Cash vs accrual accounting for SaaS: which one your startup needs
"Are your books on a cash or accrual basis?" is one of the first questions an accountant asks a SaaS founder, and one of the most common to answer with a guess. The answer changes what your monthly numbers mean.
The difference in one example
In March, your company:
- receives $12,000 from a customer for an annual plan starting in March,
- pays $6,000 upfront for a year of a software tool, and
- owes a contractor $3,000 for March work, to be paid in April.
| Cash basis, March | Accrual basis, March | |
|---|---|---|
| Revenue | $12,000 | $1,000 (one month earned) |
| Software cost | $6,000 | $500 (one month used) |
| Contractor cost | $0 (not yet paid) | $3,000 (work done in March) |
| Result | $6,000 profit | $2,500 loss |
Same month, same business, opposite conclusions. The accrual figures describe how March actually went. The cash figures describe your bank account.
How each basis works
- Cash basis records income when it's received and expenses when they're paid. It's simple and closely tracks the bank balance.
- Accrual basis records revenue when it's earned, using deferred revenue for prepayments, and expenses when they're incurred, using prepaid expenses and accruals.
- Modified cash basis is a practical middle ground used by many small businesses: mostly cash, with a few accrual-style adjustments for large or long-term items.
When cash basis is enough
Cash or modified-cash books can work well when a company is pre-revenue or very early, bills mostly monthly, has few prepaid costs, and mainly needs clean, categorized records and a reliable view of cash.
When to move to accrual
Signs your SaaS has outgrown cash-basis books:
- You sell annual or multi-month plans, so revenue spikes in renewal months
- You prepay for significant software, hosting commitments, or insurance
- You want a meaningful gross margin, which needs costs matched to the revenue they support
- You track MRR, churn, and LTV and want them to reconcile with your books (see MRR vs revenue)
- You want monthly results that don't swing with the timing of payments
Accrual books still need a cash view
Accrual accounting doesn't replace watching cash; it complements it. A company can look profitable on an accrual basis and still run short of money, especially while it's collecting annual payments that have to fund a year of service. That's why burn rate and runway should be calculated from actual cash, alongside the accrual results.
Tax and formal accounts are a separate decision
The basis used for internal management books doesn't automatically decide the basis for tax returns or statutory accounts. Rules differ by country and company size, and your accountant or CPA decides what applies to your filings. Clean accrual books make their job easier either way, because converting from accrual to cash is simpler than reconstructing accruals afterwards.
This guide is general information about bookkeeping and SaaS metrics, not accounting, tax, or legal advice for your situation. Decisions about accounting policies, tax, and formal financial statements belong with your accountant or CPA.
ACCA Affiliate and founder of The SaaS Ledger, a bookkeeping practice for SaaS and subscription businesses. She works on the connection between subscription data, payment platforms, accounting records, and SaaS metrics.
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