Much like today’s shoppers, investors are keen on using as much information as possible to make well-researched decision with their money. They look for verifiable information that accurately shows your company’s financial state and speaks their language. The majority of experienced investors look to GAAP to get this.
Many small businesses aren’t doing this, and it’s becoming a problem. In a recent article in the Wall Street Journal, Mary Jo White, chair of the Securities and Exchange Commission, warned that when companies use non-GAAP numbers, they confuse investors and strain audit committee resources.
She addressed the American Institute of CPAs (AICPA), saying “Non-GAAP measures are used extensively and in some instances may be a source of confusion.”
GAAP accounting in a nutshell
If you’re unfamiliar with GAAP, think of it as the Magna Carta of all business accounting in the United States. This standardized accounting method is used by financial professionals, third-party auditors, and investors who are looking to peek into your company’s internal financial controls.
If your company is adopting GAAP accounting, it’s a good indication that you’re moving toward big things–securing potential investors, raising funding. I recently wrote about how GAAP accounting can help with getting series A funding. While these milestones warrant giving your accounting some extra love and attention with GAAP, some business owners aren’t ready to let go of certain liberties.
Why business owners deviate from GAAP
In addition to writing about GAAP’s redeeming qualities, I’ve also written about how businesses are like snowflakes, each one different and unique from the next. And therein lies the obstacle. Most business owners adopting GAAP accounting are more concerned with portraying pieces of their company’s financial state in a “better” way, rather than sticking to the strict guidelines.
An example of this could be including some extraneous items in your EBITDA (earnings before interest taxes depreciation & amortization) margin because they are specific to your industry.
I’m going to stop you right there with some brutal honesty. If you are going into an investment round with this attitude, you’re thinking too much about yourself and not enough about your potential investors.
When going against GAAP's standards can be counterproductive to your goals:
While you may have the best intentions for presenting non-GAAP records–you want to give outsiders the best impression of your business–you’re running the risk of falling on deaf ears. As Ms. White stressed, presenting non-GAAP numbers can be misleading and confusing to your investors.
Ms. White also stressed that this can be even more problematic in the case of a GAAP audit (which some investors require). “We must all insure audit committees have the tools to perform their very important function, I know firsthand how much work and responsibility the job requires.”
This is because the team who performs GAAP audits is composed of 19 designated CPAs designated by the AICPA, who only have so much time that must be spent as efficiently as possible–not weeding through anything out of the ordinary.
When putting together your numbers for investors, do not include any non-GAAP figures without consulting with an accountant or CPA who has experience with investment procedures, series A fundraising, and your industry. Ultimately, they will know best when it comes to what will position your company in the most flattering way.
“Consider questions such as why are you using the non-GAAP measures and how does it provide investors useful information,” Ms. White advised.
Learn more about how GAAP accounting impacts your business:
Got more questions about implementing GAAP with your business? Read our free guide What GAAP Accounting Means to Business Owners to learn more about GAAP’s guidelines, best practices, and what the tax implications might be or download our checklist for getting GAAP-ready to see what switching to GAAP actually looks like.