Cash vs. Accrual Accounting: Which is best for growing company?

Cash vs. accrual accounting: your growth stage might decide for you.

I was on a call recently with the founder of a successful company doing about $35 million in annual revenue.

At one point he said, “Honestly, it was easier when we were smaller.”

He was talking about understanding what was actually happening in the business. And that moment is one I see a lot with lower middle market companies.

The $35 Million Example:

When this founder started the company, the business was doing somewhere between $6M and $10M a year.

At that size, the financial picture felt pretty clear. Fewer projects = fewer things to confuse. If a big invoice hit early or a vendor payment landed late, they could mentally adjust for it.

By the time we were talking, the company had dozens of active projects running at once. Soon it could be close to a hundred. Each one had:

• its own timeline
• revenue being billed
• expenses coming in
• deposits collected
• vendor invoices at various cadences
• and cash moving in and out along the way

When you only have a handful of projects, those timing differences are manageable. But dozens start to pile up on each other.

It becomes harder to understand the profitability you’re seeing from month to month even if nothing else has changed in the business besides the timing of your cash inflows and outflows.

“I know the business is healthy. I just don’t always know what month the numbers will make it look that way.”

Spoiler: you might have figured out by now that the company runs with cash basis accounting.

Cash vs. Accrual Accounting

This is where accrual basis vs. cash basis accounting becomes powerful. Some might be surprised that a business this big is still using cash basis.

But I see it pretty often.

It seems easier (and it is to begin with). If you’re not required to be GAAP-compliant for IRS reporting or other reasons why make the shift to something more complex?

Cash vs. Accrual Basis Accounting: the difference mostly comes down to timing. Cash basis accounting is simply recording transactions when the cash is received or paid. Accrual basis records expenses when they are incurred and revenue when it’s earned.

Cash vs. Accrual Pros and Cons

There are use-cases for both cash vs. accrual accounting. Here are some pros. and cons of each:

Cash Basis Accounting Pros and Cons

Accrual Basis Accounting Pros and Cons

Accounts receivable and accounts payable become central to your books. You’re tracking not just cash in the bank, but also what customers owe you and what you owe vendors. Accrual basis, while more complex, is GAAP compliant and will give you that long-term profit insight needed when you’re a growing company.

Example: The $2.5M Project

Say this client signs a $2.5M contract. Their customer pays a $750,000 deposit in January. Work is performed across February and March. The remaining $1.75M is paid in April when the project closes out.

Here’s what each method sees:

• Cash Basis January: $750,000 revenue (deposit received) February: $0 revenue March: $0 revenue April: $1,750,000 revenue (final payment received)

• Accrual Basis January: $0 revenue, $750,000 deferred revenue (liability, not yet earned) February: $1,250,000 revenue (50% of work completed) March: $1,250,000 revenue (remaining 50% of work completed) April: $0 revenue, just the cash collection closing out what was already recognized

The cash basis version of this business looks like January was huge, Feb and March were dead and then a massive April, even while most of the work was done in the “dead” months.

The accrual version shows a healthy, evenly executed project that generated value steadily across February and March, with cash collection trailing behind.

Now imagine you have eight of these projects running simultaneously, each with different start dates, deposit schedules, and payment terms. Your cash basis monthly P&L becomes nearly unreadable, because the timing of cash has completely decoupled from the reality of the work.

When revenue and expenses are recognized based on the work being done instead of when cash moves to clear up your financial picture. You can see:

• How profitable the project/product/service actually is
• Real margins
• Financials that make sense again

Instead of trying to mentally smooth out your cash flow, the financials simply reflect what is actually happening and decision-making becomes easier.

The accrual edit gives you the ability to see each “unit” clearly.

Sometimes it’s bad data, sometimes it’s too much data.

What surprised me about this company was not the lack of data. They were running a ton. Project reports. Cash summaries. Service line breakdowns. Financial models.

But it’s become tough for them to get the answers they want from it. At a certain scale, we expect to hear questions like:

• Are we actually making money on these product lines/services?
• Why does this month look terrible when we know the pipeline is strong?
• Why does cash look tight even though margins are healthy?

