Finanace, Technology, Results!

Archive for the ‘Financing’ Category

« Older Entries

An Entrepreneur’s Checklist for Raising Early Stage Capital

March 15, 2013

Are you hoping to secure capital to properly fund your business?  If so, you need to know how to prepare to maximize your opportunity for success.  Obtaining financing is a complicated process, but below are elements that the right CFO can help identify and execute to successfully raise early stage capital.

Understand short-term and long-term financial needs of the company. While insufficient funds may prevent your company from realizing its true growth potential, raising too much capital too soon may generate costs that far outweigh the benefits intended from financing growth.  Thus, an accurate understanding of the short and long-term needs of the company, based on accurate and timely financial information and modeled projections, is essential to successful early-stage financing.

Provide accurate forecasts of revenue, market share and margins. Adequate financial information is also crucial in obtaining the financing.  Timely and accurate reporting of key financial and non-financial information tells lenders and investors that your company understands its business model and is able and ready to act on key information to keep the business on track.  Advanced planning is important to avoid financial statements becoming the impediment to an successful capital raise.

In addition, accurate forecasts of revenue and related costs can provide a roadmap for determining the now and future value of your company.  An accurate forecast will have major consequences for your company and its current and future investors. A valuation set too low devalues the existing investors’ equity and overly dilutes their ownership percentage. On the other hand, a valuation that is set too high may cause investors and observers to doubt the company’s credibility, make it difficult for initial investors to sell their holdings and exit, and make it difficult for the company to deliver on its projections.

Have clear milestones for development. Creating a business plan with clear milestones for development is also crucial to your company’s progression and attracting the right investors.  Your company’s business plan is often the first and only introduction to a potential investor.  It must drive the assumptions and the direction of your company’s projected financial activity.  The milestones described in your business plan need to be clear and achievable.

Understand competition and market trends. As recent history has shown, the markets for public and private equity can change dramatically in a very short time. Your company needs to ensure that team members understand the current market trends.  All potential consequences should be weighed when making decisions related to forming an entity and seeking an equity partner.

Understand financing options available.

Obtaining financing is not a one-size fits all operation. There are several sources of equity capital available, including angel investors, private equity firms, strategic partners, and the newly surfaced social investors commonly known as “crowd funding.”  It is also important to understand applicable statutory and regulatory schemes affecting each kind of financing.  For example, Jumpstart Our Business Startups Act (JOBS Act) was enacted in 2012 and provides private companies with additional avenues to raise capital without registration with the SEC. Understanding the ins and outs of available financing options is essential to increasing the company’s chances of successful financing.

Focus on the team. Finally, it is vital that your company focus on developing a quality team to carry out these important objectives as well as to attract investors. Your company must show investors and lenders that its team has the experience and knowledge to manage the investment wisely with a high probability of generating the desired ROI. Having highly-qualified, experienced team members who have demonstrated success will go a long way to helping the company secure the investor’s trust and then their money.

__________________________

Andrew Stubbs is an independent consultant for Advanced CFO Solutions.  At Advanced CFO Solutions, we provide outsourced accounting and financial services. We have served with more than 450 companies. Our clients see us as their strategic, outsourced CFO.  We provide CEOs with critical information so they can make key decisions with confidence.  We do this by leveraging our experience and technology to provide actionable information and results.  And, we do it for a fraction of the cost of a full time employee.  For more information, click here.

 

 

Posted in Advice, Financing | No Comments »

Bootstrapping Isn’t Dead

October 12, 2012

While lending is easing again, the lessons and reminders from a difficult borrowing environment these past few years should be remembered.

Savvy entrepreneurs realize that the most readily available and cheapest sources of capital are to be found inside their businesses…aka ‘bootstrapping’.

Finding, developing strategies for, and managing wisely the cash already in your business can carry you through difficult periods in your business driven by either constriction or growth.

In short, these strategies usually amount to the following:

  1. Actively managing the collection of cash owed to you by customers, rather than passively letting it come in;
  2. Minimizing the amount of inventory you carry;
  3. Carefully analyzing and controlling the payments you make to your vendors.

