Closer Inspection: NetSuite Cash Basis Reporting Challenges

This article is relevant if you are seeking to understand and overcome NetSuite’s approach to cash basis reporting.

Background

When working with our Firm’s clients, my natural orientation is to think through the lens of accrual accounting. It’s hard for me not to think in these terms because I was schooled in the fundamentals of accounting and, early in my professional career, I acquired a Certified Public Accountant (CPA) distinction.  The beauty of accrual accounting is that it responsibly attempts to measure obligations, assets, and earned values based on substantive consideration in the exchange of property rights between parties. An accrual orientation helps business owners and managers consider the entirety of the promises made between all constituents.  Producing and holding promises is the fundamental mechanism to create and reinforce trust — and this trust must be nurtured in order to maintain an ongoing business concern.

With that said, an alternative orientation to the accrual method is the cash basis. In this orientation, obligations can be considered — however purchase, sale, and fulfillment transactions are earned when cash is transferred. In many low trust societies, a cash basis orientation reveals when parties have indeed kept their trade promises.

At times, clients ask about cash basis reporting in NetSuite. They are usually challenged to get cash-basis information they need out of NetSuite. As such, this article helps us look more closely at the challenge and presents a solution.

NetSuite’s Accounting Architecture and Cash Basis Method of Accounting

The NetSuite business platform is fundamentally built with the notion of accrual accounting.  This suits the majority of organizations operating in high-trust based Western economies (such as the United States).  Additionally, NetSuite offers Cash Basis Reporting seemingly able to handle both Accrual and Cash basis accounting.

Consider these articles published by the Oracle/NetSuite organization:

• Cash-Basis vs Accrual-Basis Accounting: What’s the Difference? What’s Best?
• Cash Accounting: How It Works, When It Makes Sense and How It Differs from Accrual Accounting
• Help: Setting Up Cash Basis Reporting (Login required)

The background offered lacks depth; my goal is to help illuminate how NetSuite approaches cash basis reporting.

NetSuite’s Accrual Accounting Platform with Cash Basis Reporting

NetSuite presents a cash basis reporting through  the following major idea:

1. Transaction Date/Period: this is the date for which traditional accruals are recorded.  We generally think of this as the date performance is produced, such as when we shipped goods to customers and thus property rights have transferred.
2. Date-Closed/Period: this is the date for which the transaction is deemed paid and thus no more action is expected.  For example, consider when a customer invoice is fully paid or a vendor bill is satisfied.  No more action is required.

NetSuite offers up a number of reports with a “Cash Basis” option. The nature of this reporting technique moves the reporting from the transaction date to the date-closed.  Not all financial transactions have a date-closed value — thus these transactions use the transaction date for cash basis reporting.

Interestingly, the cash basis accounting period appears not to be derived from the accounting period stamped on the transaction record (which is what gives you control to have a different transaction date that falls outside of the accounting period), but from dynamically referencing the accounting period for which the date-closed falls within.

Challenges in this Cash Basis Reporting Model

In my mind, this reporting model falls short in important ways:

1. Partial Payments: transactions with partial payments are not considered “date-closed” until they are fully satisfied. This can mean that a portion of cash transferred between parties but NetSuite won’t report it.
2. Non-Cash Payments: transactions satisfied with non-cash based transactions fall on to the cash basis report. If an invoice is paid with a credit memo, that invoice is deemed date-closed when the credit is applied. Yet, credits are not necessarily cash-based.
3. Transaction Header vs. Lines: the notion of transactions being paid is based on the header summary.  However, the meaningful general ledger detail is on the transaction lines. Consider a vendor bill with a summary of $100 but two lines, one for $25 for meals and one for $75 for training. When cash is used to pay the bill, how do you allocate the cash to the lines?  Without a rule, the most logical method is based on the weighted average value. This is further complicated by potential transactional discounts as these can be applied in various ways within the transaction.

I watched a client in the biotech industry (at the pre-revenue stage of their existence) maintain spreadsheets of every cash transaction so they could recast budgeted expenses and capital expenditures in a meaningful cash expenditure report. Naturally, I winced but understood the demand for that information and their commitment to gathering it though I knew the information was within NetSuite — if they knew how to get it.

Alternative Approach for NetSuite Cash Basis Reporting

Early in 2020, I solved an important part of the cash basis reporting challenge. I was frustrated with NetSuite’s and other third parties’ 1099 (Contractor and other Miscellaneous Tax Agency requirements) offerings as they did not respect true cash basis requirements due to the challenges discussed above. See my article Finally Solved: NetSuite 1099 Cash Basis Reporting.

To solve this, we rework the transactions starting with cash and digging into how they have been applied. In essence, we generate complementary “cash basis” transactions that balance with all the general ledger detail needed so that we can then create our own reports. Once you have the transactions detail in a true cash basis orientation, we are free to report them in any way we wish. Given we are using an automated algorithm to generate the balancing cash-basis transaction, we can apply specific policies where and how we wish.

See the article to get more information on the solution.

Take Charge and Solve Your Cash Basis Reporting

With the power of the NetSuite platform, the great news is that you are never really stuck. With a fundamental understanding of the NetSuite architecture and complementary technical competence, you can recast information into meaningful expressions. A key way we add value to our client relationships is to give them everything we have invented for other clients without a license fee — that’s what it means to be a Systems Integration Practice; to practice is to get better and better at what we do by recurrently taking care of related concerns. Our clients value expert NetSuite leadership and tailored solutions.

If you found this article meaningful, feel free to sign up for notifications of new posts as I publish them. If you are ready to tackle your cash basis reporting challenges, let’s have a conversation.

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Marty Zigman

Holding all three official certifications, Marty is regarded as the top NetSuite expert and leads a team of senior professionals at Prolecto Resources, Inc. He is a former Deloitte & Touche CPA and has held CTO roles. For over 30 years, Marty has produced leadership in ERP, CRM and eCommerce business systems. Contact Marty to set up a conversation.

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