Accounting is one of those subjects business owners tend to ignore. Because, let’s face it, there’s a lot to do as an entrepreneur, and digging into finances can be confusing and scary.
But the words of Marcus Lemonis always ring true; if you don’t know your numbers, you don’t know your business.
Of course, that pearl of wisdom doesn’t really help people overcome their fear of digging into their books. But one thing that might beat those fears is a better understanding of Generally Accepted Accounting Principles or GAAP.
As a business owner, you may have heard of the GAAP. But how well do you really know it?
The good news is, you don’t have to be an expert. In fact, just knowing five facts can help you better understand GAAP and give you the confidence to dive into those business numbers.
Fact 1: You probably don’t have to use it, but you may want to.
U.S. law regarding GAAP is pretty straightforward. Only publicly traded businesses and those releasing financial statements to the public market have to use it. So, if your business is privately owned, chances are you can use any accounting method you like.
But here’s the rub.
GAAP is the method most investors and regulators feel comfortable with because it is the most transparent. So, if you intend to grow your business, you’ll probably start attracting the attention of these people, and you’ll want to be ready.
Fact 2: It’s best to start with GAAP accounting.
GAAP requires accrual accounting. This means when a transaction occurs, it shows up on your books. So if you buy something for your business, it shows up on this year’s books even if you don’t have to pay for it until next year.
The most common alternative, cash accounting, would show you still have that money, even though it is owed to someone else.
Discrepancies like that can make moving from a cash accounting system to GAAP accounting very confusing. It can also lead to mistakes that generate the interest of regulators.
Fact 3: There are four principles to follow when creating financial statements
The ten principles of GAAP are relatively well known. But less attention is given to four principles you must follow when creating financial statements using GAAP accounting.
The first is recognition. You have to accurately show all assets, revenue, liabilities, and expenses.
The second is measurement. All financial results must be measured according to GAAP standards.
Then there’s the presentation. Your financial statements must include an income statement, a balance sheet, a cash flow statement, and a statement of shareholder’s equity.
Finally, all financial statements must disclose any necessary information to give readers an accurate understanding of the contents.
With all this going on, the following fact becomes very important.
Fact 4: You probably can’t do it yourself
GAAP accounting isn’t easy. So, unless you have an accounting background, don’t try to do it yourself. Instead, get a good accountant or finance firm to help.
Of course, this can get really expensive, but you might consider the return on investment when you read the final fact.
Fact 5: GAAP can help raise funds
Growing businesses need cash, and investors are one of the most common ways to get it. But no investor worth her salt will invest in your company without looking at the finances. And chances are they will have those numbers looked over by someone familiar with GAAP.
As we mentioned earlier, the level of transparency with GAAP provides comfort to investors. It gives them one less reason to say no to your funding request.
Having the confidence to know your business numbers is all about having knowledge. So, start with these five facts and build on them so you can know your numbers and honestly know your business.