When you are aware of the various accounting methods, it becomes clear that deciding on the basis of accounting you will use in your business is important for compliance.
Choosing an accounting method based on FASB’s Generally Accepted Accounting Principles has both positive and negative implications.
Let’s weigh the options…
Pro: Comparable financial statements
Comparability of financial statements is one of the main reasons business owners choose GAAP-compliant financial statements.
First, GAAP-compliant financial statements allow for reliable evaluation and comparison of business performance over time because financial statements are prepared and records are maintained within a well-established, written framework of accounting and financial reporting rules and policies.
When your financial statements are maintained consistently month to month or year to year, you can accurately evaluate the growth and performance of your business.
In addition, comparable financial statements are also attractive to investors and creditors, who can read and understand your company’s financial statements at a glance, giving them an immediate, transparent understanding of your company’s financial health.
Financial statements prepared in accordance with GAAP can be easily compared to GAAP-compliant financial statements of other companies. This makes it easier to compare your company’s performance with that of your competitors and that of your industry as a whole. GAAP-compliant financial statements allow you to compare your company to others in the industry. Visit also: Chartered Accountants in UK, for more details.
Maybe you’re looking for private investors or bank loans. Or maybe your company is not yet publicly traded, but you’re on your way there.
Either way, if your business is going to expand in the future, a history of GAAP-compliant financial statements will ensure that you’re always prepared for growth – whether it’s through an IPO, seeking private investors, or taking out bank loans.
If you plan to go public in the future, you are required by law to prepare GAAP-compliant financial statements. If you want to position your company competitively with private investors and lenders, you have the best chance if you can present them with GAAP-compliant financial statements that are easy to understand and compare.
Cons: Cost of GAAP-compliant financial statements.
Implementing GAAP-compliant accounting and financial statements can come at a significant cost – especially for small businesses.
If you choose to use GAAP standards in your business from the beginning, the cost is minimal (or at least comparable) to what you would spend to start using another accounting method.
If you decide to adopt GAAP financial accounting at a later date, you will incur additional costs to modify your existing accounting and financial reporting systems, implement new systems, and update your financial reports as you move forward.
Additionally, there are costs associated with re-evaluating past financial records to ensure that your current financial statements are accurate and GAAP compliant.
Cons: Making business decisions with GAAP financial reports.
GAAP-compliant financial statements are beneficial to people outside your company (potential investors and bank lenders) who need to make decisions based on your company’s financials.
However, they are not always as transparent to people inside a company who are trying to set internal goals, develop business strategies, and make data-driven decisions to steer the company in the right direction.
GAAP-based financial statements, for example, use broad brush strokes and tend to create a financial picture of an entire company without allowing executives to view their business at a more detailed level. So while GAAP financial statements allow you to see your company’s overall profitability, they don’t necessarily help you compare gross profit margins by the unit to determine which jobs, customers, or employees were most responsible for your profitability.
After weighing the pros and cons of GAAP analysis, you may find that a dual-method accounting system designed for GAAP compliance and management insight offers the greatest value to your business.
For a business to be successful, managers need both financial and management reports. If you don’t get management reporting every month, you could be missing out on information that will help your business grow or keep you from implementing costly programs that don’t deliver ROI.
Financial accounting vs. management reporting: can your company afford to use both?
Small businesses that manage their back-office entirely with their own people and processes probably cannot afford to maintain both a financial accounting system and a management accounting system. This means that a company must keep two sets of books.
However, with the right tools and back-office strategy, small businesses can accomplish both – especially if they choose to take advantage of outsourced accounting services. With outsourced accounting, small businesses can rely on a team of accounting professionals to help them set up an efficient internal accounting system that automates the processes of expense categorization, financial reporting, and financial statement preparation.
With an intelligent, well-designed back office, even small businesses can take advantage of the business insights available with management accounting while arming themselves with GAAP-compliant financial statements for investors and public trading.