Are You Ready for Accrual Accounting?

The Difference Between Cash-Basis and Accrual—And Why It Matters More As You Grow

In the early days of business, simplicity is your friend. You’re focused on sales, managing cash, and just keeping the wheels turning. So most businesses start out using cash-basis accounting—it’s straightforward, intuitive, and matches your bank balance.

But at some point, cash-basis stops telling the full story. As the business grows in complexity—more clients, more vendors, recurring billing, delayed payments—your numbers can start to feel “off.” The timing doesn’t line up. Profit looks lumpy. And you’re making decisions with incomplete data.

That’s the moment to ask: Am I ready to switch to accrual accounting?

In this post, we’ll break down what cash and accrual really mean, how to know when you’ve outgrown cash-basis reporting, and what it looks like to make the transition. Whether you're doing your own books or working with a team like ours, understanding this shift will help you become a more informed and empowered business owner.

What’s the Difference Between Cash and Accrual Accounting?

Let’s start with definitions:

• Cash-basis accounting recognizes income when cash is received and expenses when cash is paid.

• Accrual accounting recognizes income when it’s earned and expenses when they’re incurred—regardless of when the cash moves.

Example:

• You invoice a client in March but don’t get paid until April.

  • Cash-basis: You recognize revenue in April.

  • Accrual: You recognize revenue in March.

• You pay for an annual software subscription in January.

  • Cash-basis: The full expense hits January.

  • Accrual: The expense is spread across all 12 months.

The result? Accrual accounting gives you a more accurate picture of performance—matching revenue and related expenses in the periods they actually occurred.

Why Businesses Start with Cash Accounting

Cash-basis accounting is:

• Easier to understand

• Simpler to maintain

• Often acceptable for small businesses under IRS rules

• Closer to what you see in your bank account

For many solopreneurs or early-stage service businesses, cash-basis works just fine. It helps you stay on top of cash, prepare for taxes, and avoid overcomplication.

But it comes with real limitations—especially once your operations expand.

When Cash-Basis Stops Being Enough

Here are some signs that it might be time to consider accrual accounting:

1. You have large timing gaps between sales and cash collection

If you invoice clients and wait weeks (or months) to get paid, cash-basis can distort how profitable each month looks. You could have a great sales month, but if payments haven’t landed yet, your numbers won’t reflect it.

2. You prepay for inventory, software, or large vendor bills

Big expenses that benefit multiple periods show up all at once in cash-basis. This can make one month look terrible, and the rest artificially profitable.

3. You’re tracking revenue you haven’t earned yet—or earning it before you bill

If your revenue model includes retainers, milestone billing, or deferred delivery, cash-basis will fail to match income with work. Accrual allows for deferred revenue and work-in-progress tracking.

4. You’re seeking outside investment, financing, or selling the business

Banks, investors, and buyers often want to see accrual-based financials. They need a clearer view of financial performance and future obligations—not just cash flow.

5. You’re using forecasts, budgets, or KPIs to manage proactively

Accrual reports help you compare planned vs. actual results. They allow for cleaner monthly trends and more meaningful margins.

“Cash-basis tells you how much money you have. Accrual tells you how your business is actually performing.”

The Benefits of Moving to Accrual Accounting

Switching to accrual isn’t just about better compliance—it’s about better leadership. Here’s what accrual unlocks:

• Cleaner trends – Your revenue and expenses are recorded in the months they occurred, making reports easier to compare.

• True profitability – You can see gross margin by period, even if payments are staggered.

• More meaningful KPIs – Metrics like customer acquisition cost, return on ad spend, and average gross margin per job are easier to calculate.

• More reliable forecasts – Accrual gives you a solid base to plan future cash needs, hiring, or reinvestment.

• Stronger reporting for stakeholders – Your team, board, or bank gets a clearer picture.

What Changes When You Switch?

Moving to accrual accounting involves a few key changes in how your books are maintained:

• Revenue is posted when earned – This often involves tracking accounts receivable and unbilled work.

• Expenses are posted when incurred – Including accounts payable, prepaid expenses, and accruals.

• New accounts are added – You may begin using terms like deferred revenue, accrued liabilities, or prepaid expenses.

• Month-end process becomes more structured – Your accounting team will need a close process to review, adjust, and finalize the books.

It’s more sophisticated—but also more powerful. And with the right partner, it doesn’t need to feel overwhelming.

Is This the Right Time for You?

Accrual accounting is not “better” than cash-basis—it’s just better suited for certain stages and goals.

You might be ready if:

• You’re growing quickly and need better visibility

• You’re managing complex payment timing

• You’re reporting to outside stakeholders

• You’ve outgrown the simplicity of cash-basis reports

You might wait if:

• You’re early stage and managing very few transactions

• You’re not ready to invest in the additional complexity

• You have no need for monthly reporting or advanced KPIs

The decision isn’t one-size-fits-all. But it’s worth understanding, so you can make it intentionally—not by default.

Final Thought: Align Your Accounting With the Stage You’re In

Every system in your business should grow with you—and that includes your accounting method. What worked when you were just getting started may not give you the clarity or control you need now.

“If you’re making bigger decisions, you need better information. Accrual gives you that.”

The shift from cash-basis to accrual isn’t about making your books look better. It’s about helping you see the truth of what’s happening in your business—so you can lead it forward with insight, not guesswork.