Important GAAP Considerations for Startups
Whether you’re just starting out or you’ve been in business for a while, you need to be aware of the basics of GAAP. This is especially true for startups, who may not have the same level of financial expertise as more established businesses.
GAAP is crucial for startups. By understanding these concepts, you’ll be well on your way to making sound financial decisions for your business and staying compliant at all stages of your journey.
GAAP will ensure your financials are on point from the get-go. Here’s how.
What Is GAAP Accounting?
You’ve probably heard the term GAAP thrown around, but what does it actually mean? GAAP is an acronym for Generally Accepted Accounting Principles. It’s the framework that accounting professionals use to prepare financial statements.
GAAP can seem daunting at first, but it’s really not that complicated. The most important thing to understand is that GAAP is there to help you build a strong financial foundation for your business. It’s a set of guidelines that ensure your financial reports are accurate and reliable.
What Are the Key Principles of GAAP?
In total, there are ten key principles for GAAP that you should adhere to. They are:
- Regularity: That your accountant is abiding by GAAP as standard practice.
- Consistency: The same standards are applied from one financial period to the next.
- Sincerity: That an accurate and impartial depiction of a company’s financial situation is provided by the accountant.
- Permanence of Methods: Methods of financial reporting must be consistent.
- Non-Compensation: Full transparency for negative and positive financial reporting and without the expectation of compensation for debt.
- Prudence: Providing non-speculated, fact-based data representation.
- Continuity: Assuming business continuation during asset valuation.
- Periodicity: Entries are distributed within appropriate periods of time.
- Materiality: Full disclosure of all financial data and accounting information within financial reports.
- Utmost Good Faith: Honesty retained in all transactions.
Why Should Startups Prioritize GAAP?
Startups are in a precarious position. One false move and the whole business can come crashing down. This is especially true if your bad financial management scares potential investors.
Taking the time to ensure you implement GAAP principles proves that you are willing – and able – to be responsible with your startup’s finances and remain compliant throughout. This gives your startup much better odds of succeeding and obtaining the necessary funding.
Here are some scary statistics. Nine out of ten startups fail. The number one reason why is failing to read market demand, and the second biggest reason is running out of funding. By getting GAAP right from the start, you can avoid being part of these statistics.
How Does GAAP Help Ensure Financial Transparency?
If a startup plans to secure further investment, financial transparency is vital. Before deciding to invest, stakeholders and investors will scrutinize every last detail of your financial records. If you are concealing or hiding something, they will know something is “off” and refuse your request.
Being transparent from day one shows you have nothing to hide and allows financiers to quickly understand your current financial position.
Obtaining investment with transparent records will, therefore, be faster and easier to secure.
How Does GAAP Help Ensure Accountability?
This means that company management is held to a high standard and is accountable for their actions. For example, reckless spending and failure to pay invoices are two reasons why a startup may fail.
If all financial activity is fully disclosed, it is far less likely that these types of issues occur, and if they do, the person responsible can easily be held accountable for their actions.
What are the Benefits of GAAP Accounting for Startups?
When you’re starting a business, it’s important to understand the benefits of GAAP accounting. By following these guidelines, you can get a more accurate overview of your business’s financial health.
But that’s just the beginning. GAAP accounting can also be beneficial in other ways. For example, it can help you with forecasting, profit and loss reporting, and due diligence readiness.
Do you want to make sure your business is ready for any potential investors? GAAP accounting can help there, too. With this system in place, you can provide them with accurate and reliable financial statements.
Finally, when it comes to filing your taxes (everyone’s favorite time of year), the job will be so much easier because most of the work will have already been done.
Gain a More Accurate Overview of Your Business’s Financial Health
One of the top GAAP benefits is understanding the financial health of your startup. The data shows you exactly how much money you have coming in and, more importantly, how much money is going out. This allows you to see how much liquidity your business has and whether or not you have money to allocate to other areas of the business.
If you have too much money going out, this information also allows you to make cost-saving adjustments or will help you decide whether or not it’s time to secure additional investment.
How Can Accrual Accounting Be Beneficial?
Under the accrual method, revenue is recognized when it’s earned, not when it’s received. Another thing to keep in mind is that expenses should be recorded as they’re incurred, not when the bill is paid.
The benefit of this accounting method is that it clearly shows the relationship between revenue and expenses, leading to a better insight into the startup’s profitability. This method also provides a more accurate overview of the company’s assets and liabilities.
How Can Following GAAP Offer More Reliable Forecasting?
By having a set of guidelines to follow, businesses can create realistic projections based on past performance and expected future trends. This can be especially helpful for startups that are still in the early stages of growth and need to be as accurate as possible when projecting future revenue and expenses.
Does GAAP Provide More Accurate Profit & Loss Reporting?
