If your business is currently using the cash method of accounting, transitioning to GAAP accounting (or even just accrual accounting) may seem like a beast of a project. Not only will you have to call in a CPA to review your books, you’ll probably spend a lot time tracking down receipts and researching historical data to fill in the gaps.
On the surface, it looks like a ton of work for a small benefit, but there are numerous benefits that are not that obvious. Have a look at the list below and decide if moving to GAAP accounting will benefit your business in the short- or long-term.
GAAP accounting provides greater control over your business’s income. Can you imagine if all of your business decisions had to wait on customer payments to arrive? That’s how the cash accounting method works. But with accrual and GAAP accounting, transactions are recorded as they happen, not when payment arrives (as with the cash method).
With transactions recorded in real time, you can set up reports to see where payments are falling short. You now have the ability to choose invoice factoring or financing, or even sending payments to a collections agency. That’s visibility that cash accounting just can’t provide.
GAAP accounting lets you make plans for the future. What if you could look at patterns in your business on a year-over-year or month-over-month basis, and create projections for the future based on those patterns? Accrual and GAAP accounting both allow you to do just that, while cash falls short.
Let’s say you run a subscription service for monthly deliveries of assorted chocolates. Your customers pay for 12 months up front. With the cash method, the payment for 12 months of service is recorded once when it is collected. With accrual and GAAP accounting, the payment can be split over 12 months.
If you can split out all your customer payments that way, you’ll have a lot better idea of how your business is performing and whether you are ready to expand or invest in new areas, for example.
GAAP accounting checks the box for potential investors and banks. If you’re looking to secure a loan or grow your business, GAAP accounting is a must-have. Investors need to know that all potential investments are measured on the same standards, and they’ll want to see things like costs accrued to get the total picture of your business.
They’re also intimately familiar with GAAP, as it is required for public companies and private companies that reach specific financial threshholds. This makes it much easier for them to quickly and easily evaluate a company that uses GAAP accounting. Banks are actually a bit more stringent, and will ask you to come back when you’ve hired a CPA and switched to GAAP accounting.
There are definitely benefits of cash accounting: it’s simple, and it can defer taxes due to slower revenue recognition. However, GAAP accounting is worth considering for any business that wants to control its destiny, make big plans, and even get some extra funding.