The generally accepted accounting principles (GAAP) are recommended for privately owned companies, but not required. Created in the 1970s, these principles are in place to allow outside investors of big companies to analyze and compare corporate books in order to merge, sell, or acquire one another. Unless a small-to-midsized business (SMB) has big dreams of going public, GAAP compliance is costly and time consuming.
In 2013, the American Institute of Certified Public Accountants created a new financial reporting framework (FRF) for SMBs to use in order to eliminate the headaches and complexity found in GAAP. These are not authoritative rules. Financial institutions are able to pick and choose how they want SMBs to present their financial reports. The framework is based upon simplifying the necessary information for SMBs to raise capital through banks and investors.
Here are 3 small business accounting tips about the FRF that may help you realize some costs savings and start you on a road toward expanding your business.
1. Comparability
The financial report you create can be used internally, or externally with a bank or investor. Comparability means being consistent in reporting, so the comparison is apples to apples and not apples to cars.
For internal purposes, comparability allows you to examine financial and operational data over a period of time. You can compare year-over-year data. This also allow you to easily forecast your next quarter or year.
Following the FRF allows external investors to compare your books with other companies in their portfolio. Having consistent accounting polices is important because of possible misconceptions and irregularities that arise from changes to how you report your financials. If a bank examines non-FRF financials, they would spend more time questioning and interpreting the data, instead of comparing it. Questions and inconsistencies are a huge turn off for investors.
2. Historical Costs
Current market value is a GAAP requirement. It’s hard enough for retailers with large inventories to keep up with the rising costs of products to fill their shelves, let alone project the current market value of them.
Luckily, with the proper point of sale software in place, retailers can quickly analyze and report upon the historical costs of their inventory. The numbers reported can be easily transferred into a financial report, therefore minimizing time spent investigating pricing. This is especially important when items are discontinued or are on backorder.
3. Statement of Cash Flows
A statement of cash flows is an integral part of a complete set of financial statements. It’s great way to understand your business through cash and cash equivalents on your books. Cash flow reflects how a company is able to pay the bills over a shorter period of time.
Again, looking at historical data, a robust point of sale software with an accounting function can report the cash received on sales. The amount of data to generate this statement is extensive, so we suggest using an automated system if you do not have on in place already.
The obvious importance of a cash statement is for you or your investors to see the viability and health of your company at that moment in time. Investors can see how you use cash to cover expenses, regardless of the type of business you own. If you need cash to cover your expenses or a large order, then having this report is essential for a lender to understand your need.
Why FRF Makes Sense
Small businesses do not have the resources to pull together extensive financial information. Most small businesses have a difficult time creating and updating their business plans, which are similar in function, yet differ from financial reporting. The FRF gives SMBs a reasonable course of financial reporting, leveling the playing field, while understanding that most small businesses are not concerned with becoming major, publicly held entities.