The Financial Habits of Successful Entrepreneurs
If you’re a small business owner, there’s one decision that can seriously affect how you track your finances, pay your taxes, and ultimately grow your business:
Should you use cash or accrual accounting?
It’s a question that gets tossed around a lot, especially when tax time rolls around or you're applying for a loan…but many business owners aren’t sure what the difference actually is, or how it impacts their bottom line.
Let’s clear that up. In this post, we’ll break down cash vs. accrual accounting for small business, the pros and cons of each and most importantly, which one could actually save you money.
🧾 What Is Cash Accounting?
Cash accounting is the simpler of the two. You only record income and expenses when money actually changes hands.
Example:
You invoice a client in May
They pay you in June
You record the income in June (when it hits your bank)
💡 Same goes for expenses: if you get a bill today but pay it next month, you record the expense next month.
✅ Pros:
Easy to use and understand
Great for sole proprietors, freelancers, and side hustles
Gives a real-time snapshot of available cash
Typically results in fewer bookkeeping headaches
❌ Cons:
Doesn’t show future obligations or incoming money
Can give a misleading picture of long-term profitability
May not meet requirements if your business grows past a certain size
💡 Many small businesses start with cash accounting because it’s straightforward, but that doesn’t mean it’s the best long-term fit.
📊 What Is Accrual Accounting?
Accrual accounting records income and expenses when they are earned or incurred, not when the money is actually received or paid.
Example:
You invoice a client in May
You record the income in May, even if they don’t pay until June
💡 It works the same for expenses: if you receive a bill, you record it on the date you were billed, not when you paid.
✅ Pros:
Gives a more accurate picture of financial health
Better for forecasting and decision-making
Required for businesses that make over $27 million/year (IRS rule)
Preferred by lenders and investors
❌ Cons:
More complex bookkeeping
Can be confusing if you don’t track cash flow separately
May show profits even when you don’t have the cash in hand
💡 With accrual, you need to watch your cash flow carefully, because profit on paper doesn’t always mean cash in the bank.
💼 Cash vs. Accrual Accounting for Small Business: Which Is Better?
The short answer: It depends on your business model and financial goals.
💡 If you sell physical products or have inventory, accrual is usually the better (and required) method.
💸 Which Method Can Save You More Money?
🧮 Cash Method Tax Advantage:
With cash accounting, you may be able to delay income recognition until the next tax year or prepay expenses to reduce your taxable income: offering a short-term tax savings strategy.
🔍 Accrual Method Insight Advantage:
Accrual gives you a more accurate picture of your profitability, which can help with:
Strategic planning
Scaling your business
Qualifying for funding
Avoiding cash shortfalls due to unexpected expenses
Bottom line:
If your income is simple, your cash flow is tight, and you’re just getting started: cash accounting can save you in the short term.
If your business is growing, and you want full financial visibility: accrual will save you long-term headaches and help you grow smarter.
🧠 Can You Switch Methods Later?
Yes! You can switch from cash to accrual (or vice versa), but it’s not as simple as flipping a switch. It often requires:
Adjusting your books
Filing IRS Form 3115
Possibly working with a bookkeeper or CPA to ensure compliance
💡 At Breakspears Bookkeeping Services LLC, we help clients transition smoothly, keeping your financials clean and audit-proof.
💬 Final Thoughts: Choose the Method That Matches Your Goals
Understanding cash vs. accrual accounting for small business is about more than taxes: it’s about choosing the right lens to look at your finances through.
If you want simplicity and short-term control, cash accounting is a great start.
If you're planning to scale, take on investors, or just want better financial insight, accrual is your friend.
Either way, the key is consistency…..and having support to make the most of whichever method you choose.
📌 Not Sure Which Method Is Right for You?
At Breakspears Bookkeeping Services LLC, we help small business owners:
✅ Choose the right accounting method
✅ Set up QuickBooks to match their needs
✅ Track cash flow and stay tax-ready
👉 Explore our monthly remote bookkeeping packages
👉 Book a free discovery call to make the right financial choice for your business today.
