Do I Need to Follow GAAP Rules for My Small Business?
Reliable and transparent bookkeeping and accounting practices are crucial for any size of business. But for small business owners trying to do it alone, all of the terminologies can be confusing. And in doing research, they often wonder if GAAP rules apply to them.
If that last sentence just about sent you off the deep end of confusion, it might be time to chat. The team at Fisher Bookkeeping is here to help you keep your biz financial records in great shape. As a full-service firm with Profit First certification, we support you in keeping your finances healthy. Reach out today to connect.
What Are GAAP Practices?
The acronym GAAP in the accounting world refers to generally-accepted accounting principles. These are a set of best practices to guide businesses in how they account for their revenue, expenses, and profit.
As the phrase “generally-accepted” indicates, GAAP practices are not legally mandated by US law. Rather, they seek to bring uniformity to the way companies track and report their finances. These principles come from the Financial Accounting Standards Board (FASB).
The FASB is a non-profit organization, independent of any governmental agency. It seeks to set consistent, acceptable standards for businesses to follow in their accounting and reporting practices.
Typically, GAAP accounting principles apply to businesses who report their financials in the United States. The GAAP global counterpart is the International Financial Reporting Standards (IFRS). European Union companies, among others, generally adhere to these principles.
What Purpose Do GAAP Principles Serve?
Financial accounting statements for companies, big and small, provide essential data. But if businesses do not follow acceptable standards, there is a risk of misinformation or even fraud.
By implementing GAAP practices, the FASB seeks to make financial statements:
- Clear
- Consistent
- Complete
- Comparable
These goals are crucial in creating a transparent overview when it comes time for a company to seek funding from lenders or investors. By adhering to GAAP rules, business owners and boards demonstrate their trustworthiness. Businesses who do not follow GAAP accounting principles should raise a big red flag to potential investors.
Comparability is one of the key benefits of GAAP principles. This piece makes it straightforward for investors or lenders to compare one company’s financials with another’s. A business with all its ducks in a tidy row will have better success in securing needed cash.
Who Must Follow GAAP Rules?
Small business owners may wonder if they are required to follow GAAP accounting practices in their reporting. In most cases, they do not.
Publicly-traded companies have to adhere to GAAP principles, so most small businesses do not fall under this requirement. But even when these accounting practices are optional, there are several reasons a company should consider following them.
1. It’s Time to Expand and Grow
If you are ready to grow your business, you will probably be seeking additional credit, lending, or investors. And to do that, you will have to follow GAAP practices. Those who have the money will not want to invest or loan it if you don’t have GAAP in place.
When you want to grow or scale your company, it’s time to make sure you follow GAAP rules. If these aren’t already in place, it’s best to hire a professional to get everything set up correctly. This work will have you ready to seek out the funding you need to grow your business.
2. Avoid Fraud
The more employees you have at your company, the more risk there is of someone committing fraud. When GAAP principles are in place, it is more likely that you can spot and address inconsistencies or risky practices.
3. Gain a Clear Understanding of Your Financial Health
It is common for small business owners to fall into the habit of not examining their finances. They might do a cursory account balance check once in a while. But they don’t get intimate enough with the money details to be crystal clear on where they stand financially.
To really control your company’s dollars and cents, you have to use clear and consistent reporting. GAAP practices are ideal for this, and they prepare you to grow and thrive.
4. Identify Waste and Areas to Streamline
Just because you’re able to pay all of your bills doesn’t mean there isn’t room for improvement. Nailing down all the nitty-gritty specifics of your finances with GAAP practices will allow you to identify unnecessary or outdated expenditures.
Most business owners are shocked to see how much wasted money is leaving their pockets each month. But as with anything, out of sight is out of mind. So it’s critical to have consistent and precise data on your company’s financials.
Some of the big areas that account for unnecessary spending include:
- Unused memberships
- “Free” trials that expired and switched to paid
- Products that auto-renew that you no longer need
- Subscriptions that you no longer use
5. Gauge Your Pricing
If you’re not clear about your expenses and where your money is going, you can’t accurately price your services or products. With GAAP practices in place for your business, you clearly understand what your offerings actually cost.
Armed with this knowledge, you are in a better position to set a sustainable pricing structure. By homing in on the details of your expenditures, you will know what you need to charge.
Are There Reasons to Avoid GAAP Practices in a Small Business?
If you are just starting your company, and you know you want to grow, then it’s a smart idea to adhere to GAAP rules right off the bat. It will set you up for a much smoother transition as you scale your business.
For companies that didn’t start with GAAP, it may be expensive to set it up now. It can be very time-consuming to bring an established business in alignment with these standards. If you don’t plan to grow the business, there probably isn’t a need to go through this process.
However, if you are considering reaching out to investors or lenders for more cash, then you need to get these accounting protocols in place. It will be worth the investment of time and money to get this piece of your financials ready to shine.
Let’s Get Started
No matter what sort of accounting practices you have in place for your company, Fisher Bookkeeping can help. Whether you are just setting up shop or have been in business for years, transparent and orderly bookkeeping is crucial.
We work on a national scale from our offices in Portland, OR, and outside Lexington, KY. Our firm offers a comprehensive suite of services that give you a complete view of your financials so that you can continue to blossom. Connect with one of our experts to learn how we can serve you.
About the Author Barb Fisher
Barb is the CEO of Fisher Bookkeeping, an outsourced bookkeeping consultancy that provides small businesses with a full-service financial department. Her favorite aspect of work is to break down the accounting to meaningful bits, so entrepreneurs can make a powerful difference in their own business. She's also a power lifter (squat: 215, DL: 270).
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