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The Small Business Life Cycle: That Was Quick By Steve Ernst, CPA  In
mid-July, the Committee of Sponsoring Organizations (COSO) released
their guidance on effective internal controls over financial reporting
for smaller organizations, Internal Controls Over Financial Reporting – Guidance for Small Public Companies.
The guidance covers a broader area of business management than just financial reporting and should be viewed as applicable to small public and private companies. Larry Rittenberg, chairman for COSO, indicated on the release of the guidance that he hopes smaller businesses will use it as a springboard for designing and implementing processes that will help them run their businesses better and evaluate the effectiveness of their internal controls for regulatory purposes. Rittenberg's comments about evaluating the effectiveness of internal controls is in reference to the Sarbanes-Oxley Section 404 requirement for public companies to make a self-evaluation of the controls surrounding the financial-reporting process and to report the results of such an evaluation annually. Although smaller, public companies have been given a reprieve on the deadline to begin the required reporting, it is still a tremendously expensive sword of Damocles hanging over their heads. The "Holy Cow" factor If anything, the COSO guidance and the ever-increasing number of companies going public is indicative of the high speed at which small, entrepreneurial companies are traveling along their life cycles. When I speak to groups of CPAs who serve small business clients or of small-business owners and managers, I describe the scenario of two people who have just started their distribution business and are operating out of their garage. They have a Web site, a phone number, and are outsourcing their components from China. On their first day of business, they receive two orders – one from Japan and the other from the United Kingdom. At the end of the day, they look at themselves in disbelief and say, "Holy Cow! We are an international company." Because one of the components is a small medical device, a call is received the next day from their lawyer reminding them of certain Health Insurance Portability and Accountability Act of 1996 (HIPAA) and U.S. Food and Drug Administration (FDA) reports that will be due at the end of the quarter, making sure they are maintaining adequately detailed records to support those reports. At the end of the second day, they look at each other and say, "Holy Cow! We are an international, regulated company." Now this example might be a bit overdone as to the warp speed that small businesses find themselves traveling, but it is not far off the mark. Solid advice In today's world, small-business advisors – especially CPAs and public and private small-business incubator organizations – are pushing their advisees, clients, and incubating companies to think bigger sooner and formalize (if not best practices) business processes and control systems at a much earlier stage in their business life cycle than what most start-ups would have anticipated. It is easier and less expensive to establish solid process and effective, cost-efficient internal controls, while the business is being developed. This will ensure that these processes are an integral part of the original business, rather than being inserted at some stage when the business is growing rapidly. Sometimes we make this business about processes and controls almost too complicated – almost to the point of overwhelming a small business and taking its needed oxygen at that crucial birthing stage. Advisors should think in terms of a framework of corporate governance being as important for the start-up, emerging business as it is for the boards of directors of the largest multinational, top-tier public companies. Governance means a board, even if it is a board of advisors, and the small emerging business should get used to receiving independent board-level guidance from the day it takes its first step. Scalable business processes and meaningful, expandable control systems do not automatically flow from a board or a group of advisors. Rather, an organization that can initially look to that type of governing framework or advisory group is able to take advantage of the interest, expertise, and experience to naturally guide the company into making good decisions early about process and control. The right equipment Just as important as the early first steps a company takes in its scheme of corporate governance, the plan a company puts into place to acquire and implement the technology base should be the primary support and engine for operations and finance and facilitate the business processes and control systems. Not giving technology a great deal of thought is similar to hiring the best architects and engineers to design and build a beautiful building and then selecting a bog as the site for it to be built. Regardless of the plans and materials, if you cannot build it on a solid base, you will eventually lose the building or a major portion of its functionality. Technology is the base that companies are built on today. Start-up businesses, especially those anticipating rapid growth and expansion, should be careful to choose technologies that are scalable. Remember the example above about the second-day realization that the company is international and regulated. A growing company who must slow down or call a time-out every time it finds itself constrained by its technology and having to search, acquire, and install another level of technology to support the growth will never achieve its true value or attain its goals. |
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