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| Monday, February 16, 2009 |
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Numbers matter now, perhaps mor than ever
By Eric Koefoot @ 9:33 PM :: 1352 Views ::
0 Comments :: Eric Koefoot Blog, Start Up World
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Zzzzzzzz. That sound you hear is the audience when people start to talk about the accounting numbers and financial reports from companies. And I suppose that for most people, it is understandable.
But not to the entrepreneur. The accounting of your business and what it represents not only measures the success of your current venture, but it often will be the foundation of the scorecard when it comes to cashing out.
As a former CFO of a division of a publicly traded company, I can tell you that there are quality books and sloppy books, with very little in-between. While most accountants will tell you that accounting rules often leave some room for interpretation, a good auditor will clarify that "there are interpretations and then there are interpretations." Take the latter path and not only will that put you in potential hot water with banks, investors, and even buyers. Go too far, and the IRS will have some words with you. Go way to far and Bubba in Cell Block A will have more than words to share with you.
Okay, enough of the scare tactics. How does an entrepreneur keep clean, manage the books and minimize the risk of problems? Note that I say minimize, because unless you have a huge pile of cash to spend, you will need to make choices on who does the work, how much is audited, and how much is outsourced to professionals in your accounting. And if you have critical mass as a company (read: revenues, profits), you will still need to decide how many resources should you apply to accounting and financial reporting.
So here are ten Must Do rules for accounting and reporting that should serve as a guideline for any entrepreneur. Clearly, as you grow, it takes more resources to keep to the list. But the concepts still hold true:
1. Keep receipts -
A napkin is not a receipt, nor is a business card or a menu. If you forget to get one, call for a replacement. Or at least pull up a credit card statement and print it out.
2. Don't mix unlike things -
Travel is travel. Travel meals are travel (per IRS rules). But entertainment meals are not travel. Don't play games and mix them up. And don't mix personal expenses like a haircut in with business expenses. Software and services are not to be mixed. The list goes on and on. If an auditor or buyer finds one issue, they will assume there are many more.
3. Match expenses and revenues -
This is a major accounting rule. Far too many companies pull ahead revenues and push back the corresponding expenses. Can't do that -- just ask Microstrategy about 8 years ago.
4. Separate responsibilities -
Never let the same person write checks, sign checks, and reconcile the bank statement. Never let the approver also make payments. As soon as you have a second employee, you can begin to separate these check-and-balance roles, so do it.
5. Worry about cash handling - a lot -
Cash is so fluid, liquid and tempting. So are live, postal-delivered checks. And vouchers and other negotiable items are as good (or bad) as cash. Do everything possible to have a very robust cash management and tracking process in your company.
6. Book conservatively -
Write off computers over 5 years instead of 3. Amortize software development expenses and the related staff. The list goes on and on. This is a good place for professional accounting advice.
7. Follow the accounting rules -
Yes, they are often guidelines and not rules. But the more you adhere to the center, the better off you are. And although you may be a founder/CEO, you should at least begin to have a solid understanding of the rules of the accounting and financial reporting world.
8. Document your decisions -
One of the best Controllers I have ever hired was meticulous about writing down the reason for any decision that we made on booking, recognition, writeoffs, etc. In any case where the rules left room for interpretation, we would do a step-by-step writeup of why we chose a particular path, including notes about any outside counsel we obtained. The IRS is much more forgiving on penalties and prosecution if it sees clear evidence of a company trying to be good, responsible taxpayers. Ditto for your auditors.
9. Always assist the IRS -
I never understand why individuals and companies try to play tough with the IRS. Maybe it's only the ones that have something to hide. So if you play tough, what is the IRS thinking? My rule is that if any authority (IRS, auditors, etc.) has questions, both my team and I will go out of our way to help them out. If they find a problem, I would rather find out sooner than later -- and under friendly circumstances.
10. Never hide anything -
If you hide something, it will eventually come to light, and then your reputation is shot. Employees, investors, and buyers will all talk, so you can kiss off that big exit and perhaps even your next round of funding. Honesty is the cornerstone of business, even today in 2009, so if you want a strong foundation, build it on the bedrock of trust.
Okay, so that's my list of 10. Live it and love it. But I am sure I missed something here, so feel free to add a few more that you can come up with...
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