It is unfortunate that the stories on small businesses who fail to comply with government requirements for receiving and using grant funds don’t make the papers.  Even though small businesses fail audits everyday, they just don’t make the headlines.

The scale of these business failures and closures isn’t normally such that anyone not directly involved pays attention.  If a small business with fewer than 20 employees closes, for whatever reason, it isn’t big news in the local or national media.  It should be.

Small businesses are the backbone of innovation and the economy.  When they are successful in technology innovation, but fail “business” (that includes financial management and commercialization), everyone suffers.

Compliance isn’t optional and it isn’t difficult if you get setup properly and understand the requirements.  It can be complex to understand, however, if you aren’t familiar with accounting, financial systems, and management control principles.

It does require investment in the business infrastructure to initialize and maintain compliance.  That investment is substantially less if you implement compliance from day one of receiving grant or contract funds.

It is always more costly to do retroactive initiatives to clean up the issues.  Recreating and tracking down documentation of prior actions is difficult and time consuming.  It also doesn’t rectify the fact that you weren’t compliant during the prior period.  It just means you’ve cleaned up the paperwork and can provide documentation (usually limited) of what occurred previously.

What are the “costs” of non-compliance?

  • Greater investment in generating the documentation to satisfy an audit or auditors’ questions
  • More time to track down and identify transactions
  • More time to aggregate and report the results of a program and the costs
  • More likely to have costs (direct and indirect) disallowed, not paid
  • Fines and penalties
  • Debarment and suspension from grant programs
  • More likely to have to repay the grant funds – all of them
  • Possibility of  forfeiting claims on intellectual property developed using the funds if you can’t repay grant
  • Greater investment in setting up a new accounting system – higher standard of “result” imposed due to audit failures
  • Personal liability for breaches of fiduciary responsibility and possibly jail time.

These are just a few of the costs to businesses which don’t comply. You may not read about them in the paper or hear about them from your colleagues and friends.  But SBIR recipients are audited everyday.  Everyday someone fails an audit or fails to file the appropriate reports.  Every day these businesses on the verge of success put the business and its leadership at-risk by failing to invest in compliance.

Is your business at-risk?  Does your accounting system meet the minimum result expected?  Do your records support what you report?  Can you demonstrate management control and oversight?  Is your company able to generate commercial revenues or other non-federal funds?

Understanding what you must do or become for compliance is the first step in the process of reducing risk.  It is the first step to being strategic in utilizing this funding source.  The funds are not loans.  They enable you to accomplish your objectives without diluting the ownership stake you have in your company.  They are not free – they come with a cost:  compliance.  But they are well worth the investment in compliance to tap into them.

Grants are intended to assist businesses in the early stage of development and the discipline they impose on a business that receives them is a type of “insurance” that businesses will be well run.  Grants are meant to grow the economy through commercialization of technology.  In order for grants to have maximum effect and return, commercialization needs to be both possible and probable.  If a viable technology is discovered, then the organization needs to be capable of taking it to market and developing a business to profit from the technology.

Technology without market potential – other commercial entities, consumers, institutions, government and not-for-profits – produces no direct benefit to the economy and to “the greater good”.  The ultimate objective of technology investment (grants) is commercialization.  Commercialization is a by-product of a technology which has a viable market and business acumen (a well-designed business model and the ability to run that business). This is the reason the government requires sound business management systems (compliance) of its grant recipients.

If you are a grant recipient who isn’t sure you are fully compliant, chances are you aren’t.  Whether your business hasn’t established accounting and other financial systems which demonstrate strong control and capability for managing funds or whether you have no established controls and oversight of business operations, then getting those systems in place to work for you as you move forward is critical and deserves to be the top priority.

The second priority should be to “clean up” your past performance.  This is definitely the more time consuming and difficult task for most companies.  Because your organization wasn’t aware of the specific requirements, key records and documentation may not exist to “defend” prior filings, reports, and performance adequately.  Frequently when audits occur, costs which were legitimately incurred and appropriately charged can’t be verified.  Costs that aren’t verifiable aren’t allowable and are excluded from program costs.

The third priority is to ensure that future efforts – proposals and awards – are executed according to a strategic plan.  Essentially this means that if you weren’t going to pursue the application, product, or line of business if the grant weren’t available, then you may not want to do it even if there is a grant.  Why?  Because grants aren’t intended to cover the “full cost” of pursuing the technology or product development; they are meant to defray a portion of the costs.  The business will have to contribute other funds to share and/or match costs during proof of concept and product development and will have to pay the full bill for getting a commercially viable “product” to market.  Because grants don’t cover 100% of costs, a business which is “distracted” by pursuing every proposal and award that has possibilities for the business may find that it has spread its resources so finely across multiple potential opportunities that it can’t afford to get any single product to market.  Be strategic in deciding when and where to pursue opportunities.

Grant programs (SBIR and STTR) are fantastic funding alternatives and opportunities to move your business forward.  They aren’t without costs.  They are worth the effort to get them and to comply if you pursue them as one aspect of your strategic and commercialization plans.

Copyright ©2005 Lea A. Strickland, F.O.C.U.S. Resource, Inc.

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