Cashflows vs. Accruals

Pop Quiz! Suppose you pay your car insurance twice per year – once in February and again in August. Each semi-annual invoice is $600. In your budget, what would you record in the month of July?

A: $0

B: $100

C: $600

D: None of the above

Follow up question (using the same possible answers) – how much expense would you record for August? Your answer to both questions likely depends on your budgeting mindset.

A cashflow-based budgeting mindset focuses on when you actually receive or make a cash payment. In this case, you would recognize a $600 cash outflow in the months of February and August.

With accrual-based budgeting, the actual cashflow date is less meaningful. What matters, is the value of the goods or services consumed during the period. Despite not making a payment in any of the intervening months between the payment dates, in the above example, accrual budgeting would "see" a monthly expense of $100, every single month of the year.



Why is this important?

Imagine driving at night and after rounding a bend, you come upon a deer standing IN THE MIDDLE OF THE ROAD. While flooring your brakes, you simultaneously think – oh no, did I make my last car insurance payment? Imagine including an accrual of $100 per month for your car insurance in your monthly budget, only to have the actual $600 semi-annual payment sneak up on you as stealthily as that deer just did.

Talk about a major blind spot!

Cashflow-based budgeting helps provide visibility and helps ensure you’ll have the money in your financial account or wallet when you need it.

So why do I need accrual based budgeting?

Imagine palm fronds blowing in the wind, with a touch of sea salt in the breeze. Planning a vacation is more than than figuring out how to save up and pay for it. Without accruing some savings each budgeting period towards vacation, it may be difficult to save up enough money to reach the beach.



Insurance payments, vacations, real estate tax bills, holiday gifts – are all examples of expenses of that don’t always come due at the same time and in the same order as our income. Simply put, there’s a timing mismatch.

Troutwood shows your budget both ways!

Rather than making you live with the downsides of settling for one method alone. Cashflow and accrual-based budgeting are complementary ways to view and manage your finances. With Troutwood’s daily cashflow forecasting functionality, you can plan and save today for tomorrow’s big expenses without losing sight of your future. The benefit of a daily cash-flow based approach is that you can visualize your earnings and spending between any two dates.

With Troutwood you can model every cash inflow or outflow for each and every day fifty years out and beyond, while witnessing in real time, the projected impact on your finances.

Sleep better

Whether you’re still wiping the sweat off your brow after that near-miss with the deer, or whether you moved past that trauma and are just now laying down in a hammock – margarita in hand – know that Troutwood has both you and your money covered with advanced budgeting made easy! We planned hard so that you won’t need to.

Interested in reading more on this topic?

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