February 6, 2014 | 4-minute read (700 words)
If you’ve already raised VC funding or are looking for your first round, it’s time to switch over to a GAAP-compliant accounting solution—if you haven’t already. Investors expect this and it’s a useful tool for your company as well.
Generally Accepted Accounting Principles (GAAP)—What You Need to Know
For those of you unfamiliar with GAAP compliance, let me bring you up to speed. Generally Accepted Accounting Principles (GAAP) is accounting on the full accrual method, in accordance with accounting rules that are “generally accepted” by accounting and finance professionals across the board. These accounting rules have primarily been formulated—and are guided by—the FASB (Financial Standards Accounting Board) and the American Institute of Certified Public Accountants.
The rules may slightly change over time but the result is always the same: financial reports that are accurate and consistent, and thus comparable. GAAP compliance works to guarantee that you have the kind of error-free and transparent financials that will help you to make informed decisions for your company, and reassure potential investors and partners that they are seeing a consistent picture of your company. It’s a way to track and present your company’s financial activities in a way that is acceptable and meaningful.
So how can your company benefit from GAAP compliance?
GAAP-compliant financial statements provide essential insight into the inner workings of your company. From revenue to pricing, GAAP financial statements give you a clear view into what’s working and how.
Reliable forecasts. When you base your forecasting on financials that are consistent, this ensures the reliability of your forecasts.
For help with GAAP compliance and financial forecasting, contact Early Growth Financial Services.
Proves you mean business.
When you’re GAAP compliant, this shows potential investors and partners that you know what you’re doing and aren’t a company that’s going to cut corners. Taking the effort to have GAAP-compliant financial statements demonstrates a certain kind of business savvy and discipline.
Negotiation tool. Your financial statements aren’t just internal docs to track your business; they are how you communicate externally. For example, when you’re selecting a vendor, GAAP-compliant statements can lead to better vendor terms.
Bank loans. Banks will usually insist on GAAP-compliant financial statements. And GAAP-compliant statements can sometimes even help you to get you a lower interest rate.
Foundation for exit. Unless you’re planning on running a lifestyle business, chances are that you’re going to want to make an exit at some point: either going public or selling your company. GAAP compliance is the foundation of your exit strategy.
Valuation. When your company is being valuated, you will need to supply relevant financial documents such as GAAP-compliant financial statements. If your accounts are in order, then your valuation can be based on your sound financials.
M&A. Potential acquiring companies rely on GAAP-compliance to ensure a lack of bias and give different companies a common language for financials.
Taxes. When filing your taxes, you need to have GAAP-compliant financial statements. Keeping your records up-to-date from the outset means that they are ready to use when tax season comes.
While we give our clients a wide selection of financial service options to choose from, one thing that’s not a choice is GAAP compliance. When we take on a new client, this is a non-negotiable. While you may be tempted to cut corners when it comes to your accounting, let me assure you this is a bad decision. GAAP compliance is essential for all companies, and the earlier your company starts with GAAP compliance the better.
Questions about GAAP compliance? Tell us in comments below or contact Early Growth Financial Services with your questions.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, an outsourced financial services firm that provides early-stage companies with accounting, finance, tax, valuation, and corporate governance services and support. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.