Question

What is GAAP, and what is the purpose of GAAP?

How do you think a potential creditor would view a startup company's financial statements? What would the creditor be looking for?

How do you think a potential investor would view a startup company's financial statements? What would the investor be looking for?

Answer 1

What is GAAP, and what is the purpose of GAAP : GAAP stand for generally accepted accounting principles which contain accounting rules and regulation to be followed while preparing financials of the firm. There is no standard GAAP across the world and it varies based on country to country. In USA SEC require all companies to comply with US GAAP while in UK this is called IFRS. Substance of any accounting principle will remain same. Purpose of GAAP is to have mandate to all business to present financial statement/ disclosure etc. using one set of accounting rules or guidelines so that it will have comparability, consistency and relevancy of financial information. GAAP along with country’s regulatory framework will also reduce to large extent financial crime.

How do you think a potential creditor would view a startup company's financial statements? What would the creditor be looking for : Startup refer to a firm which has just started or about to start is business. Since firm has just started or about to start and there may not be availability of financials and past trend to evaluate performance of the organization. For startup current financial may not matter much rather projected growth and time required form start up to have its project/service ready to delivery, background of the promoter/ management, current funding if any by promotor, working capital requirement and plan to meet those requirement etc. will matter. Creditor will be more interested in business growth plan, market demand of the product or services. In case if financials are available creditor will be interested in liquidity position of the firm, Cash flow, Cash collection cycle etc. - to know whether firm can make payment of debt on time. Cash collection cycle.

How do you think a potential investor would view a startup company's financial statements? What would the investor be looking for : Investment in startup is more risky for investor as probability of nonsuccess is considered as low. However, startup provide super normal growth in case of success. As no much financials are available for the startup investor would be interested not only in financials but also in sales growth plan, profit growth, future expansion plan, management background, current funding for the startup, demand of the product/services.