To GAAP or Not to GAAP

As always, thank you for subscribing to Intro to Finance. I'm Jason, and this week we’ll be talking about finance's less popular sidekick — Accounting. 

"How do I make sure that my numbers are telling my story well enough?"

One of our core beliefs is that businesses should access funding based on numbers instead of the narratives. Meaning, if you have a great company, accessing funding shouldn't depend on which school you went to or your ability to create a captivating PowerPoint presentation. Instead, your business should attract financiers based on the business performance that shines through in your numbers.

To make this work, you need interested financiers and accurate numbers to tell your story. We can help you find the financiers by using INTRO, but you will need to make sure you have the numbers ready.

My experience working in public accounting tells me that accounting isn't the most exciting topic of conversation. So, we will keep it light and highlight some of the things you should keep in mind for your company's accounting as you look for financing.

Don’t Try to Be Fancy

Accounting rules are prescriptive, and most businesses have fairly straightforward accounting. It will be best if you don’t try to do too much in your accounting. Your goal should be to have consistent and detailed numbers that can eliminate questions rather than create them. 

There are no accounting tricks to make your business performance look better. Financiers would rather see cleanly presented and accurate numbers. If you find yourself needing to explain how you are accounting for certain things, you probably need to simplify.

To GAAP or Not To GAAP

Founders are often concerned that a financier will not be interested in working with them because their company financials don’t follow GAAP. If you don’t know what GAAP is...

GAAP stands for Generally Accepted Accounting Principles and is simply a set of rules to follow in accounting. It is a standardized way of communicating your numbers to others. The larger the company, the more that others will expect you to follow this. 

However, if you are less than a few million dollars in annual revenue, it is not surprising if you are not doing GAAP yet, especially if a founder is still doing the books. No one expects you to become a CPA while building your business. 

To avoid confusion, you may want to let the financier know upfront that you aren't doing GAAP accounting yet. Informing them will help accelerate your conversations. You can avoid all of the questions that may come up about the differences between the two. But not following GAAP is not a deal-breaker.

Getting Outside Help

At the very beginning of the company, you may not be able to afford, or even need, help to do the bookkeeping. But, there will come a point where the time and effort needed to regularly maintain your financials on your own will be more than you bargained for.

Unless you are doing something financially complicated, your first finance hire should not be a CFO. Until your operations demand too much of your time to lead the fundraising processes, you should bring on a junior finance/accounting person or engage a consultant or accounting firm to provide bookkeeping services. 

If you decide to use a consultant or accounting firm to do your finances, here are a few things to watch out for:

• You won't have time to teach them your business. Make sure they are already familiar with your industry and serve similar clients. 

• Come prepared with a desired length of time that you expect them to support you and make sure they have the staffing to meet the expectations.

• Make sure the firm/consultant can independently set up financial processes and systems without taking up too much of your time. 

• It’s critical that you have an excellent rapport with them and can communicate about any issues that might arise. 

Note that this does not include outsourcing the fundraising process or financing conversations. You won't need this because you are already becoming a finance ninja by reading ItF, but more importantly, financiers don't want to be talking with your outsourced CFO. They want to speak to you. Outsourcing the financier relationship can leave you vulnerable if your company hits hard times or you stop working with the outside firm.

If you want a head start, check out our accounting partners on our resource page. Once you have your numbers ready, we’ll have the financing waiting for you at INTRO.

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