Each of these very general strategies has many options to consider, but some are more impacting than others.

The available information on the internet to help educate entrepreneurs on the strategies to manage their cash for growth is almost endless.  Nevertheless, here is a link to a well written piece by Scott Bergquist of Silicon Valley Bank and posted on CFO.com.

Another source that holds a tremendous repository of articles to help guide entrepreneurs manage their cash is Inc.com.

David Chase has experience in small to medium private companies and large public companies as a senior operational and financial leader.  With 14 years in finance, a CFO of multiple entities and divisional EVP experience, Dave has a breadth of experience.  Dave has led or been instrumental in raising multiple rounds of equity and debt in excess of $450 million.

Tags: ,
Posted in Advice, Financing | No Comments »

Understanding Your Business Through Trend Analysis

August 30, 2012

Trend analysis is a critical, and all too often overlooked, element of understanding what is happening in one’s business.

Far too often we see that companies are looking only at the unformatted, current period financial statements. By doing so, they are missing a valuable opportunity to be educated by their financials statements about the current period performance, but also the likely near-term performance of their business.

Business cycles vary widely by industry, but typically, a one-year look by month (graphically where possible) at the key financial metrics of a business is ideal. Identifying the key financial metrics to measure is a critical step as well that shouldn’t be glossed over. In addition to a one-year look, a more detailed trend analysis of the past 3 months and a comparison to the same period from the prior year are two other great comparators and teachers.

There are some examples, shown below.

There are many ways to accomplish and view these trends including: reporting software packages (local or in the cloud), accounting software, or simply Microsoft Excel™, to name a few. Some are better than others, but as long as you’re looking at the data in the right way, you’re learning. Here is a brief but helpful treatise on Financial Statement Trend Analysis from eHow.com.

David Chase has experience in small to medium private companies and large public companies as a senior operational and financial leader. With 14 years in finance, a CFO of multiple entities and divisional EVP experience, Dave has a breadth of experience. Dave has led or been instrumental in raising multiple rounds of equity and debt in excess of $450 million.

Tags: ,
Posted in Advice, Financing | No Comments »

13-Week Cash Flow Forecasting – An Effective Tool for CFO’s

June 1, 2012

The 13-week cash flow has emerged as an indispensable tool to help our clients actively managing cash flow in businesses where cash flow is tight.

By the way, this does not mean that a business is in trouble – rapid growth is just as likely to cause a cash flow crunch as is operating at a loss.

Unlike the common practice of backing into an estimated cash flow based on high level working capital assumptions, the 13-week method is built upon a strong understanding of the underlying cash sources and uses in a business.

Fundamentally, the 13 week cash flow estimates detailed weekly receipts based on revenues, offset by weekly cash expenditures organized by type (e.g. payroll, inventory purchases, taxes, other vendor payments, etc.).  Experience with our clients has taught us that the most important step in creating a 13-week cash flow is to perform an estimate-to-actual comparison each week against the just completed week.

An increasing number of savvy investors and finance institutions are asking for, or even requiring, 13-week cash flow forecasts…an indication that a business has a good handle on short-term cash needs and is less likely to be caught by surprise – a very good thing in the mind of a bank or investor!

There are many websites discussing the merits of 13-week cash flows and the one from wikicfo.com is just one good example.

David Chase has experience in small to medium private companies and large public companies as a senior operational and financial leader.  With 14 years in finance, a CFO of multiple entities and divisional EVP experience, Dave has a breadth of experience.  Dave has led or been instrumental in raising multiple rounds of equity and debt in excess of $450 million.

Posted in Advice, Financing | No Comments »

Three Basic Questions To Ask Before Looking For Funding

April 20, 2012

Many start-up companies are looking for funding to help them achieve their dream of creating a commercially viable company.

Before seeking funding these 3 basic questions need to be answered.

1 – Does It Work?

It’s a simple question, but it is really critical to ask up front. Many good ideas end at the idea stage. Before an investor will write a check, you have to prove that your idea works, be it technology, a new service or a new product.

