Don’t Let GAAP Spook You: Why Financial Statements Matter
Income statements and balance sheets and cash flow – oh, my!
The three major financial statements required under Generally Accepted Accounting Principles (GAAP) are often enough to evoke sheer terror from even the steeliest entrepreneurs – and it’s no surprise why. GAAP or “accrual basis” financial statements can make-or-break your ability to make educated decisions and plan strategically for your business.
Need more funds to expand your business? Look no further than financial statements to weigh your debts, shareholders’ capital, and other loans you’ve taken to decide which type of financing is optimal.
Not sure how much money is available to you for distributions? Your accrual basis financial statements can tell you the profits you’ve made, debts that need to be paid, and provisions made for various reserves so you can clearly and confidently determine how much is available for distribution.
All too often entrepreneurs are spooked by accrual basis and financial statements because odds are that unless yours is an accounting business, you didn’t start your company to spend hours pouring over debits, credits, and spreadsheets. You started your company to follow a passion or a lifelong dream.
So it’s only normal to be a little apprehensive discussing GAAP. At CFO Alliance, we’re here to take the fear out of creating a financial framework that will help you grow your business – with confidence and peace of mind
Still shuddering at the mere mention of GAAP or accrual basis statements? Here are some of our favorite reasons we love to help entrepreneurs create GAAP financial statements.
Top Reasons to Create GAAP Financial Statements
They Build Trust
Whether you’re looking to attract investors or get more credit for your expanding operations, clean, accurate, and timely financials can build trust with your audience. Providing these documents regularly can be the difference between landing a really great investor or struggling to find a financial partner to expand your business. Once you land these banks or investors, earning their trust by continuing to provide financial statements can also open the door for more funding in the future. When you think of financial statements and investors, the sky’s the limit with a foundation of trust.
They Are Consistent and Comparable
Sure, most accountants love rules. But GAAP wasn’t created simply to have more rules. The ‘P’ in GAAP stands for principles, and two key principles of GAAP are to make financial statements consistent and comparable by using the ‘accrual’ basis of accounting rather than the cash basis.
In our experience, accruals can be one of the most intimidating GAAP concepts to grasp. It’s no small feat to master the art of understanding accruals but once you do, you are in for a treat. Trust us.
Accrual financial statements enable you to gain clear insight into what is driving your profit or loss because income is recognized when it is earned and expenses are recognized when they are incurred, regardless of when cash is received or paid. This makes your financial results comparable on an ‘apples-to-apples’ basis from one accounting period to the next.
They Aid in Decision Making
Not sure whether you’re ready to add new product offerings? What about expanding with that new equipment you’ve been eyeing? How did your business really perform this holiday season?
Analyzing your income, balance sheet, and cash flow can help answer all of these questions. Knowledge is power – and knowledge is gained by having information. The information provided by these reports will allow you to have reliable data to support your decisions. And reliable data a happy investor does make!
They Help You Catch Errors
As an entrepreneur, you’re likely highly attuned to your business. You know how much you’re selling, you’re involved in spending decisions on a daily basis, and you have a pretty good idea of what your sales and expense numbers are going to look like before they come out.
And when something seems off, taking a good look at your financials can uncover any errors that may have happened that month. Do your sales numbers look high? Or maybe travel expense seems a little low this month. Looking at these things on a monthly basis can give you time to look into possible errors and correct them before officially publishing the financials. This process can save you time and money in the future.
So the next time GAAP rears its head to spook you, call CFO Alliance. We’ve got the experience to make all your GAAP concerns run for the hills!