You started with cash accounting because it was simple, easy to manage, and perfect for your business at the time. But now things are different. Your revenue is climbing, compliance requirements are increasing, and you're considering making the switch to accrual accounting. Yet you remain on the fence, unable to take that leap to another accounting method.
What if we told you that you could keep both? While there are plenty of reasons to switch from cash to accrual accounting, you don't always have to make a hard break between the two. There's a sweet spot that gives you the best of both worlds.
Here's the thing: cash accounting works until it doesn't. Even if it technically works for your business, it can cost you more in the long run when you're hit with non-compliance fines or miss out on funding because you can't present acceptable financial statements.
But if you get the timing right and take a strategic approach to changing your accounting method, you're looking at smooth sailing as you scale.
This blog will walk you through the tell-tale signs it's time to make the switch and show you how accrual accounting can help your organization grow, comply, and make smarter decisions. We'll also let you in on a little accounting secret.
Cash versus accrual accounting in a nutshell
If you’re going to choose between these two accounting methods, you first need to understand how they differ. The biggest difference lies in how and when they account for your available money.
- Cash basis accounting recognizes money when you receive it and accounts for expenses when the money is spent. It mimics how your personal finances work—you have and lose money in the bank depending on when it comes and goes. This makes it easier for small businesses to manage their finances.
- Accrual accounting considers revenue and expenses when they are earned and incurred. Because this method takes future transactions into account, it paints a more accurate picture of your financial standing. It's also required for certain organizations since it follows generally accepted accounting principles.
When you understand the two methods, it simply becomes a question of when to switch to accrual accounting.
8 reasons to switch to accrual accounting
1. Your revenue hit the IRS threshold
The IRS requires any business whose gross receipts exceed $31M in 2025 to use accrual accounting.
This threshold rule applies to several types of businesses, including C Corps, partners of C Corps, and other large businesses. If you wait to switch accounting methods, you could get hit with fines and/or experience delays in successfully filing your taxes (which also results in fines).
The IRS updates this threshold yearly for inflation, so even if you don't think you'll reach it this year, you might hit it next year and have to switch.
2. You manage inventory
If your business buys, sells, or manages inventory, you’re required to use accrual accounting. This is because this method helps match your cost of goods with the revenue they generate, leaving very little, if any, room for inflating or deflating numbers. With accrual, you produce clearer margins for reporting and can enable strong inventory management.
There are some exceptions for small businesses that manage inventory but remain under the IRS threshold. These companies can stick to cash basis accounting, but it’s risky to do so long-term.
3. You’re a nonprofit
Nonprofits and other 501(c)(3) organizations are subject to generally accepted accounting principles (GAAP), which are only followed under accrual accounting. The main reason is accrual’s ability to deliver more accurate financial statements.
Nonprofits must continuously prove they’re properly grants and other available financial resources. Accrual accounting for nonprofits enables GAAP compliance and allows them to maintain more transparency and trust with regulatory agencies, donors, and board members.
Now, just because you don’t technically have to switch from cash to accrual accounting, doesn’t mean it’s not the strategic choice.
4. Your revenue is approaching the IRS threshold
Let's say your current revenue is $5 million short of the IRS threshold for using accrual accounting. No reason to switch, right?
But you're struggling to plan for the future and dealing with cash flow confusion. You could really benefit from the bigger, more accurate financial picture that accrual accounting offers to get on solid ground.
In that case, you're better off switching from cash to accrual accounting. If you're attached to cash accounting, that's okay! If you time things right and take a proactive approach to switching, you can actually use accrual for internal operations and cash for taxes.
5. You’re prepping for a funding round
In the same way that regulatory and tax agencies prefer GAAP-compliant financial statements, so do investors.
Documents and financial reports created using accrual accounting methods allow you to more accurately calculate key financial KPIs like burn rate, revenue run rate, and customer acquisition costs. Those are all things investors and lenders will want to see.
While you could technically produce GAAP-compliant financial statements if you’re using cash basis accounting, you’ll essentially be starting from zero. That’s precious time wasted that keeps investors waiting.
