Software startups can be very stressful. They often involve months of late nights, cash flow concerns, making payroll, finding a customer, finishing a product, and lots of coffee. Managers frequently focus their attention on whatever fire needs to be put out first. To address all of these important concerns, early stage startups often take short cuts or comprise on what they consider less important areas. For example, most startup founders are grateful when a sale occurs and so do not pay attention to how that sales is recorded in the accounting books. Although this may seem like an unimportant area, improper accounting will be a problem for future growth. No matter what stage a startup is at, it is never too early to start thinking about GAAP revenue recognition compliance. Below, we present three reasons why startups should consider GAAP compliance:
At startups, limited time means tradeoffs between risk and rewards
Begin with the End in Mind
Unless you are working on a lifestyle business, most software startups should develop an exit strategy. That strategy will eventually include one of two option; either the company will go public or it will be sold. Under either option, a startup is much more attractive to investors if it can show that it is at least GAAP revenue recognition compliant.
The reasons that GAAP compliance is important to investors are twofold. First, GAAP compliance aids in the valuation of the company. If the accounting books are properly kept, then a valuation can be determined based off the numbers. Second, GAAP compliance shows that the company is organized and disciplined. Creating GAAP compliant financial statements requires diligent effort. Investors believe the effort that is put into keeping proper accounting books is a sign of good management.
Founders planning an exit need to consider GAAP revenue recognition compliance
For startups founders that want to eventually exit the business, GAAP compliance is essential.
The Language of Business
Financial statements are used in everything from vendor negotiations to obtaining business credit. Properly prepared and tracked financial statements can mean better vendor terms and lower interest rates on bank loans. To communicate properly with customers, vendors, and investors, startup founders need to learn to speak the proper language of business – GAAP compliant financial statements.
Financial Statements are used to communication company information to each group or tribe.
Data based information to grow the Business
With all of the talk about big data, most startups have learned that it is important to track everything. This includes conversations with customers, order history, and the time a customer spends on a particular webpage. Although it is important to track as much information about the customer as possible, it is more important to properly track financial transactions. Properly prepared financial statements will provide managers with the data they need to grow their business. Good financial statements will reveal information about inventory turns, pricing strategies, the effectiveness of labor, and revenue.
If startups want to grow and expand beyond their present state, they need to ensure they are in compliance, particularly GAAP revenue recognition compliance. At Bi101, we know the challenges and difficulties of GAAP compliance. In the next 5 posts, we are going to cover the progression of accounting within a startup. During these posts we will discuss what startups do right and what they could do better. Contact us if you want to know more.
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