A seed SaaS company can lose $96,000 in a quarter on its accountant's books and $87,000 in cash, and both numbers are right. Cash accounting records income when money arrives and expenses when money leaves. Accrual accounting records income when you earn it and expenses when you incur them, whenever the cash moves. Accrual tells you whether the business is profitable, and cash tells you how long you can survive.
A startup needs both answers at once. Your accountant keeps the books on accrual, because that is what investors, auditors and (above certain sizes) tax rules expect. You make the runway decision on cash, because the bank balance is what runs out. The rest of this guide runs that quarter through both methods so you can see where they split. The example is in dollars because the tax rules below start with the US.
The example: one quarter at a seed SaaS company
The example is one quarter at a seed SaaS company that starts January with $300,000 in the bank. It has regular monthly customers, one annual prepayment, one annual software bill, steady payroll and one late-paid project. Each item makes the two accounting methods disagree.
- Regular customers pay $10,000 a month, on time.
- On 1 January one customer prepays a 12-month contract: $36,000 in cash.
- On 1 January the company pays $24,000 for an annual software plan.
- Payroll is $40,000 a month and other costs (contractors, usage fees) are $6,000 a month, paid as they are incurred.
- A $9,000 onboarding project is delivered and invoiced at the end of January. The customer pays 45 days after the invoice, in mid March, about 15 days late on the net 30 terms most contracts use.
Annual plans on net 30 terms make this a normal quarter, and each item makes the two methods disagree.
Accrual view: is the business making money?
On accrual, the example company books the prepayment a twelfth at a time, so $3,000 of revenue a month. The software plan is used a twelfth at a time, so $2,000 of cost a month. The onboarding project is January revenue, because January is when the work was done, and the late payment changes nothing about that.
| Jan | Feb | Mar | Quarter | |
|---|---|---|---|---|
| Subscription revenue | $10,000 | $10,000 | $10,000 | $30,000 |
| Prepaid contract, released | $3,000 | $3,000 | $3,000 | $9,000 |
| Onboarding project | $9,000 | $9,000 | ||
| Revenue | $22,000 | $13,000 | $13,000 | $48,000 |
| Payroll | $40,000 | $40,000 | $40,000 | $120,000 |
| Other costs | $6,000 | $6,000 | $6,000 | $18,000 |
| Software plan, used | $2,000 | $2,000 | $2,000 | $6,000 |
| Costs | $48,000 | $48,000 | $48,000 | $144,000 |
| Accrual profit (loss) | ($26,000) | ($35,000) | ($35,000) | ($96,000) |
January looks best because it carries the one-off project. The steady state is a loss of about $35,000 a month, and that is the figure that tells you whether the model works.
Cash view: how long can we keep going?
On cash, the example company counts each payment the day it moves: the $36,000 prepayment lands in January, the full $24,000 software bill leaves in January, and the $9,000 project invoice arrives in March. Cash shows how long the company can keep going, and it falls from $300,000 to $213,000 over the quarter.
| Jan | Feb | Mar | Quarter | |
|---|---|---|---|---|
| Subscriptions received | $10,000 | $10,000 | $10,000 | $30,000 |
| Prepayment received | $36,000 | $36,000 | ||
| Project invoice paid | $9,000 | $9,000 | ||
| Cash in | $46,000 | $10,000 | $19,000 | $75,000 |
| Payroll and other costs | $46,000 | $46,000 | $46,000 | $138,000 |
| Annual software plan | $24,000 | $24,000 | ||
| Cash out | $70,000 | $46,000 | $46,000 | $162,000 |
| Net cash movement | ($24,000) | ($36,000) | ($27,000) | ($87,000) |
| Cash at month end | $276,000 | $240,000 | $213,000 |
The quarter lost $96,000 on accrual and $87,000 in cash. The $9,000 gap has an exact explanation. The company collected $27,000 for service it still owes (the unreleased 9 months of the prepaid contract), and it paid $18,000 for software it has not used yet (9 months of the plan). Collected $27,000, paid $18,000, and the difference is the $9,000. The late invoice nets to zero by the end of March, because it was revenue in January and cash in March.
How does runway read under cash and accrual?
Runway is cash divided by monthly burn, so the answer changes with the burn you pick. With $213,000 at 31 March, the example company has between 5.9 and 7.9 months of runway, depending on whether you use the accrual loss, March cash burn, the quarter average or forward cash burn.
| Burn figure | Monthly burn | Runway |
|---|---|---|
| Accrual loss, March | $35,000 | 6.1 months |
| Cash burn, March only | $27,000 | 7.9 months |
| Cash burn, quarter average | $29,000 | 7.3 months |
| Cash burn going forward (April, no one-offs) | $36,000 | 5.9 months |
March alone makes the company look like it has nearly eight months, because the late $9,000 finally arrived. The quarter average is flattered by the prepayment. The forward figure is the honest one: $46,000 out, $10,000 in. The prepaid customer has already paid, so that $3,000 of monthly revenue will never touch your account again.
