Financial Statements Are the Keys To Unlocking Access to Capital

Does your business need funds to bridge seasonal cash flow gaps or pursue growth opportunities? If so, you’ll need reliable, timely financial records to persuade lenders or investors that your business is worth the risk. They’ll probably want to see more than just tax returns and general ledgers. Providing comprehensive financial statements that comply with U.S. Generally Accepted Accounting Principles (GAAP) can help expand your access to capital and potentially improve financing terms.

Why Does GAAP Matter?

Financial statements are a must-have for any organization seeking external financing. GAAP is the most common financial reporting standard in the United States. This framework generally uses accrual-basis accounting that matches revenue earned with expenses incurred during the reporting period. It’s also based on the principle of conservatism. Although this principle doesn’t guarantee accurate financial statements, it generally aims to prevent businesses from overstating profits and asset values to mislead investors and lenders.

Comprehensive GAAP financials include three key reports:

1. The balance sheet, which lists all your assets and liabilities on the financial reporting date, typically based on historical cost,
2. The income statement, which provides insight into revenue, expenses and profit (or loss) during the accounting period,
3. The statement of cash flows, which details sources and uses of cash from operating, investing and financing activities.

Together, this information helps company insiders make better-informed business decisions. Lenders and investors also monitor the financial condition of businesses in their portfolios on an ongoing basis. They’re particularly focused on industry sectors that are susceptible to market fluctuations, such as real estate, construction, restaurants and retail. Business owners should be prepared to respond to changes in their stakeholders’ reporting requirements in periods of economic volatility.

The Securities and Exchange Commission requires public companies to follow GAAP. However, closely held businesses can use other financial reporting frameworks. Examples include cash-basis and tax-basis reporting. These simplified frameworks may suffice for startups without external lenders or investors. But you may need to “graduate” to GAAP as your business evolves. Most external stakeholders prefer GAAP because it’s familiar and consistent, and failure to accommodate those preferences could put you at a disadvantage when seeking external sources of capital.

How Much Assurance Is Needed?

You can prepare your own financial statements using your in-house bookkeeping software. However, it’s common for lenders and investors to request reports prepared by outside accounting firms. CPAs offer the following types of historical financial statements under GAAP:

Compiled statements. These provide no assurance that the statements are free from material misstatement or that they conform to GAAP (or another reporting framework).

Reviewed statements. These provide limited assurance that the financial statements are free from material misstatement and that they conform to GAAP. Here, inquiry and analytical procedures may be performed to identify potential adjustments for material errors or misstatements.

Audited statements. These provide reasonable assurance that the statements are free from material misstatement and conform to GAAP. Auditors conduct more in-depth procedures, such as testing, confirmations and asset observations. Many see audits as the “gold standard” in financial reporting.

In some cases, compiled financial statements — the option that provides the lowest level of assurance — might suffice. But when a stakeholder decides to manage risk more closely, it could require reviewed or audited statements. As the level of assurance increases, so too can the cost and lead time associated with preparing them.

In addition to the types of statements lenders and investors may request, the frequency of statement production may also change. For example, they may request interim statements (typically quarterly or mid-year) that summarize a reporting period of less than a full financial year.

Putting Your Financials To Work for You

Before you apply for a loan or seek outside investors, consider how third parties will perceive your financial records. Are you putting your best foot forward? GAAP financial statements allow you to showcase your business’s historical results and demonstrate your management team’s commitment to monitoring financial performance. Lenders focus primarily on your ability to repay debt, while equity investors want insight into your business’s growth prospects to help assess the potential return on their investment.

Kirsch CPA Group will work with your bank or investors to provide guidance on the right reporting framework, level of assurance, and reporting frequency for your situation.