When it comes to securing funding for your business, it’s easy to think investors or lenders only care about growth potential or profitability. But there's something more fundamental that often gets overlooked—how you keep your books.
Your accounting method plays a bigger role in funding decisions than you might realise. Whether you’re eyeing a small business loan, pitching to investors, or applying for a grant, the way you report income and expenses can shape the outcome.
If you’ve ever wondered how your numbers are viewed from the other side of the table, here’s what you need to know.
The Two Big Methods: Cash vs Accrual
The first step is understanding the difference between cash vs accrual accounting. They’re both legitimate methods of tracking financial activity—but they paint very different pictures.
Cash accounting is straightforward. Income is recorded when it hits your account, and expenses are recorded when they’re paid. It’s simple, easy to manage, and gives a real-time snapshot of cash flow.
Accrual accounting, on the other hand, records income and expenses when they’re earned or incurred, regardless of when money changes hands. This method gives a fuller picture of your business’s financial health, especially over the long term.
Many small businesses start with cash accounting for simplicity. But as your business grows—or as you seek external funding—accrual becomes more attractive to outside parties who want to see your future obligations and expected income.
Why Lenders and Investors Care
Lenders and investors don’t just want to know how much cash you have today. They want to understand how your business performs over time, how predictable your revenue is, and whether your profit margins are sustainable. That’s where your accounting method matters.
Accrual accounting tends to win favour with financial institutions because it aligns more closely with how they model risk and return. It offers:
Clearer revenue recognition: They can see if revenue is earned consistently, not just when clients pay.
Better expense matching: Costs are aligned with revenue, helping assess profitability.
Predictability: It’s easier to forecast growth and cash needs.
Credibility: Accrual-based financials often look more professional and are considered more transparent.
This doesn’t mean cash accounting is wrong. But if you’re using it, be prepared to explain your cash flow patterns and why the method works for your business model.
How It Affects Loan Applications
When applying for a loan, your financials are under the microscope. Banks want to understand not just whether you can repay the loan, but how stable your income is over time.
Accrual-based books make it easier for lenders to evaluate:
Revenue trends over multiple quarters
Seasonal fluctuations
Accounts receivable and payable
Fixed and variable costs
Profit margins on earned (not just received) income
If you’re using cash accounting, you might need to provide additional documentation—like cash flow forecasts or aged receivables—to give lenders the full picture.
What Investors Want to See
Investors think long-term. They want to know your business can scale, that margins are strong, and that you’re operating efficiently. Accrual accounting shows them:
Your growth trajectory over time
When revenue is earned vs. collected
Your commitment to strategic financial planning
Any major liabilities on the horizon
It’s not just about how much you made last month—it’s about whether your model is working consistently and predictably.
Choosing the Right Method for Your Stage
There’s no universal answer for which method is “best.” It depends on your business type, goals, and funding needs.
Here’s a quick guide to help:
Startups and sole traders: Cash accounting can work well in the early days when cash flow is king and transactions are simple.
Growing businesses: If you’re seeking funding or dealing with larger contracts, switching to accrual can improve your credibility and make financial forecasting easier.
Product-based businesses: Accrual is often essential, especially when managing inventory or delayed payments.
Service-based businesses: Cash can be fine, but if projects span multiple months or billing cycles, accrual gives better visibility.
As a rule of thumb, if you’re considering a funding round or planning significant growth, it’s worth making the shift—or at least consulting a financial advisor about when to do it.
Watch for Tax Implications
Your accounting method also affects how you report income and expenses to HMRC. Switching from cash to accrual (or vice versa) may impact when you pay tax, especially if you’re deferring income or accelerating expenses.
Always consult an accountant or tax advisor before making any changes. They can help ensure you’re compliant and making decisions that support your business goals.
One Stat That Sums It Up
According to a 2022 survey by Xero, 57% of small business owners said they didn’t fully understand how their accounting method affects their ability to access funding.
That gap in understanding can be costly—especially when funding is on the line.
Final Thoughts
Accounting isn’t just for tax season—it’s a foundational part of how others see your business. Whether you’re bootstrapping your way forward or gearing up for a big investment pitch, understanding how your accounting method shapes perception can give you an edge.
It’s about more than numbers. It’s about clarity, strategy, and giving yourself the best possible footing when it’s time to ask someone to believe in your vision.