Why Business Owners Must Know If They Use Cash or Accrual Accounting

Jason, the owner of a growing construction business, thought he had a good handle on his finances. His bookkeeping was current, invoices were sent on time, and he had cash in the bank. But things didn’t add up when his banker asked for financial statements to support a loan application.

The bank questioned why his revenues fluctuated unpredictably, why expenses seemed to be missing some months, and why his accounts receivable and payable figures didn’t align with what was expected. Jason was confused; the numbers were straight from his system.

Bottom Line Upfront

Jason’s business was unintentionally mixing cash and accrual accounting.

The Costly Consequences of Not Knowing

Because Jason wasn’t clear on which method his business followed.

Financial Reporting Was Inconsistent

Some invoices were recorded when sent (accrual), but others were only logged when the money hit his account (cash). Expenses were treated the same way. This resulted in reports that didn’t reflect reality, confusing lenders and financial statement users.

Cash Flow Assumptions Were Wrong

Jason assumed his profit meant he had money available to reinvest. However, he hadn’t accounted for outstanding invoices that hadn’t yet been paid, which left him short on cash when he needed to buy materials.

Year-End Accounting Was a Nightmare

His accountant had to review months of transactions, sort out what had been recorded correctly, and adjust the books to align with proper accounting standards. This extra work delayed his year-end financials, and the additional hours led to higher fees.

Bank and Investors Lost Confidence

Since his financials weren’t reliable and his year-end financials were late, the bank hesitated on his loan request, making it harder to secure funding for expansion.

What Jason Learned (And What You Should Know, Too)

After a stressful experience, Jason worked with his CFO to ensure he was entirely on accrual accounting, making his financials more consistent and helpful for decision-making. He now understands how revenue and expenses should be recorded, and his reporting to banks, investors, and financial statement users is much clearer. He has consistent information to use to make decisions and run his business.

If you’re a business owner, do you know whether you use cash or accrual accounting? If not, you might be in Jason’s situation—where things don’t make sense and cost you more in the long run.

Take control now. Get a CFO, ensure your books are consistent, and avoid the headaches of mixed accounting methods.

For a deeper dive into cash vs. accrual accounting, check out this article: Cash vs. Accrual Accounting.