In a word, yes. GAAP is designed to help businesses report their financial results in a standardized way, which makes it easier to compare different companies, industries, and financial years.
Why is this important? When looking for investment, this is one of the factors that is considered. If you can show that your industry and other similar companies are profitable, your chances of securing investment are improved.
What Is Due Diligence Readiness?
The due diligence process is when a potential investment or acquisition is vetted. You’ll want to be as prepared as possible for this process. One of the things you need to think about is your company’s readiness.
What does that mean, exactly? Due diligence readiness means that your company can provide all the information the potential investor or acquirer is going to want to see. This includes financial statements, contracts, licenses, and any other relevant documentation.
You’ll also need to be able to answer any questions the investor or acquirer may have. So make sure you have a well-informed team who can help you navigate this process. It’s important to remember that the due diligence process can take a while, so be prepared for the long haul.
How Do Startups Comply with GAAP?
Now that you know a bit more about GAAP let’s talk about how startups comply with it. The key is to be as transparent as possible with your financial statements. This means recording all your income and expenses and making sure your books are in order.
If you’re not completely familiar with GAAP, it might be a good idea to get an accountant or financial advisor on board. They can help you understand the guidelines and make sure you’re meeting all the requirements.
Don’t be afraid to ask for help! As a startup, you’re going to have a lot on your plate, and compliance with GAAP shouldn’t be one of them. Let the professionals take care of it, and you can focus on what you do best—running your business.
How Can Startups Comply While Maintaining Their Unique Identity and Culture?
One of the challenges for startups is complying with GAAP without compromising their unique identity and culture. It’s essential to have a good understanding of the requirements and to put in place systems and processes that will make it easy to track everything.
But it’s also important to be flexible and not get bogged down in the details. You don’t want to become so focused on compliance that you lose sight of your original vision. The key is to find a balance and to make sure that everyone in the company is on board with the new procedures.
There’s no question that GAAP principles can be overwhelming, but with a little planning and perseverance, you can make it work for your startup.
Where Can Entrepreneurs Go for More Information on GAAP?
Talking to an accountant or financial advisor is generally recommended for startups wishing to understand more about general accounting practices and GAAP. Since GAAP is an integral part of these people’s jobs, they will be well versed in GAAP principles accounting and can easily explain how to apply it within your startup.
Resources for Further Reading on GAAP
To read more about accepted accounting principles, you will find everything you need online. Make sure you choose a trusted resource for your information. Investopedia is a highly regarded source, as is accounting.com.
If you prefer to read a publication, there are plenty of accounting GAAP books available on the subject available for purchase.
How to Know When a Professional Is Needed
Your startup was likely born from a brilliant idea, not from your ability to understand and perform accounting tasks. You also probably have enough on your plate trying to develop your idea and turn it into something truly special.
Hiring professionals frees up your time considerably. It takes years of dedicated studying and practice to become a qualified accountant, so you’re going to be way better off getting someone who knows what they’re doing and how to apply general accounting principles to their work.
In short, all startups need a professional to manage their finances, particularly if funding needs to be secured.
How to Hire a Professional Financial Advisor or Accountant
One barrier to hiring a professional advisor is the cost. Hiring a financial professional full-time is expensive – and rightly so since you’re getting a highly experienced individual. Because of this, many startups try to go it alone, often with disastrous consequences.
One way to avoid these problems is to hire a virtual financial advisor or accountant. You get the same professional service and advice with an affordable price tag.
The reason for this is that you only pay for what you need. If you only require an accountant on a part-time or occasional basis, you can have this with a virtual one. If you need an advisor to help you get set up with acceptable accounting practices and conform to accounting principles GAAP, a virtual one can do this for you.
How to Find a Certified Finance Expert in Your Field
At Finvisor, we have a dedicated team of financial experts available on a virtual basis. All are highly qualified and experienced in their field. When you approach Finvisor for financial advice or accounting help, we make sure you match you with the right person.
This means you get someone who already knows your industry and has knowledge of how startups are run. Whether you need management consulting, understanding GAAP, or a day-to-day bookkeeper and accountant, Finvisor can provide you with the best person for the job.
Conclusion
To give your startup the best chance of success, you need to apply GAAP principles right from the start. If you don’t feel comfortable or knowledgeable enough to do it yourself, don’t hesitate to get a professional onboard.
To talk more about GAAP principles and why they’re important, get in touch with Finvisor today. We’ll be glad to show you how much our expertise can benefit your business.
To learn more about what we do, or to request a quote, contact us at hello@finvisor.com or 415-416-6682. We’re here to help you navigate deferred revenue journal entries so you can make the most of your assets!
*This blog does not constitute solicitation or provision of legal advice and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction.*
- Last Modified
- April 24, 2024
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