Cash vs. Accrual Accounting:
What Every CPG Founder Needs to Know

 

Imagine running a thriving CPG brand—your organic snack company is taking off, orders are pouring in, and your bank account is growing. Everything looks great… until you suddenly realize you don’t have enough cash to pay your supplier next month. What happened?

The answer might be in the way you track your finances. Many CPG and e-commerce founders struggle with financial clarity because they don’t fully understand the difference between cash and accrual accounting.

To break it down in simple terms, let’s think about managing your fridge and grocery shopping. Just like there’s a difference between what’s currently in your fridge and what you’ve planned to eat for the week, there’s a difference between money in your bank and your actual financial health.

Meet Sam—a fictional CPG founder who will help us illustrate how cash & accrual accounting work in a real-world scenario

Sam is the founder of an up-and-coming organic snack brand. They’re great at product development, marketing, and scaling sales—but when it comes to finances, things get murky. To make it easier to understand, let’s compare Sam’s business finances to something familiar: managing a household fridge.

 

Sam has 2 ways to track groceries:

  1. 1. Cash Method – Only worrying about what’s in the fridge today and what they just bought.
  2. 2. Accrual Method – Keeping track of what’s planned for the week, even if they haven’t bought it yet.

 

This same idea applies to accounting: Cash accounting tracks money when it moves in and out, while accrual accounting tracks income and expenses when they happen—even if cash hasn’t changed hands yet.

 

The Cash Accounting Method (Pay as You Go)

Cash accounting is simple: You record money when it actually moves. You count revenue when you receive cash, and you count expenses when you pay bills.
In grocery terms, imagine Sam is only looking at what’s in their fridge right now. They don’t think about the groceries they’ll need next week until they run out. If the fridge is full, they assume they’re doing great. If it’s empty, they rush to buy food.


Why Some Businesses Use Cash Accounting

  • ✅ It’s easy to track.
    ✅ It shows exactly how much money is in the bank.
    ✅ It works for very small businesses without complex finances.


The Problem With Cash Accounting

  • 🚨 It can be misleading—just because there’s cash today doesn’t mean there will be next week.
    🚨 It doesn’t account for upcoming bills, inventory costs, or pending revenue.
    🚨 It makes financial forecasting difficult, especially for growing businesses.

 

Many small e-commerce and CPG brands start with cash accounting because it’s simple. But as they scale, they realize it doesn’t give them the full financial picture.

 

The Accrual Accounting Method (Planning Ahead)

Accrual accounting is like meal planning. Instead of just looking at what’s in the fridge today, Sam also keeps a list of meals they plan to cook for the week. Even if they haven’t bought ingredients yet, they know what they need and what’s coming up.

In business terms, accrual accounting tracks revenue when it’s earned (not just when cash is received) and expenses when they’re incurred (not just when bills are paid). This gives a more accurate picture of financial health.


Why Many Growing Businesses Use Accrual Accounting

  • ✅ It helps track real profitability, even when cash hasn’t changed hands yet.
    ✅ It accounts for inventory, supplier payments, and upcoming revenue.
    ✅ It allows for better financial forecasting and decision-making.

 

The Challenge of Accrual Accounting

  • 🚨 It’s more complex and requires tracking receivables and payables.
    🚨 It can make cash management trickier if you’re not planning ahead.
    🚨 It often requires an accountant.

 

While accrual accounting takes more effort, it provides a clearer picture of a business’s financial health, making it easier to scale and attract investors.

 

Why It Matters for CPG and E-commerce Companies

For businesses with inventory, supply chain costs, and fluctuating sales cycles, using the right accounting method is crucial.

 

Cash Accounting Can Be Misleading

If Sam’s organic snack brand is using cash accounting, they might think they’re profitable just because they have money in the bank today. But they might be forgetting about a large supplier invoice due next month.

 

Accrual Accounting Shows the Full Picture

With accrual accounting, Sam knows exactly what revenue has been earned (even if the cash hasn’t arrived yet) and what expenses are coming up. This helps avoid surprises and allows for smarter financial planning.

 

Real-Life Example: Why Accrual Accounting Helps Growth

Let’s say Sam’s brand sells snacks to retail stores. A major grocery chain places a $200,000 order in December, but they won’t pay until February. Meanwhile, Sam has to pay suppliers in January to fulfill the order.

 

What Happens With Cash Accounting?

  • ✅ December looks bad: no cash yet from the grocery chain.
    ✅ January looks terrible: paying suppliers but no cash yet.
    ✅ February looks great: big cash inflow, but does it reflect real profitability?


Cash accounting makes Sam’s business look like it’s struggling in December and January, then booming in February—when in reality, the revenue was earned in December.

 

What Happens With Accrual Accounting?

  • ✅ The $200,000 order is recorded as revenue in December, when it was earned.
    ✅ Supplier costs are recorded when they happen.
    ✅ The business has a clear financial picture throughout the process.


This accurate tracking helps businesses secure financing, manage expenses, and avoid cash flow crises.

 

How a Fractional CFO Can Help

A Fractional CFO helps founders go beyond basic accounting and turn financial data into real strategy. Here’s how:

 

  • Translating Numbers Into Strategy
  • A Fractional CFO doesn’t just track numbers; they help founders understand what those numbers mean. Think of it like using a meal plan instead of just buying random groceries—now you have a strategy instead of just reacting.
  • Connecting You With the Right Accounting Firm
  • Switching to accrual accounting? A Fractional CFO can connect you with a great accounting firm to handle the transition.
  • Seeing the Full Picture With Financial Forecasting
  • Instead of relying on today’s cash balance, a Fractional CFO builds a three-statement forecast—like meal planning for the next few weeks—helping you anticipate revenue, costs, and profitability.
  • Tracking Business Health With KPIs
  • A KPI dashboard helps you track important metrics like profit margins, cash flow, and customer acquisition costs—just like tracking calories or grocery spending.
  • Smart Cash Planning for Growth
  • Want to expand, buy more inventory, or hire a team? A Fractional CFO helps you manage cash flow so you’re always prepared.

 

Conclusion

Running a growing CPG or e-commerce business is like managing your fridge—you need to balance what’s available today with what you’ll need in the future. Cash accounting only tells you what’s in the fridge now, while accrual accounting helps you plan ahead.

If you’re looking to scale, get better financial insights, and make smarter business decisions, working with a Fractional CFO can help you turn financial data into a growth strategy.