Proof of concept means more than just a white paper or your own research. It really means you need to have third party validation. Sometimes you can have outside research firms contribute to the proof, but the best source is a customer that is willing to pay cash for your product or service.

Determining the market size is also part of this research. If you are trying to sell into an existing market, some of that data may be readily available, but that is when you really need to prove that you can differentiate yourself from the competition.

One of our past clients is Skullcandy, they sell headphones and earbuds – lots of them! This was not a new market – there were lots of companies selling headphones. They were able to differentiate themselves from other headphone companies by becoming one of the best marketing companies around and targeting their marketing to their core customer base. It is critical for you to verify that your business actually has a market and that the identified customers really will buy your product or service.

2 – Is Your Idea Protected?

If your idea can be protected through a patent, trademark or through other intellectual property, investors feel much more comfortable about making the investment. It is critical that you have that protection in place before exposing your idea to the market place.

Some ideas cannot be protected and the strategy is simply a “land grab” and an attempt to gain market share. Skullcandy did not have IP on its headphones, but they did a great job of marketing to a specific niche that allowed them to obtain significant market share. Your strategy has to be identified up front and executed effectively.

3 – Who Will Manage The Company?

You must show investors and lenders that your team has the experience and knowledge to manage the investment. Having highly-qualified, experienced team members who have demonstrated success will go a long way to helping you secure the investor’s trust and then their money! Your core management team members, employees and consultants / advisors have to demonstrate that they have experience in the industry you are pursuing.

It is critical that you have a CEO who is experienced in the industry. If you are a technology company, you have to have a CTO who has experience in the industry. Naturally, your CFO has to be a very seasoned veteran who can help you provide timely and accurate financial reporting as well as key performance indicators (KPI). Your KPI’s should include financial and non-financial information about your business.

A solid financial forecast is also critical to be a financial roadmap for the management team. This tells lenders and investors that the Company and its team understand their business model and are able and prepared to monitor and act on key information to therefore manage the business and achieve success.

Starting a business and raising capital is not easy but if you take the right steps to get customer traction, properly protect your concepts and have the right team your journey is more likely to lead to the desired destination!

JB Henriksen is with Advanced CFO Solutions, L.C. With over 500 clients served and  experience with financing transactions totaling over $600 million, Advanced CFO Solutions is Utah’s largest  and oldest provider of  out-sourced CFO and Controller services.

We become the CEO’s trusted, strategic financial partner. We help our clients make decisions based on accurate information, thorough analysis and sound advice – all for a fraction of the cost of the equivalent full time the staff. Visit www.advancedcfo.com or call 801-942-0408.

Tags: ,
Posted in Advice, Financing | No Comments »

Is Another Bubble About to Burst?

October 20, 2011

I don’t know about you, but I’ve started shaking my head over recent valuation trends and terms from venture capital – especially in Silicon Valley.

Some startups in the “hot” sectors are getting insane valuations based on projected revenue!

Hold on here, I just had a de ja vu moment – I’ve been here before… let me see. It was 1999 – 2000. I remember flying to Boston and New York for a two day visit to two venture funds and a private equity group to raise a mezzanine round of financing prior to the IPO of a client. My task was to get commitments for twenty million. These were two funds that we had met with several times and we knew that they were very interested in our space. Well I was successful times three – I got commitments for up to sixty million and spent no more than four hours with each group!

I remember flying home to Utah and shaking my head, wondering how I just accomplished what I had done. Now I remember what I learned that time around – there was no rationale around valuation or investment criteria. I’ve also recalled the aftermath of the bubble bursting – the so called “nuclear winter” of raising capital. No one was making new venture investments and a lot of businesses folded.

Lest we be forced to re-live history, let us remember the lessons from the past. I found this blog post titled ‘Another Prick; Is the Bubble Over?‘ that does a good job of reminding us – read and learn or re-live and suffer!!!

Here is the full reference to the post I mentioned: http://blog.openviewpartners.com/another-prick-is-the-bubble-over/?referrer=exacttarget

—Kent

Tags: , , ,
Posted in Advice, Financing | No Comments »

Life-long Learning and Competence

October 19, 2011

Life-long learning is at the core of competency and competency may be the most visible, expected and measurable attribute that sets a good CFO apart from the typical accountant. Unfortunately having the “CFO” title or even having the CPA designation does not guaranty competency.

