Why gross deposits overstate revenue
A merchant cash advance is a purchase of future receivables, repaid with a set percentage of the business's daily sales receipts, as the Federal Reserve puts it. So the advance should be sized on sales. Gross deposits mix sales with money that only passed through: a transfer from savings, the owner topping up the account, last month's advance landing. Counting them makes a business look bigger than it is, and the advance too large for what it really earns.
What to take out of deposits
| Deposit | Why it isn't revenue | How it often reads |
|---|---|---|
| Own-account transfers | Money the business already had, moved between its accounts | ONLINE TRANSFER FROM CHK 5520 |
| Owner and related-party money | Capital put in by the owner or people close to the business | ZELLE FROM M COPPER |
| Loan and advance proceeds | Borrowed money that has to be paid back | A lump-sum credit from a funder or lender |
| Reversals and returned items | A credit that undoes an earlier transaction | RETURN, REVERSAL or a returned item |
| Bank interest | Earned on the balance, not from customers | INTEREST PAID |
Everything else counts: card settlements, ACH payments from customers, cash and check deposits, and wires from customers.
How to calculate it, step by step
- Total every credit for each month. That's gross deposits.
- Mark transfers between the merchant's accounts. With both statements in hand, the amount leaving one account matches the amount arriving in the other on the same or next day.
- Mark money from the owner and related people: their names, personal accounts and P2P payments from them.
- Mark loan, advance, lease and factoring proceeds. A funding deposit usually arrives just before a funder's pulls begin.
- Mark reversals, returned deposits and bank interest.
- Subtract each group from gross deposits and keep one line per group, so anyone reviewing the file can check every dollar that didn't count.
| Line | Amount |
|---|---|
| Gross deposits | $98,400 |
| Own-account transfers | −$12,000 |
| Owner and related-party money | −$5,000 |
| Loan and advance proceeds | −$25,000 |
| Reversals and returned items | −$1,350 |
| Bank interest | −$50 |
| True revenue | $55,000 |
Large one-off deposits
A single deposit far bigger than usual can be a real sale, a contract payment, or money that should have been excluded. Don't remove it silently and don't accept it silently: check it. Underly marks a deposit as unverified when it's 20% or more of an average month, measured without that deposit, and leaves it in true revenue for you to decide.
Working out the average month
Statements rarely start on the 1st, so a calendar-month average is dragged down by partial months. Divide total true revenue by the days the statements cover, then multiply by the length of an average month (365.25 ÷ 12, about 30.4 days). Days no statement covers are left out rather than counted as zero, and days covered by more than one account count once.
New York and California take a similar view in the disclosures they require for sales-based financing: estimated monthly sales are the merchant's historical average over a fixed period of four to twelve months.