Opinion: Consider GAAP Financial Statements

By Chris Davis

Senior Vice President

BancorpSouth Equipment Finance

This Opinion piece appears in the June 29 print edition of Transport Topics. Click here to subscribe today.

Finding quality financing for trucks and trailers recently has become more difficult for many trucking companies. The market has changed. Since last autumn, several transportation lenders have exited the business either permanently or temporarily, in large part because of losses and a lack of liquidity. 

Not all the news is bad, though. There are still lenders actively financing trucks and trailers. However, because of the downturn and the uncertainty it creates, many active lenders are increasing the requirements for approvals by asking more questions and requesting more detailed financial statements. These lenders, whether captive, bank-based or broker, want to lend, but most now need better information and more certainty to make credit decisions.

So how can well-managed trucking companies provide that certainty and get the best financing possible? Financial statements may be the key. A real solution to consider is upgrading to GAAP-based financial statements with notes. Specifically, those methods of reporting are a compiled statement with notes, a review or an audit. 

As many know, GAAP stands for generally accepted accounting principles. Online stock and financial dictionary Investopedia defines it as: “The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information.”

Fleets already reporting on a GAAP basis are ahead of the game. A common misperception is that GAAP statements are only for larger fleets — those with annual revenue generally exceeding $70 million. It’s true that many larger fleets do report using GAAP-based statements, but smaller fleets, even those with revenues around $10 million, can benefit and should consider an upgrade.

Reality, though, is that a large number of fleets in the $10 million to $70 million range report their year-ends on tax returns, in-house statements or non-GAAP compiled statements.

Why upgrade to GAAP? In short, because GAAP statements provide the full disclosure and standards preferred by many lenders for credit decisions — especially large transactions. They more accurately report a company’s true financial picture, net income, cash flow and nature of operations. Tax returns, in-house statements, or non-GAAP compiled statements just aren’t as thorough as GAAP.

Without the standards provided by GAAP statements, a company with real financial strength can appear weak. For a credit decision, this image leads a lender to make assumptions.

Other benefits to GAAP statements include:

n Balance sheet and income statement — A GAAP balance sheet generally reports a more accurate and higher asset total and net worth than tax returns. Furthermore, the income statement reports net income calculated using book depreciation.

• Cash flow statement — Transportation is a capital-intensive business. Often, the largest asset on a fleet’s balance sheet is equipment. It takes a lot of money to get goods from Point A to Point B. Cash flow always has been important in trucking. It’s even more important now. GAAP-based statements provide a more accurate account of how a company will meet its daily, current portion and long-term obligations.

• Retained earnings statement — GAAP statements chronologically detail a company’s cumulative earnings and whether those earnings have been retained, distributed to shareholders or used to buy out shareholders.

• Notes — Notes on a GAAP basis complete the story of the company’s financial performance by detailing the operation through numbers and text. Notes are an important part of a financial statement, describing everything from the nature of operations to customer concentrations to a complete debt picture, including off-balance-sheet leases. Notes can help answer questions resulting from a review of the numbers.

• The company’s performance and positives — Altogether, GAAP-based statements best present a well-run operation. Statements that effectively communicate strong management and results can be the difference between an approval and a turndown.

Common concerns and factors to consider include:

• Taxes — A common concern and objection to GAAP statements has been that reporting true net income on a book basis may result in higher taxes. This objection may be based more on myth than reality. Tax returns are important and have their purpose. GAAP statements are just as important — with a very different purpose. To weigh the options, consult a CPA or tax professional.

• Cost — Generally, GAAP-based statements do cost more, but switching to GAAP doesn’t necessarily mean an audit or review. For smaller companies, upgrading to a compiled statement with notes is a good start. With growth, a review or audit may become necessary later on. Because of their size and complexity, companies with annual revenue of more than $35 million may want to consider at least a review.

Over the years as a fleet owner, you’ve helped your employees, your community and your country. This small improvement to GAAP-based financial statements may yield lasting benefits that can help your company.

For more than 30 years, BancorpSouth Equipment Finance, Hattiesburg, Miss., has served a wide variety of industries in the mid-South, including transportation, construction, petroleum, manufacturing and municipalities.