I passed the CPA exam over 30 years ago. What I had to know to pass the CPA exam then is a very small fraction of what I have had to learn in order to remain competent. Generally Accepted Accounting Principles now occupy almost ten times as many pages as they did then. In the process, I have had to specialize (i.e., restrict the work that I do) in order to feel confident that I can provide the services and results that my clients need and expect.

CFO’s aren’t the only group with this challenge, I once read that many of a computer programmer’s skills learned in college are almost obsolete within five years after graduation. In a paper published in 2007, the authors, Jim Allen, Rolf van der Velden found that “the average ‘half-life’ of competencies acquired during tertiary [post-high school] education may lie somewhere in the range between 10 and 15 years. . .”

This study and my experience indicates that not only do we have to have a plan for renewing our competencies, but perhaps just as importantly, we should develop a core of intellectual tools or skills that will never become obsolete. These skills, while not always directly related to our specific career or job, are more general in nature (e.g., analytic, problem-solving, social, leadership and attitudinal skills) and give us the ability and judgment to actually use what we know to provide the results that our jobs or clients demand.

I have found that individuals in our profession who do not develop and hone these “general skills” tend to get caught up in the “rut” of their job. They suffer from what I call “one year of experience ten times” rather than ten years of experience! As a result, while they may be able to produce accurate, basic financial reports, they struggle to provide real information that is useful to the business owners and managers, thus their value to the organization(s) that they serve is questionable.

As a profession, CPA’s are fortunate because we are required to participate in a minimum amount of continual professional education (CPE) experiences each year in order to keep our licenses current. This gives us the opportunity to self assess and take the courses that we most need in order to maintain our competency. Unfortunately, I’ve heard far too many fellow CPA’s admit (and in some cases boastfully announce) that they take the easiest and cheapest CPE that they can find. What a waste of time, money and effort! What a shortsighted and destructive perspective! Unfortunately these “professionals” won’t be sufficiently competent in a few years and their prospects for advancement or even employment will be limited. Even more unfortunate, however, is the damage that they will do to their employers / clients and to the reputation of our profession.

A long-term, and what I believe appropriate, view of life-long learning dictates:

  1. That we acknowledge what we don’t know. My friend Chuck Coonradt of The Game of Work calls not knowing what we don’t know “unconscious incompetence” – what a great phrase and how true! In order to know what we don’t know, we have to learn what we should know.  I like to use a portion of my education investment on update courses and general information about accounting, finance, business and economics.
  2. That we use some portion of our educational budget to keep sharp and up-to-date in the areas where we most commonly practice so that there is never a question about our competency in our practice specialty.
  3. That we spend time learning skills that will help us in the long-term. This is where learning about enabling technologies and the latest financing and accounting techniques allow us to take a step beyond minimal competency towards “expert” status.
  4. That we start viewing life-long learning as an investment rather than a cost. It is an investment in our future and the return on investment is real and easily measurable over time.

Remaining competent sounds like a lot of work doesn’t it? Well it is, actually and that is the way life works. We cannot achieve greatness in any aspect of our lives by dedicating only the minimal amount of effort required. Beyond the confidence that we gain from knowing that we are truly competent and that we can deliver exceptional results to our clients or employers, we also receive the added personal benefit of being in greater demand and that equates to higher value (i.e., compensation).

Let’s not ignore the value of a great reputation as we consider gaining and retaining competency in the work that we do – especially in a small community like Utah. Believe me, your personal and professional reputations regularly precede you as you apply for a new job or look for an introduction to that new, prized client. Your goal is to have your reputation be the only thing that the new employer needs to know about you in order to make the decision to hire or retain.

Take it one step at a time and log your progress. You will be surprised at how quickly you can recover from stagnant and frustrated to competent and confident. Good Luck!

