The Accrual-Cash Gap

The P&L recognizes revenue when earned. The bank account recognizes cash when received. These two events can be separated by 30, 60, or 90+ days. A company that books $500K in March revenue on net-60 terms does not see the cash until May. But the March payroll, the March hosting bill, and the March contractor invoices are due in March. The gap between when you earn and when you collect is the accrual-cash gap — and it is the single most common cause of cash crises in growing companies.

Monthly Cash Flow — The Gap in Action:
──────────────────────────────────────────────────────
         Revenue    Cash In    Expenses   Cash Out
         (Accrual)  (Actual)   (Accrual)  (Actual)
──────────────────────────────────────────────────────
Jan       $420K      $280K*     $380K      $380K
Feb       $460K      $310K*     $395K      $395K
Mar       $510K      $340K*     $410K      $410K
──────────────────────────────────────────────────────
*Cash received is from invoices 45-60 days prior

P&L says: $1.39M revenue, $1.185M expense
  → $205K profit. Looking good.

Cash says: $930K received, $1.185M paid
  → ($255K) cash deficit. Trouble.

The company is profitable and running out
of cash simultaneously. The gap kills.

1. Measure Days Sales Outstanding (DSO) DSO = (Accounts Receivable / Revenue) x Days in Period. This tells you the average number of days between invoicing and collection. SaaS benchmark: 30-45 days. Above 60 days and your cash conversion is a problem. Every day of DSO improvement releases trapped cash — on a $20M ARR business, a 10-day DSO improvement frees approximately $550K.
2. Measure Cash Conversion Cycle Cash Conversion Cycle = DSO + Days Inventory Outstanding - Days Payable Outstanding. For SaaS (no inventory): CCC = DSO - DPO. If you collect in 45 days and pay in 30 days, your CCC is 15 days — you need 15 days of operating cash to bridge the gap. If you collect in 60 days and pay in 15 days, your CCC is 45 days. That 45-day float requires real money.