More and more the answer wea to how one accounts for transactions fall to "GAAP says..." 1. Does GAAP fit every company amd every industry? 2. Is it truly one size fits all? 3. Can today's more sophisticated
Does GAAP fit all; or are multiple books no longer in vogue ?
Answers
Wayne,
While GAAP is a must for financial reporting purposes, for
1
And that is the crux of the question. Do we, when we (initialize, inherit) a system find that it is made with financial reporting in mind over managerial reporting; and if such, is Management and the Company at a disadvantage for said adherence?
Management reporting is really critical for finance, especially if the financial team wants to be more than just recorders of financial history. For financial information to be strategic, it needs to move beyond being accurate reporting of history to yielding insights that help you manage your organization going forward. Budgets are useful, of course, but they’re also too removed from the kind of actionable management reporting that’s needed to steer your company’s strategic direction.
Understanding the key financial drivers of your business and how they are performing is critical for most organizations. I wouldn’t call this maintaining multiple sets of books (like cash basis vs. accrual basis, or different fixed asset books) – I’d call it different data driven insights from the same data set.
Many of my company’s customers today have subscription based revenue as well as project based revenue. Most are on a path where their subscription based revenue will scale over time, and will be the primary driver of our business. Project based revenue is “lumpier” - or less predictable – than subscription-based revenue, although it is still important overall, but their subscription business is what is currently driving their companies forward.
One of the key management reports that many of our customers rely on segments revenue to multiple sections on a report. The top line revenue is only subscription revenue, which is compared to fixed cost. Basically, this looks at: how are we doing on driving our business profitably based on our long term revenue plan? Project revenue and project related expense comes below the net of subscription revenue to fixed cost. This is not a GAAP statement by any means. On the other hand, fixed expenses and subscription revenue are solid indicators of the company’s direction, while project revenue and related expenses are not. All of the above is before drilling deeper into the subscription revenue nature and product line margins.
Other industries would have different examples. Ideally the data from one ERP / business software solution is keeping all of the required information to drive both your GAAP reporting and your management reporting. Understanding what drives your business and its decision-making power and turning that into standardized management reporting is, in my mind, what makes a financial person strategic for day-to-day
Bob Scarborough
Filed Under:
Accounting