Financial reporting for emerging companies can be an expensive proposition.
Small companies are finding themselves burdened with extensive financial reporting requirements as banks, venture capitalists and government regulatory agencies like the Securities and Exchange Commission increasingly impose accounting requirements for the many unique transactions encountered by start-up companies.
Yet, for a variety of reasons, many emerging companies aren’t inclined to employ a full-time chief financial officer or controller, even though the reporting and financial control requirements can become quite overwhelming for the companies’ bookkeepers.
This is especially true for those companies seeking an eventual public offering or those with complex accounting requirements, such as technology companies, small manufacturers and the growing number of micro-cap public companies. For many of these companies, a contract or per-diem chief financial officer may be the answer.
Reasons why companies do not invest in qualified financial managers range from the most common reason, financial constraints, to the fact that entrepreneurs often don’t want to lose control of their operations. However, the existence of an experienced and competent CFO may provide companies with what they need to meet reporting requirements, maintain control over their assets and provide investors with a level of comfort with management that may otherwise not have existed.
These benefits may be accomplished at a fraction of the cost of hiring a full-time professional or contracting with an outside accounting firm to process the company’s transactions and provide required financial information.
Complicating IPOs
Oftentimes, companies beginning the process of a public offering or entering into debt arrangements with a bank for the first time find themselves in the position of needing financial statements prepared in accordance with generally accepted accounting principles. After representing to the bank or underwriters certain facts about the performance of their companies, entrepreneurs may discover that they did not perform nearly as well as they had thought, or at least that results differed greatly from what was previously represented.
This can be a deal killer and can damage the credibility of the entrepreneur, even if the results of operations are not important to the financier.
In addition, restating and correcting the financial statements can be extremely expensive if a company’s auditors or accountants incur significant time in “cleaning up” the accounting records. Engaging a part-time professional can save significant company dollars in the financial reporting process and provide accurate information for the entrepreneur on an interim basis, thereby avoiding these nasty surprises.
Accounting requirements have become more complex, especially in the case of technology and emerging public companies where the evolution of new and innovative transactions has created an entirely new accounting doctrine. The expertise to understand this doctrine can be expensive.
Due to the impact of these transactions, understanding their effect on the company’s financial position can be invaluable prior to undertaking them. Part-time executives can provide a great resource for companies when contemplating a transaction, such as an acquisition, a complex barter arrangement, or issuing options or warrants for services and their rates are generally lower than those of other professionals.
Internal controls are required if a company is public and are generally an inexpensive way to provide security of company assets, and assist in the management of any company’s operations.
These controls take the form of budgets and forecasts, cash and credit collection systems, purchase order systems, and capital stock issuance systems, among others.
Most emerging companies are faced with the implementation of controls at some point in their evolution. However, most entrepreneurs do not have the time to design and implement these systems, nor do their staffs necessarily have the needed expertise.
Essential controls
In addition, the implementation and design are not all that is required for these systems to be effective. The company’s management must maintain and monitor the usefulness of the controls and continue to upgrade them to adapt to changing operating requirements.
Interim finance professionals provide an effective way to design, implement and monitor these controls and give the company access to much-needed expertise in identifying key areas to focus systems and process controls.
There are also disadvantages and risks to be considered when contracting with part-time professionals. If a company becomes very dependent on its contract professional, it can become quite expensive, primarily if fee arrangements are set up to bill on an hourly basis. However, one can negotiate fixed-fee arrangements for services performed or for given time periods in order to meet budget limitations. Many times, these professionals may even take options or stock grants as payment or partial payment when cash is tight.
Other problems can arise if the professional is not committed to the company, or may not be available to the company when needed. A company’s management should research any professional it is considering engaging and may want to seek the advice of its more traditional professionals, such as its CPAs or attorneys, to assist in engaging an interim CFO.
Jim Pitrat, is a manager at Singer Lewak Greenbaum & Goldstein LLP, a firm of certified public accountants and management consultants located in Westwood. He can reached at [email protected].
Entrepreneur’s Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1759 with feedback and topic suggestions.
