Choosing between cash and accruals accounting is one of the first practical decisions every service business faces — and it’s one that affects how you see your cash position, how you manage tax, and how you talk about performance. I help lots of small service businesses make this choice, so here’s a straightforward, experience-based guide that walks you through the trade-offs and how to pick the right method for your circumstances.
What's the difference in plain terms?
At its simplest:
The two systems can tell very different stories. A month where you invoice a big project but don’t get paid yet will look profitable under accruals but may leave you cash-poor under the cash view. Conversely, a month where several clients pay old invoices may look great in cash terms even though the work happened earlier.
Why it matters for service businesses
Service businesses — consultancies, designers, contractors, agencies, freelancers — often have variable payment terms and a mix of small and larger invoices. That variability makes the choice important:
Practical pros and cons
Here’s a compact comparison I use with clients when deciding which way to go:
| Feature | Cash accounting | Accruals accounting |
|---|---|---|
| Ease of use | Simple to maintain; great for sole traders and micro-businesses | More bookkeeping work; needs invoices and credit notes recorded promptly |
| Cashflow clarity | Directly reflects your bank balance | Can hide short-term cash shortages |
| Profit tracking | May distort profitability when timing of payments differs from work done | Matches work to income/expense periods — better for management reporting |
| VAT and tax | For VAT: you can use VAT cash accounting schemes; for tax: taxable profit depends on chosen basis and HMRC rules | Commonly required for larger businesses and compliance reporting |
When I usually recommend cash accounting
I steer clients towards cash accounting when:
For many freelancers and consultants, cash accounting reduces the temptation to spend money that looks like profit but is actually owed on outstanding invoices. It also keeps bookkeeping straightforward, especially if you use software that reconciles bank feeds automatically (for example, FreeAgent, Xero, or QuickBooks).
When accruals accounting is usually the better fit
I recommend accruals when:
Accruals help avoid misleading month-to-month swings in profit and loss figures caused by payment timing. If you run a small digital agency that invoices at project milestones or a consultancy with recurring monthly work billed in arrears, accruals will give you a clearer picture of when value was created.
UK-specific considerations
There are a few UK-specific rules to keep in mind:
I tell clients: don’t mix up cash VAT schemes and your wider accounting basis. They interact, but they're distinct choices with separate rules.
Common questions I get asked
A practical checklist to decide
How I implement the chosen approach with clients
If we choose cash accounting, we set up bank feeds, automate reconciliations, and categorise receipts and payments so monthly results reflect actual cashflow. If we opt for accruals, we create a schedule for entering invoices, credit notes, and supplier bills on a weekly basis and run ageing reports to track receivables. Either way, I usually recommend:
Real-life example
One client, a small UX agency, used cash accounting initially because payments were quick and they wanted simplicity. As their retainer clients grew and invoices started to be paid 45–60 days after billing, the business saw big swings in "profit" months that didn’t match work delivered. We moved to accruals, introduced monthly profit reporting by client, and the owners suddenly had the insight they needed to price and manage resources. The transition required one-off adjustments but paid off in better decisions and more predictable margins.
If you’d like, tell me a bit about your billing patterns, average invoice values, and who uses your accounts (just you, lenders, or investors). I can help you weigh up the choice and outline the practical steps to implement whichever method fits your business best.