Which is great. You want to be digging into that data. As long as you understand your revenue recognition, cost allocation and profit margin by line or unit.

Every business has its own unit economics

When I analyze any business model, I like to break it down into the economic unit of one transaction:

• A restaurant sells one meal.
• A manufacturer sells one product.
• A SaaS company sells one subscription.

For this company, the unit of one was a project and you can think of it within a pretty simple model: Revenue. Costs. Margin.

That’s it.

Now once you have 100+ products, services or projects overlapping each other, you can see where the mental adjustments just won’t cut it anymore.

“This month looks low because a payment came in early.”

“That project actually made money but the vendor bill hit this period.”

“It will even out next quarter.”

Sounds a lot like guessing to me.

No doubt, as you introduce accrual basis accounting you’re going to want to secure a good outsourced controller or accounting service to handle the increase in complexity.

Needing to scale your finance team is a good sign

By the end of the call, the founder said, “For years I’ve been running the company in my head. Now it’s too big to do that.”

Now that’s a milestone to celebrate.

Hot tip: if you have any plans to exit in 3-5, you absolutely want more on paper and less in your head. Reducing founder dependency is #2 on our list for exit planning. Buyers like this.

A lot of businesses never reach the point where their operations become too complex for instinct alone.

The companies that do reach that stage have earned a good problem.

The shift every growing business eventually faces

What works at $6M rarely works at $30M. And what works at $30M will probably break again at $100M. The shift usually looks like something this:

A Cash vs. Accrual Transition Framework

Start by asking these questions:

1. What is the economic unit of our business? Every business has one. Product. Customer. Project. Subscription.

2. Does that unit clearly show revenue, cost, and margin? If it does not, the company level financials will always be confusing.

3. Are our financials reflecting reality or just the timing of cash? Cash answers one question: do we have money in the bank. Accrual answers another: did we actually make money. You need to know both.

5 Steps to Transition from Cash to Accrual Accounting

Step 1: Identify Your Economic Unit and Map Its Cash Timing

Before touching your books, get clear on your unit of one: the project, product, subscription, or customer engagement that drives your revenue.

Document exactly where the timing gaps live:

• Where do deposits come in before work is done?
• Where do vendor invoices lag behind delivery?
• Where does revenue get recognized before cash clears?

You can’t fix what you haven’t mapped. This diagnostic phase usually surfaces 3–5 timing distortions that are actively confusing your monthly financials.

Step 2: Audit Your Chart of Accounts for Accrual Readiness

Accrual accounting requires accounts that cash-basis books typically don’t have, or have but rarely use. Before flipping the switch, you need:

• Accounts Receivable
• Accounts Payable
• Deferred Revenue (for deposits and prepayments)
• Work in Progress or Unbilled Revenue
• Accrued Expenses.

Audit your current chart of accounts and build out the structure you’ll need. Getting this right upfront prevents a messy retrofit later.

Step 3: Choose a Clean Cutover Date and Reconcile Opening Balances

Don’t try to restate years of history. Instead, pick a clean starting point — typically the beginning of a fiscal year or quarter — and establish accurate opening balances for every new accrual account.

This means going through all open projects, outstanding invoices, unearned deposits and unpaid vendor obligations as of that date. This is your most time-intensive step, but it’s the foundation everything else is built on. Rushing it creates balance sheet problems that compound for years.

Step 4: Build Revenue and Expense Recognition Policies by Unit

This is where most companies underinvest and later regret it. You need written policies that define when revenue is earned and when expenses are incurred, specific to your business model. Here are some examples:

Step 5: Put Oversight in Place Before You Go Live

Accrual accounting surfaces complexity that cash-basis hid. You need a controller or outsourced accounting partner who understands your business model before you transition, not after problems emerge. Pair this with a monthly close checklist that includes reconciling deferred revenue, clearing unbilled amounts, and reviewing accrued expenses.

Growth creates complexity faster than most operators anticipate. But if you recognize that early and build the right financial structure around your business you’re giving yourself a leg up from the start.

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Curious question for our mid-market operators: At what point in your company’s growth did instinct stop being enough to understand the financials? Was it headcount, inventory, revenue? Drop your experience in the comments to help other companies that are just entering their growth stage.