Posted in Advice, Financing | No Comments »

The Role of the CFO

July 15, 2010

I came across a post on the website of OpenView Venture Partners from October 2009 about the Role of the CFO (Chief Financial Officer) today. It so closely reflects our philosophy that I wish I had found it sooner. I’ve been saying it for a long time and OpenView agrees: the real value comes with a highly experienced CFO who can function in the role of a strategic financial advisor to the CEO, executive team and board of directors. It is in providing actionable information, not just financial statements.  They outline seven facets of the CFO’s role that are important to understand and consider:

  1. Transition the company from basic cash financials to GAAP based (or equivalent outside the US) including the completion of audited financials on an annual basis;
  2. Implement scalable financial processes and systems to support the growth of the company;
  3. Ensure that the company is compliant with various government and legal requirements;
  4. Facilitate the deployment of key operational processes and systems to support the growth of the company (such as, a robust budgeting process or an HR system);
  5. Develop the board, CEO, senior team level operational dashboards;
  6. Facilitate the operational reviews across all functions of the company to help the senior team in setting strategies and goals;
  7. Support the company exit strategy by representing the company externally to media, government agencies, funding agencies, and the public.

While the OpenView post focuses on the value of having a CFO in an early stage company, indicating that those who bring the CFO on earlier tend to be more successful than those who forgo the hiring of a CFO due to cost constraints, the value proposition also applies to established companies.

In reality, companies do not have to pay the cost of another highly-compensated executive in order to receive the value of a highly experienced CFO for their business because CFO Solutions can provide all of the CFO’s value that small to midsized companies need on a part time basis and at a fraction of the cost of a full time employee. We have been doing it for more than fourteen years for over 450 companies. If your business needs a CFO but you can’t afford (or don’t want to pay for) a full time employee, call or e-mail us for a no obligation consultation and assessment.

—Kent Thomas, Founder

Posted in Advice, Financing | No Comments »

Venture Capital Trends: Breaking News!

February 17, 2010

I just received the Fenwick & West Silicon Valley VC Survey for Q4 2009.

Although this survey does not exactly equate to what happened in Utah, Silicon Valley certainly sets the standard and establishes the trend for venture capital investing in the U.S. and in Utah.

Here are some interesting insights:

  1. For the second quarter in a row, ‘up’ and ‘flat’ rounds exceeded ‘down’ rounds (interpretation: company valuations are increasing and the new investors are receiving less ownership for the same total amount invested – good news for founders and prior investors), this time 70% to 30% and the average price increase was 19% for the quarter. This is great news and portends good trends for good businesses that are looking to raise capital.
  2. In the 4th Quarter series A rounds (usually the first institutional financing round) represented 23% of all financings, up from 17% in Q3 and a low of 8% in Q2. This is great news for earlier stage companies and indicates that VC’s are starting to open up to their financing needs again.
  3. The survey indicates that financing terms are starting to relax (i.e., becoming less onerous) for the companies receiving capital but preferences such as participation rights and liquidation preferences are still being used in the majority of financings. In other words, it is still a ‘buyer’s market’, however, the trend continues towards a relaxing of some of the more stringent and onerous terms.
  4. The total invested by venture capitalists during the quarter increased by 17% over Q3 but is still down compared to earlier years. Also, the total funds raised by VC’s during the quarter increased by 80% over Q3, however, the total raised in 2009 represents a nearly 50% decline when compared to 2008. The message here is that with less total funds to invest, fewer companies will qualify for investment in the future. As a result, the better the management team and the better they (you) understand and solve customer ‘pain’ and the better prepared they (you) are to execute on your plan, the more likely they (you) are to attract serious VC interest in the future.

If you are considering venture capital or angel investor equity investment for your business or if you would like to better understand what this information means for your situation, Contact Your Utah CFO for a free consultation.

Tags: , ,
Posted in Advice, Financing | 1 Comment »

Preparing Your Company for the Audit

November 2, 2009

So, your company has grown enough that you need to get a substantial line of credit or equipment financing or you are taking on new investment.

utah-auditAll of these could be reasons for you to “need” to have an audit done.  Banks and investors will normally require an audit.  If you are looking to go public, you need to have three years of audited financials.

