Most people consider the act of keeping the books balanced to be relatively straightforward for the average small business. As such, any decent accounting system tends to work well in a small business setting initially as long as you keep it current and accurate. However, as your business expands you’ll need to build generally accepted accounting principles (GAAP) compliant financial statements so that your statements can be compared to other companies. This will help creditors and investors as they review your company for potential funding opportunities. There are definite pros and cons to weigh as you determine if you’ll move towards a GAAP based system, all of which you need to be aware of before taking your small business to the next level.
When expanding your business, you may require funding from investors, many of whom will want to compare your financials with that of similar businesses. GAAP-compliant financial statements make comparisons easier. The comparison of your statements with others in your industry is known as benchmarking and is effective at helping you and investors measure your performance. Using GAAP means having a consistent accounting process in place that makes it easier to see how you’re performing over time and how viable your business is.
If you’re looking to grow and become a public company, you’ll need to move to GAAP-based financials. You should begin to plan a transition to GAAP as soon as you’ve made a decision to go public. Making the switch now will allow you to have a solid financial statement process in place and make your expansion that much smoother.
If you are just getting ready to start a business and are trying to decide on an accounting system, you should look at going the GAAP-based route right from the start. Implementing GAAP immediately means spending a little more money and time now, but will save you significantly over the long run. If you decide to wait until it comes time to expand before making the switch you’ll have to bring all of your past accounting details into the picture in addition to moving towards GAAP-based financial statements.
Changes to GAAP
If you use GAAP-based financials you’ll be affected by upcoming changes. The International Accounting Standards Board is planning on converging GAAP with International Financial Reporting Standards, which impacts revenue recognition, leases and financial instruments. These are the most significant changes made in decades. While the current GAAP standards are rule-based, the converged standards will be principle-based. This means more professional judgment and interpretation are necessary. These changes are likely to go into effect starting some time in 2016.
The best way to decide on what’s best for your company is to look at where you want to take it in the future. If you plan on keeping things small, you may be better served with your existing accounting system. If your dream is to expand the business over time, move to GAAP now but meet with an expert to determine how you should best prepare for these changes. If you have any questions about how to move to a GAAP-based system let me know. I’d be happy to help.