needs to be creative and focused on performance and financial data.
If you’re a marketer who’s trying to get a handle on expenses and forecasts, it helps to understand the ins and outs of financial reporting and accounting. Today I’m going to explain accrual accounting and why it matters to modern marketers.
What is accrual accounting?
Using accrual accounting, expenses are recorded when an obligation is incurred — regardless of when the cash is paid out.
An expense is incurred and should be recognized:
- When the good has been received and will be used.
- When the service is being performed.
Who uses accrual accounting?
Many large, public organizations must follow GAAP (Generally Accepted Accounting Principles) and IFRS (International Finance Reporting Standards), which means they have to use accrual accounting. And, many smaller companies follow these principles as a best practice, and also use accrual accounting.
How can marketing teams use accrual accounting?
To illustrate how accrual accounting works for marketing teams, let’s look at a couple of examples.
Spend Story #1: Credit Card Expense
Matt is managing an AdWords program. He plans on spending $1,000 per month for one quarter. He puts the AdWords spend on his CMO’s credit card. The ad service is delivered every month, and the expense hits the credit card on the last day of each month.
The spend is recorded in the financial system as three entries — one for each month. The recognized expense corresponds with the cash out.
Spend Story #2: Prepayment
Brittany is planning an event that will cost $100,000. The event is in March, but she needs to reserve a spot and pay registration fees in January. So, she opens a purchase order for $100,000 for the quarter.
Using accrual accounting, the expense would be recorded in March, not January, because that’s when the service is being performed.
The spend is recorded in the financial system as three entries: an invoice and reversal in January for a sum of zero, then an expense in March when the service is performed.
Spend Story #3: Accrual
Amanda hires a contractor to create new sales collateral. The total cost is $20,000.
She opens a purchase order for $20,000 for the quarter. The collateral is delivered in February, but the contractor doesn’t invoice until March.
Using accrual accounting, the spend is recorded in the financial system as three entries: one accrual in February to recognize the expense when the good was delivered, and two entries in March (an invoice and a reversal) that cancel each other out to equal zero.
Spend Story #4: Accrual + Prepayment
James wants to purchase Allocadia for the year. He negotiates to start using Allocadia in December, but wants to pay starting in January. He agrees to pay for the year up-front, and opens a purchase order for $12,000 for the year ($1,000 per month).
The spend is recorded as 14 entries in the financial system: one accrual in December to recognize the service being used, two entries in January to recognize the invoice and the service being used, and one entry in each month following to recognize the service being used.
How does accrual accounting impact marketers?
When you understand when your expenses will be recorded in the financial system, you can create accurate plans and forecasts for your marketing spend.
This means you can earn credibility with CMOs and CFOs. An additional bonus: Marketers who understand accrual accounting can more accurately enter their expenses into marketing tools such as Allocadia and reduce back-and-forth communication between finance and marketing.