Definition
Cash accounting recognizes revenue and expenses when cash is received or paid. It can be simpler but may not reflect economic reality for longer-term contracts.
Example
If you bill $12,000 in January for a 12-month contract and collect cash immediately, cash accounting records the full $12,000 in January.
How to use it
- Cash views are helpful for runway, but they can mislead about profitability in prepay businesses.
- Use consistent definitions when comparing periods to avoid timing noise.
- Combine cash accounting with deferred revenue schedules to avoid overreacting to prepay swings.
- Use cash accounting to validate collections health, not to measure delivery performance.
Common mistakes
- Assuming cash timing equals customer value delivery.
- Comparing cash-based periods with different billing terms without adjustment.
Why this matters
This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.
Practical checklist
- Write a 1-line definition for "Cash Accounting" that your team will use consistently.
- Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
- Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
- Sanity-check with a related calculator from the same category on MetricKit.
- Read the related guide (e.g., Runway and burn: gross vs net burn, working capital, and cash levers) for context and common pitfalls.
Where to use this on MetricKit
Calculators
- Profitability Index Calculator: Calculate profitability index (PI) from discounted cash flows and estimate the max investment for a target PI.
- WACC Calculator: Calculate WACC (Weighted Average Cost of Capital) from capital structure, cost of equity, cost of debt, and tax rate.
- Equity Value Calculator: Convert enterprise value (EV) into equity value using cash, debt, and other adjustments (optionally per share).
- Pre-money vs Post-money Valuation Calculator: Convert between pre-money and post-money valuation and estimate investor ownership from a financing round size.
- Pro Rata Investment Calculator: Estimate how much you need to invest in a new round to maintain your ownership percentage (simplified).
Guides
- Runway and burn: gross vs net burn, working capital, and cash levers: A practical guide to runway: compute net burn, understand why cash differs from profit, and how working capital and collections change runway.