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.
Measured as
Measure Cash Accounting with the same date, unit basis, and accounting or policy definitions used in the rest of your model.
Misused when
- Assuming cash timing equals customer value delivery.
- Comparing cash-based periods with different billing terms without adjustment.
Operator takeaway
- 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.
- Tie Cash Accounting to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Read Runway and burn: gross vs net burn, working capital, and cash levers if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
- Decide whether Cash Accounting belongs in cash planning, valuation, or debt monitoring so the number is used in the right model.
Where to use this on MetricKit
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.