One of the biggest stumbling blocks for companies seeking funding is the time and money it takes to get an audit completed, especially if they are not prepared for an audit.  Usually, it is best for you to prepare to be audited from the beginning.  Your business should already be ready for an audit.  Just because you haven’t “needed” an audit, is no excuse for not having your financial house in order and doing things right.  Doing things right will lead to more control and better information.  Better information leads to better decisions, which will lead to higher profits and eventually a higher valuation.  You have to have your financial house in order when you look for investment or a sale in order to maximize your valuation.

If you are going to get an audit, you are going to pay an outside CPA firm to audit your financial house and your goal is to get an “unqualified opinion”, sometimes called a “clean opinion”.  Simply put, this means that the auditors audit your books and find nothing that will make investors uncomfortable about the numbers (nothing “materially misstated” in audit speak).  So, what steps do you need to take in order to be prepared for your audit.

  1. Accounting staff. Your accounting information is only as good as your accounting staff.  That does not mean that you have to have a full staff of CPA’s, but you do need to have competent staff at all levels.  Most companies are better off to have a part-time CFO and Controller until they are large enough to justify a full-time person in that position.  The Controller is the main accountant for the company.  The Controller must be well versed in GAAP and have several years of experience in actually closing the books of a company.  A CPA is helpful, but not required.  The Controller will supervise all of the accounting staff and insure that proper accounting is set up from the beginning and is consistent every month.  The accounting staff will depend upon the size and complexity of the accounting for the company.  Companies who have inventory or revenue recognition issues may have to have staff specifically for those issues.  It may also be necessary to have larger Accounts Receivable or Accounts Payable staff, depending on the industry and number of transactions that flow through the accounting records.  In any case, it is mandatory that your Controller is strong enough to build a strong accounting staff that is familiar with GAAP and with the highest of integrity.  The Controller should also be familiar with reporting issues facing the company.  These issues will also change depending on the company and will range from internal reporting, job costing and managerial accounting to external financial reporting, SEC reporting and other required reports.  Companies with more strategic financial issues, especially those with large bank loans and investors should consider hiring a part-time CFO and as the company has over $30 million in revenue, should consider a full time CFO to be the strategic financial partner of the CEO and the Board.
  2. Audit your balance sheet. All audits start with the balance sheet.  It is critical that the company has a balance sheet approach to preparing financial statements.  This means that every month the books are closed, the balance sheet accounts are reconciled and there is supporting documentation for each of the accounts.  No exceptions!
    1. Cash. It is amazing how many small companies don’t reconcile all of their cash accounts every month.  It is critical that someone reconciles the general ledger to the bank statement as soon as possible after month end. For control purposes, this should be someone who does not have access to check signing, nor check preparation.  This not only makes the statements more accurate, it is a good control on cash, which is the most easily stolen asset.
    2. Accounts Receivable. If the company has customers who owe them money, it is necessary to have a subsidiary ledger of all accounts who owe them money.  This subsidiary ledger must be reconciled to the general ledger every month.  One of the hottest audit areas is the “Allowance for Doubtful Accounts”. This is an area where companies have been able to manipulate earnings in the past, so auditors will scrutinize this area very closely.  You need to have some historical statistics to support the amount of allowance you are keeping on the books.  If you are a new company with limited history to support your allowance balance, you still will be required to justify your number.
    3. Inventory. Probably the most scrutinized item on any balance sheet is the inventory balance.  Not only is it critical that you have accurate inventory records, but also any allowances that you have set up for purchase allowances, damage allowance, coop advertising allowance, etc., will all be scrutinized by auditors very closely.  As with other allowances, this is an area where earnings management could be an issue.  Many companies don’t realize that if they want an audit done, they need to have not only year-end inventory balances audited, but the beginning of the year balances need to be audited also.  So, if a company wants an audit for December 31, 2009, it had better make sure the auditors review the inventory balance as of December 31, 2008.  It is imperative that the company performs a physical inventory count at year end and beginning balances plus the auditor must participate in both inventory counts.  Inventory is probably the biggest issue that will stop companies from getting an “unqualified opinion”.  If a company doesn’t want to hold up its financing, then inventory MUST be properly accounted for.