6. You’re a SaaS company
As a SaaS company, you’re working with a lot of multi-month contracts – and all the deferred revenue that comes with them. Accrual accounting properly recognizes that revenue, so you have a more accurate view of your available cash and upcoming inflows and outflows.
Accrual also supports more accurate matching of your cost of goods and services (COGS) and revenue, giving you better insight into your gross margins.
The cherry on top? The venture capital funding you'll likely pursue? You'll have the proper financial statements ready for investors and board members.
7. You plan to sell or merge your business
Accrual accounting’s accurate picture of your finances looks less risky to investors and M&A advisors. This method helps align your EBITDA and working capital with industry standards.
Since other parties know they can trust the documentation you’re accurately producing under accrual accounting, you can reduce friction during negotiations and limit additional work.
8. Your financial statements are regularly audited
Cash basis accounting leaves more room to manipulate financial numbers. That's why auditors require accrual accounting to verify that revenue and expenses match business activities.
Especially for nonprofits, organizations in highly-regulated industries, and public companies, accrual accounting can help shorten audit times and reduce costs spent on producing the financial statements regulatory agencies want to see..
9. You want to strengthen tax planning
While there are certain tax benefits that come from using cash basis accounting, accrual accounting enables better long-term planning. Accrual methods enable more precise tracking of tax deferral strategies and better times income, particularly in identifying deductible expenses.
Switching to accrual accounting is a wise, strategic decision for businesses using partnership structures, S corps, or other organizations with complex ownership.
Now…about that magic moment: What we recommend at Hiline
You didn’t think we forgot, did you? Unless initially required, most businesses wait to switch from cash to accrual accounting until they hit that IRS threshold. But too often, finance teams and accountants aren’t actively watching that rise in income and planning a strategic switch.
The result? A clunky, rushed switch that results in missed opportunities and costly mistakes.
We think there’s a better way – a magic moment when timing aligns for the best of both worlds.
When you're between $1M-$25M, you can convert to accrual accounting internally for superior business decision-making while maintaining cash basis tax benefits. It's the optimal strategy to support both your business and tax liabilities.
A few FAQs for switching from cash to accrual accounting
Is accrual accounting only for large businesses?
No! Small businesses can benefit from accrual accounting too, especially since they always need to have that accurate, larger view of their finances as they scale.
Why do investors and lenders prefer accrual accounting?
Because accrual accounting supports more accurate financial statements. They know they can trust statements made using accrual methods to offer an honest look at your finances. Cash accrual statements leave too much room for number manipulation.
Can I switch to accrual accounting whenever I want?
Technically, yes, but it’s complicated. Your switch to accrual accounting should be properly timed in line with IRS requirements and your own fiscal calendar. Mid-year switches need to be handled very carefully to avoid issues.
Is switching to accrual accounting complicated?
Also, sorry, but yes. On top of monitoring your financial operations for the ideal time to switch, moving to accrual accounting requires you to file the correct paperwork with the IRS and change up your accounting ledgers and processes to align with different standards.
Will switching to accrual accounting increase my taxes?
Probably not. Although you might be able to leave off income or record expenses that get you tax benefits under cash accounting, accrual accounting allows for a more strategic approach to tax deference. You might even see your tax liability lowered!
Make the switch today to be ready for tomorrow
Whether you're hitting revenue thresholds, preparing for an audit, or thinking about your next stage of growth, switching to accrual accounting if you’re a growing business is more than a compliance step. It’s a strategic upgrade.
You don't have to wait until one of these scenarios immediately applies to make the switch. And you shouldn’t if you want to take advantage of hidden financial opportunities and avoid costly mistakes during a last-minute transition.
At Hiline, we take a proactive approach, reviewing your compliance obligations, tax planning strategies, and long-term business goals to help you choose the right accounting method before you’re backed into a corner. Rather than reacting to IRS mandates or investor demands, we help you get ahead of the curve so the switch to accrual accounting happens on your terms, not under pressure.
Let’s talk about how we can partner to ensure you’re using the right accounting method for success.
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