As if generating sales as an SMB owner wasn’t tricky enough, you also have to figure out how to manage your financial records and pay taxes.
In this cash vs accrual accounting guide, let’s look at how both approaches differ from each other and decide which is best for your business.
What is cash accounting?
Cash accounting records income and expenses when they are received and paid.
Imagine you completed a web design project in December 2021, and the client paid you in January 2022.
In cash accounting terms, the income occurred in 2022.
What is accrual accounting?
Accrual accounting records income and expenses when they are incurred.
Using the same example from above, this means that the income you received from the web design client occurred in 2021, not 2022.
What is the difference between cash and accrual accounting?
With cash accounting, transactions are recorded in the books only when money is received or paid.
You won’t be taxed until money is in the bank, which is a huge plus if you own a small business reliant on cash flow.
Alternatively, accrual accounting requires that all transactions be recorded regardless of whether they are received or paid. In other words, you might be taxed for income you haven’t received.
Positive cash flow provides peace of mind.
With excess cash on hand, it’s easier to pay off your loans and grow your business to greater heights. To do this, you must constantly monitor how much money is going in and out of your business.
Tools like Cratoflow automatically track sales and expenses, visualizing cash flow projections in real-time.
To get started, connect Cratoflow with your favorite bookkeeping software. Cratoflow will analyze your payables and receivables and assess where your business stands in one, three, or six months.
Pricing for Cratoflow starts at $199/month when billed annually. Grab the Cratoflow lifetime deal on AppSumo today for only $69.
Cash accounting reflects only the current state of your business.
Because of its short-term nature, it might give you the false impression that your business is doing well in a specific month when it’s actually not.
Unlike cash accounting, accrual accounting paints a more accurate picture of what’s happening in your business financially in the long term.
It’s quick and easy to use cash accounting, especially when tracking expenses. Record the transaction when it occurs and get it done and dusted with.
However, it’s more complicated to manage accrual accounting. Since transactions are recorded when incurred, you need to track your receivables and payable separately to stay on top of your finances.
Should you pick cash or accrual accounting?
The cash-based basis is more straightforward than accrual accounting by a mile, which is why it’s a popular choice among small businesses with fewer transactions.
However, note again that it doesn’t present a complete picture of your business’s long-term financial health.
Let’s say you hit $10K in February. At first glance, it seems like it’s your best month yet, but as you dig deeper, that’s not the case at all. As it turns out, the bulk of the money came from a nightmare client who hadn’t paid for six months!
Our take? SMB owners should opt for cash accounting to keep it simple and use smart bookkeeping and accounting tools to plan far into the future.
Unlike corporations, small businesses don’t have the luxury of waiting during long payment intervals. We need to plan to keep our businesses afloat.
Fortunately, this is where strategizing with cash flow projections comes in handy. Cash Flow Frog adds projections to your forecast (e.g., payroll, money earned from retainer projects) and creates scenarios to identify potential shortfalls.
Source: Cash Flow Frog
You can even compare your planned cash flow with actual performance to answer your biggest financial questions (e.g., “Which expenses can I do without?”). Go to Planned vs. Actual and save your cash flow forecast at a specific point in time.
Next, click Save Current Forecast For This Scenario.
Cash Flow Frog will then update your forecast on a rolling basis based on what’s happening in your bookkeeping software (e.g., new bills).
The next time you click the Planned vs. Actual tab, you’ll see a comparison table of your planned cash flow and your actual cash flow.
Source: Cash Flow Frog
Pricing for Cash Flow Frog starts at $29/month. Grab the Cash Flow Frog lifetime deal on AppSumo today for $59.
Cash accounting made simple today
Cash accounting may not be a perfect bookkeeping system (neither is accrual!), but tools like Cratoflow and Cash Flow Frog help you stay on top of your finances, plan for the future, and make smart decisions down the road.
Browse 170+ bookkeeping and accounting tools on AppSumo to take charge of your business finances today.