    4. Current liabilities. The issues related to accounts payable, accrued payroll and accrued expenses can also be an issue for most growing companies.  It is critical that there is a clean cut off and that all of the expenses are included in the proper time frame.  Auditors will perform what is called a “test for unrecorded liabilities”, which will look at all checks cut after year end to make sure they were recorded in the proper period.
    5. Deferred Revenue. Many companies don’t even know they have a deferred revenue issue.  If a company receives money up front for services to be performed in the future, they have deferred revenue.  The money must be put on the books as a liability until the service is performed.  This is a HUGE issue with software, technology and businesses who collect money up front.
    6. Equity. Behind inventory, the equity of a company will usually be the next most scrutinized area on the balance sheet.  It is critical that all capital contributions are properly recorded and for the proper amounts.  Stock options, warrants and other equity compensation are areas that have been abused in the past, so a company needs to have an expert in FASB 123r and IRS 409A help them prepare the correct accounting of these issues before they have a chance to blow up with cheap stock issues, large compensation issues and tax issues that can be avoided.
  3. Internal controls. Auditors have always put significant weight on internal controls.  If the auditor can rely more on internal controls, then the amount of testing can also be reduced and potentially reduce the cost of the audit.  After Sarbanes Oxley was passed as legislation, auditors are now required to do more of a review of internal controls.  The size of the company will dictate how in depth the internal controls can be.  Auditors will be looking to make sure there is a proper “segregation of duties”, which means employees with access to assets, do not have access to records.  So, simple controls over cash as mentioned earlier are a great control for cash.  Individuals who prepare and sign checks should not reconcile the accounts.  The internal controls in place should do two main things for the company:
    1. Protect the assets of the company and;
    2. Insure the accuracy of the financial statements.
  4. Policies and procedures. Accounting policies and procedures need to be put in place for the entire company.  These procedures need to be in written form and include GAAP rules for all of those that are specific to the company.  This will include procedures for handling cash, inventory and fixed assets plus the revenue recognition policies.  There should be policies in place prohibiting personal use of company assets and expenses.  It is also critical that these policies are the same for everyone in the company from the CEO to the receptionist.  If it is not proper for the receptionist to run through personal expenses, then the CEO should not be allowed to do so either.  This type of commitment to policies will insure the strength of the accounting records.  Policies and procedures should include detailed job descriptions of all of the accounting staff as well as other staff.  Internal controls should also be documented as part of the procedures.
  5. Month end close checklist. Each member of the accounting team should have a month end checklist to follow.  This checklist will insure that financial records are prepared consistently month after month.  It will also insure that the nothing is forgotten and that the records are complete.  The checklist should include such items as auditing the balance sheet every month and insuring that reconciliations are completed.  Normal adjusting journal entries such as depreciation and amortization expense, month end accruals and revenue recognition should be captured in the checklist and should be used as a guide for insuring proper accounting.  The Controller is the main individual responsible for insuring that the checklist is followed and that it is complete each month.

Once a company has put the proper staff in place, audited all of its balance sheet accounts, developed internal controls and put in proper policies and procedures, then the audit will be easy.  Each month end should be a mini audit of the accounts to insure that the year end and quarter end statements are proper.  Companies should get in the habit of preparing the statements that are required in an audit, which always includes a balance sheet, an income statement and a statement of cash flows.  The year- end audit will require significantly more reporting, such as footnotes to the financial statements, but if the above steps are taken, then the audit will go much smoother and should cost significantly less than normal first year audits will cost.

If a company is unsure if it is really ready for an audit, then it may be worth hiring a firm that has significant experience in managing audits for companies.  An audit should not be something that a company should fear, but an audit should be a chance for the company prove that it is a financially strong company and that its accounting procedures and policies are proper and in place.

—By JB Henriksen, CPA – CFO Solutions, LLC

Tags: , , ,
Posted in Advice, Financing | No Comments »

« Older Entries