Accrual Accounting vs Cash

Understanding performance versus liquidity in board-level financial oversight

Introduction

Board members are often told that an organization “had a surplus” while, in the same meeting, hearing that “cash is tight.” This can feel contradictory—but it isn’t.

Understanding the difference between accrual accounting and cash position is one of the most important financial concepts for effective governance. Boards don’t need to do accounting, but they do need to understand how these two perspectives work together to avoid false confidence or unnecessary concern.

Accrual accounting: measuring true financial performance

Accrual accounting answers a simple but critical question:

Did the organization earn what it spent during this period?

Under accrual accounting:

Revenue is recorded when it is earned, not when cash is received
Expenses are recorded when they are incurred, not when they are paid
Financial results reflect economic reality rather than timing

This is why accrual accounting is used for:

Financial statements
Budget comparisons
Audits
Long-term planning

For boards, accrual results show whether operations are financially sustainable over time.

Cash: the organization’s ability to operate

Cash answers a different question:

Can the organization meet its obligations when they come due?

Cash is about:

Timing
Liquidity
Short-term risk

An organization can:

Show an accrual surplus but experience cash pressure
Hold significant cash while running an underlying deficit

Neither situation is unusual—and neither can be understood properly in isolation.

How both can be true at the same time

Surplus on paper, cash pressure in practice

Revenue is earned and recorded (e.g., grants or pledges)
Cash arrives months later
Expenses must be paid now

Result: Accrual surplus, cash stress

Cash available, but structural risk underneath

Cash received in advance or deferred revenue held
Operating expenses exceed earned revenue

Result: Healthy cash today, unsustainable performance longer-term

Boards that look at only one view miss half the picture.

What board members should focus on

Boards do not need daily cash management or accounting detail. What they do need is visibility.

From accrual financials, boards should watch:

Trends in surplus or deficit
Budget versus actual performance
Revenue reliability and concentration
Expense growth relative to mission delivery

From cash, boards should understand:

Current cash position
Expected timing of inflows and outflows
Exposure to short-term financing
Whether timing gaps create risk

The goal is awareness, not micromanagement.

Common governance mistakes

Assuming surplus means “everything is fine”
Ignoring accrual deficits because cash is available
Treating cash reports as accounting documents
Reacting to short-term cash noise instead of structural trends
Expecting finance to “fix” timing issues that require strategic decisions

What good governance looks like

Well-functioning boards:

Use accrual results to guide strategy
Use cash information to understand risk
Ask about timing, not just totals
Expect clear explanations rather than raw data
See issues early, not at the point of urgency

When this balance is understood, financial discussions become calmer, clearer, and more productive.

A simple mental model for board members

If you remember nothing else:

Accrual accounting shows performance
Cash shows capacity
Both matter
Neither tells the whole story alone

Understanding this distinction helps boards make better decisions, ask better questions, and support long-term organizational health.