A startup can only fly so far on the wings of continual capital raises and a desire to be acquired. An over-reliance on big bets and rapid growth can land your startup in the GAAP Trap – when startups focus too heavily on acquiring investor capital and rapid growth instead of a more balanced approach that focuses on real Generally Accepted Accounting Principles (GAAP) profitability and shareholder return.Being bold in seeking capital and being fiscally smart are not mutually exclusive; truly savvy startups are focused on the cost of capital and take a measured approach to growth. The other 90% of startups that fail often do so because they are bloated on capital, yet unable to become significantly profitable.So many startups fail that there is an entire website called Failory that provides lessons learned and interviews from failed startup founders (the founders themselves also failed in their previous enterprise). They recently conducted a survey with failed startup founders, and below, you can see a visual representation of how many respondents cited a specific reason for the collapse of their startup:

Source: The Ultimate Startup Failure Rate Report [2020] | Failory

Notably high on this list are Bad Business Model, Mismanagement of Funds, and “Acquisition Flu.” The authors of this report also noted that companies that failed due to mismanagement of funds had a large number of investors and had passed several investment rounds.

While your impulse as a growing business may be to keep betting big, eventually, you’ll need an accountant or CFO on your team who will check your desires and provide sound financial advice. The earlier your startup invests in GAAP accounting and working with financial experts that have a strong track record of helping startups achieve profitability, the better.

Not only will this focus on GAAP compliance help you grow responsibly, but it will also put you in a better position to access lower-cost capital from banks and other lenders to self-fund your growth.

 

What Does it Mean to be GAAP Profitable?

GAAP standards were developed by the Financial Accounting Standards Board (FASB) to provide an accurate benchmark to weigh businesses against one another and prevent misleading reporting. GAAP compliance requires you to perform full accrual-based accounting rather than cash-based.

That being said, these standards are not mandatory. In Q3 2019, 67% of the companies in the Dow Jones Industrial Average (DJIA) reported non-GAAP earnings per share (EPS). Many companies omit irregular or non-cash expenses in their reporting to smooth out high-earning volatility due to temporary conditions. However, this also impacts the forecast of anticipated cash flow and can lead to a conflict of interest between company owners and shareholders.

For a business to comply with GAAP, it must include ALL EXPLICIT COSTS of doing business in their financial statements, including operating expenses, depreciation, interest, and taxes.

Other operating costs that must be accounted for include:

  • Employee and Contractor Wages
  • Inventory
  • Raw materials
  • Transportation
  • Sales and marketing
  • Production
  • Overhead


Are Pilot or Bench GAAP compliant?

It can be a pain to manage your finances without a dedicated bookkeeper or accountant, and it can distract from other strategic components of our business. Pilot and Bench are two of the top online bookkeeping and accountancy services that are marketing themselves actively to small companies and early-stage startups.That being said, these services do not provide the oversight that a dedicated accountant would. In fact, the Pilot terms of service reads:

“The Service (including any communications you may have with Pilot personnel in connection with the Service) is not a substitute for and does not include legal, tax, financial, real estate, healthcare or accounting advice, and Pilot is not a public accounting firm… only a certified public accountant can attest (e.g. as part of an audit) as to whether the results of the Service are compliant with GAAP, IFRS, or any other accounting standards or rules, and Pilot makes no representation or warranty with respect thereto.”

Once your business grows beyond the point where you just need a bookkeeping service to keep your finances in line, bringing in a startup accountant is a must.

 

When Should I Consider Onboarding an Accounting Firm?

It is always preferable to have an expert in your corner when you aren’t able to give your full attention to finances.

In terms of your growth cycle, you should look to bring in an accountant when your business model and revenue model are more complex and require more than merely classifying your credit card transactions and banking transactions.

Greenough Group’s startup accounting services are highly sought by both small businesses and rapid-growth tech startups alike. Their involvement in your business is scaleable to remain cost-effective, and their hourly commitment can grow alongside your business.

GCG is the preferred accounting services for startups firm of executive Tom Rowley, who has utilized GCG’s services in several of his ventures:  “I’ve brought GCG into my last four startups. Getting finance running smoothly, as quickly as possible, allows me to focus on building the business. Hiring GCG is one of the first things I do.”

Our reputation for accuracy, senior attention, and exceptional client service has made us one of the financial community’s most highly recommended back-office services firms. Contact us today for a free consultation and learn how we can help you focus on growing your business.