The forward figure is also not the end of the story. Next January the annual software bill comes back as a $24,000 payment, and the prepaid contract only brings in new cash if that customer renews. Put those dates in your plan now, or January will surprise you. Our guide to what burn rate is, and which one to use covers the net versus gross versions, and when will I run out of cash shows how to turn the forward figure into a date.
What is deferred revenue?
Deferred revenue is money a customer has paid for service you have not delivered yet. When that $36,000 arrived, it was cash in the bank but not yet revenue. On the accountant's books it sits as a liability, a promise to deliver twelve months of product, and shrinks by $3,000 each month as you deliver.
SaaS companies hit this constantly because annual prepayment is a standard lever: it improves cash and often comes with a discount. It is also where accrual and cash split most. In January, the cash view shows a company that received $46,000, and the accrual view shows revenue of $22,000.
Who has to use accrual accounting?
Who has to use accrual depends on your entity, your size and your country, and the rules change. In the US, a corporation or partnership can generally use the cash method if it passes the IRS gross receipts test. In the UK, a limited company cannot use cash basis. What the tax authorities say is below.
United States. The IRS says a corporation or partnership can generally use the cash method if it passes the gross receipts test: average annual gross receipts over the 3 prior tax years at or under a threshold that is indexed for inflation every year (IRS Publication 538). The same page lists corporations other than S corporations, partnerships with a corporate partner and tax shelters as entities that generally cannot use the cash method unless they pass the test. For tax years beginning in 2026 the threshold is $32,000,000, set under section 448(c) in Rev. Proc. 2025-32, and it will change again. A seed-stage company is far below it. Passing the test makes cash method allowed for tax, though it does not stop investors and auditors asking for accrual statements.
United Kingdom. HMRC says cash basis is the standard way to record income and expenses for a sole trader or partnership without corporate partners, and that limited companies cannot use it (GOV.UK: cash basis overview). From 6 April 2024 it became the default method (GOV.UK: before the 2024 to 2025 tax year). GOV.UK describes the alternative, traditional accounting, as recording income and expenses by the date you invoiced or were billed, which is the accrual idea. A limited company therefore uses traditional accounting.
Elsewhere the rules differ, so check with an accountant who knows your jurisdiction. We are a modelling tool, not tax advisers.
What three mistakes catch founders out?
Founders most often confuse the two methods in three ways: they read accrual profit as cash in the bank, they treat a prepayment as spendable revenue, and they judge runway from the latest month, when one late payment or bill can make a single month unrepresentative.
Reading accrual profit as cash in the bank. A profit on the monthly statement is a statement about earnings. A company can report a profit while cash falls, for example when customers pay on net 60 terms and the invoices pile up. In our example the January loss on the books was $26,000 and cash fell $24,000, which is close, but March's accrual loss of $35,000 and cash loss of $27,000 show how far apart a single month can sit.
Treating a prepayment as spendable revenue. The $36,000 did land in the account, and $27,000 of it at 31 March pays for service you still owe. Treat it as spare cash and you will be delivering the rest of that contract with money you have already spent, and a customer who cancels early may be owed some of it back. Our guide to ARR explains why recurring revenue and recognized revenue are different numbers for the same reason.
Judging runway from the latest month. A late payment arriving or a bill landing makes one month unrepresentative, as the March row above shows.
What to do next
Get two documents from your accountant each month and keep your own cash view beside them. Then calculate runway from forward cash burn with one-offs removed, and show investors accrual numbers for the history and cash runway for the decision. The four steps are below.
- Ask your accountant for two things each month: the accrual P&L and the deferred revenue balance. Who should own the books as you grow, an outside CFO or an accountant, is a separate question; what a fractional CFO costs covers it.
- Keep your own cash view next to it: money in, money out, the day it happens. Update it when a customer pays, not when the invoice goes out.
- Calculate runway from forward cash burn with one-offs taken out, and list the annual bills and renewals that fall in the next twelve months. The cash runway calculator does the division.
- When you raise, show both: accrual numbers for the history, cash and runway for the decision.
Where Plainhub fits
Plainhub is not accounting software. It does not keep your accrual books, and your accountant should. It keeps the cash view: you record money in and money out as it happens, and recurring costs and revenue feed monthly burn, so the runway on screen is always current. For founders it works as a cash-first view beside your accrual books.
A one-off payment such as the annual software plan changes your cash balance when you log it. Plainhub needs no bank login. Use it for the question "how long do we have", and leave "are we profitable" to the books.
