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When Do Small Companies Grow Up? By Steve Ernst, CPA  Earlier this year, SAP sponsored a Webcast on the new "Committee of Sponsoring Organizations (COSO) Report: Guidance for Smaller Companies as part of the American Institute of Certified Public Accountants (AICPAs) CFO series." Several SAP channel partners hosted events around the country inviting AICPA members to view the Webcast and to discuss their small-business concerns, as well as those of their small-business clients. I attended one of these events, and afterwards a few of the attending CPAs stayed to chat about the Webcast.
The new COSO report had been aimed at smaller public companies. Even though most of the companies represented at the event were private, they were still very interested in the COSO report’s guidelines and recommendations. They considered it part of the larger issue of implementing and utilizing best practices within their organizations. The discussion invariably came back to the question of when a company — as it grows and takes on a critical mass — should begin the process of implementing a best-practice philosophy in all its operations. You have got to be kidding, right? The companies and clientele involved in the informal, post-event discussion varied in size and industry. However, one factor seemed to be common to all — the lack of the scalable, consistently used business processes at the beginning of the business life cycle and the almost pervasive chaos of starting a business regardless of the business model being followed, the business plan in place, or the existence of adequate funding to launch the company. When I asked a couple of them if business processes and internal controls were even considered when drafting a business plan and making presentations to various funding sources, I received an almost exasperated "You have got to be kidding me, right?" I have been there, done that...trying to start a business. Even though I failed and they had not, I did remember the weeks and months of being spread too thin and never having enough time or money, but I never abandoned the goal. Were business processes and systems of internal controls on my mind? Not even close. One business owner said she had been interested in the COSO Webcast because, although the COSO report is more concerned about the controls surrounding financial reporting, it was part of the broader concept that small businesses will grow and be able to maintain a higher rate of successful growth if the precepts of good corporate governance — and business processes and internal controls — were applied throughout the operation. When and how? Two items were obvious from the discussion. Very few small, emerging businesses had given much thought beyond plan, funding, product, customer, infrastructure, federal and state legal and taxation matters, and some underlying technology. Those concerns were enough. There was precious little time for thinking about or actually implementing some initiatives — that were esoteric, theoretical, unrelated to cash flow, and CPA recommended — about corporate governance or establishing processes on which to build. For most of them, the future was the present. Each of them, in hindsight, wished they had paid more attention to the recommendations of outside advisors such as their CPA or their banker to focus on the future of the business as it grows, establishing goals, and the means to attain them. Hindsight is always 20/20. When can a small, rapidly expanding business take the time to build procedural infrastructure? When can a small, emerging business take the time to formalize what usually is a very informal advisory group made up of family, friends, investors, and other business associates? None of these efforts are easy, and all of them will cost in terms of time and money to put in place. Although cash is king for all businesses, it is even more so for a small company. Expending that hard-earned capital on what can be perceived to be the soft, non-revenue related efforts such as forming a board of advisors is viewed as a "good idea, understand the need, maybe later" item. No time like the present "When?" is often a tougher question than "how?" The new COSO report is another piece of a growing body of information, discussions, education and recommendations for small-business leadership. An increasing number of CPAs who advise small businesses are more capable of this business process and operational controls consulting than ever before. But the "when" is a one-off decision for each business. It is never too late, but — if you are a small-business owner meeting with that potential investor or potential acquirer — how do you want to answer a question about the structure and solidity of your corporate governance policy? How do you want to answer the question about the strength, resilience, and consistent usage of best-practice business processes? How do you want to answer an inquiry about the state of controls over your financial reporting that obviously means all the significant contributors to your financial statements throughout the operations of your company? How do you want to answer that inevitable comment or question about the ominous Sarbanes-Oxley Section 404 and your confidence level that you can comply and report affirmatively on that control structure? If you ask yourself those questions or ask your client those questions, you know the "when" is earlier than you had planned. |
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