Operational Excellence
Are You Using Accrual-Based Accounting?
Always Use Accrual-Based Accounting
Startups should always use accrual-based accounting. Public companies are legally required to use it, and for good reason — it gives a far more accurate picture of a business's financial health.
Accrual-based accounting is a GAAP standard (Generally Accepted Accounting Principle).
What Is the Difference?
| Method | When Revenue and Expenses Are Recorded |
|---|---|
| Cash-based | When money is actually received or paid |
| Accrual-based | When revenue is earned and expenses are incurred, regardless of cash movement |
Example for a SaaS business: if a customer pays £12,000 upfront for an annual contract, cash-based accounting records all £12,000 in month one. Accrual-based accounting recognises £1,000 per month over twelve months — which is the correct reflection of when the service is actually delivered.
Why It Matters
- Investors expect it. If your books are cash-based, investors will question your financial discipline and may request a restatement before proceeding.
- It prevents false positives. A large upfront payment can make a cash-based P&L look great in month one and terrible in month two — accrual smooths this out and gives a true picture.
- Revenue recognition is a real issue. You need to know not just how much revenue you have, but when and how it is recognised.
The Practical Step
Switch to accrual-based accounting from day one. Use accounting software that supports it (QuickBooks, Xero, and most modern tools do by default) and confirm with your accountant that your books are set up correctly.