Recognizing the Need to Grow: The Business Expertise AND the Business

Have you ever experienced a situation in which a leader, manager or business owner (let’s refer to this person as “Frank”) is dependent upon an established relationship in the workplace that no longer really works for the organization or for Frank, but he won’t give it up. Frank just won’t or can’t let go. He can’t see the need to change or the reality of the relationship and its impact on the business. Here’s an example to illustrate.

In the Beginning

Frank started a company ten years ago with two colleagues and hired two others as general administrative support staff. These five people worked hard and long hours. The company grew. Everyone pitched in to do whatever, whenever, to make things happen. And the company grew. Each of the original five gradually became responsible for different parts of the business as the company grew. Some logically matched up with their educational and technical backgrounds. Bill was an engineer and took over the management of the engineering group. Susan was the computer genius, so all things computer and IT for products and operations became Susan’s. Allison was by skills and training marketing, sales, and business development. Frank was the idea man: product ideas, creativity, new business lines. Then there was Jack: Jack of all trades. Jack did whatever was needed and was left over. Jack was the generally good guy who got things done in time: accounting, human resources, legal, purchasing, and anything day-to-day, nuts and bolts. Jack had no business training, no accounting background, and no experience in running a business. Jack just figured things out the best way he could. He just did it the way he had done it before or looked something up online or talked to a “friend of a friend of a friend.” If it looked good, added up, and seemed okay, then it worked. Jack worked hard to get things done. He was loyal and dedicated. And the company grew.

The company hired outside accountants for taxes. The company obtained legal counsel for business deals and contracts. And the business grew.

The company expanded and acquired more clients, becoming a more complex business. The company grew and decided to pursue government contracts. Things were going along as before: Jack continued to handle the accounting and internal day-to-day business. He did things as he always had. Everything is good. After all, things don’t have to be that precise; it’s “close enough for government work,” as the saying goes.

Jack of All Trades

The company was successful. They acquired more and more business including government contracts. The company was so successful they decided to set up another company to provide services and handle subcontracts; and why not? “Let’s expand internationally too!” While the company created new legal and tax entities (corporations) to operate, Jack decided to keep the bank account, credit cards, and vendor accounts all the same. “It will just be easier. No need to have a different checking account for each company. No need to go to all the trouble of having different credit card accounts for each company either. All the vendors already have accounts for the first company, they can just use that account for the new companies too. It’s one big happy family!”

Jack kept doing things the way he always did. He kept providing the “numbers” to the CPA to prepare the taxes. The CPA issued a letter: “The taxes are prepared using accounting information provided by management and the company.” So, when the CPA prepared the taxes and receives a list of “lab supplies,” he used the number in that account as lab supplies, relying on the information to accurately reflect the categorization of the transactions. When Jack reported to the CPA a list of “independent consultants,” the CPA accepted that these were truly individuals who meet the criteria of independent consultants who received a 1099-Miscellaneous from and were not employees (as defined by the IRS and other regulatory agencies). The CPA acted as a “preparer,” and not as someone who is validated the underlying information.

The company continues to grow and the demands on everyone continue to increase, as does the complexity of the business. The business has grown to the point—past the point—where the internal functional expertise such as accounting, human resources, and other aspects that have significant regulatory and compliance aspects have surpassed the knowledge base of the founders and the “common sense” method of doing business.

In fact, the external reporting demands have for a number of years REQUIRED accounting and financial systems to meet very specific requirements known as “Generally Accepted Accounting Principles” and to comply with Federal Acquisition Regulations (among other rules and regulations that they were either not aware of or didn’t pay attention to). The business is now facing an audit of the required filings it has been submitting as well as those it was required to submit but didn’t. These required filings include accounting and financial reports, intellectual property reports, and other reports related to procurement practices, subcontracting, and many other business practices and activities. Furthermore, the reports that have been filed and the accounting records supporting them clearly have not, and do not, meet the standards set for the business and internal control systems. The business is facing some major issues and questions. Now what happens?

How Do Businesses Get To the “Now What?”

The ability to grow and generate profits, and capture customers is of course the determinant of whether or not a business will stay in business. Underlying the ability to get and keep customers, there is a requirement to be capable of doing business according to the “rules” imposed on the type and nature of the business you are engaged in. In this example, if you are going to be a government contractor, you have many requirements for conducting business with the government and under the terms and conditions of specific contracts. Also, in general, businesses must follow rules and regulations related to accounting practices for taxes, classification of expenses, revenues, assets, liabilities, and owners’ equity. There is very little anyone does in a business of any type that doesn’t have some aspect of government oversight, if only for determining how much you owe in taxes. Also, you can generally expect that the larger your organization becomes in terms of revenues, employees, physical operations, and other measures, the more “interest” outside entities (e.g., government, creditors, third party stakeholders[1]) will have in ensuring that your activities are conducted appropriately.

So “the way we’ve always done it” may be working for the purposes of growing the business, but it may also be growing the risk associated with your business. The less functional expertise in the “technical” business areas (e.g., accounting, human resources, finance, legal) a company has in its internal team, the more it needs to be aware of and establish an external team of qualified, experienced experts that it communicates with on a regular basis to monitor the business’ enterprise risk and operational requirements. Without ongoing communication and periodic assessments, the business cannot prevent a “Now What?” situation from occurring or at least minimize the chance.

Preventing the “Now What?”

What are some steps that any business can take to prevent or mitigate developing a massive “Now What?”

  1. Recognize the skill set limitations of the internal team.
    1. “He’s good at math” does not equal accounting or financial expertise.
    2. “She’s good with people” does not equate to knowledge of human resource law and employment practices.
    3. Being related to an accountant doesn’t mean you can do accounting.
    4. Because your neighbor told you his dad did something 20 years ago doesn’t mean you can do it today … or even that his dad really did it 20 years ago.
  2. Invest in expert resources. Growing the business does mean you know what you are doing when it comes to growing the business, but that doesn’t mean you know business, tax, employment, or any other type of law; accounting; taxes; and so on. No one expects you to know all of this.
  3. Communicate with your teams—internal and external. What they don’t know and you don’t know can hurt you.
  4. Recognize that the team will and must evolve. The same team that starts a business is rarely has the skill set to stay in place in the exact same roles throughout the life of the business. Prepare everyone upfront to evolve into different roles as the business grows; that may even include YOU.
  5. Ask … Ask … Ask! Always be willing to keep asking questions to make sure that your teams really know the answers, and that you are asking the right questions. Are you asking “Can I?” questions? Maybe the questions you are supposed to be asking are “Should I?” or “What happens if we? Rephrase; challenge; look at things from different angles. Never assume.

Grow, Grow, Grow: The Business, Not the Risk

Ultimately, you want to grow the business, not the risks. To get the rewards of all your efforts, be sure that you don’t hang on to the way you’ve always done things and the comfortable and familiar team out of habit or because it has (seemingly) been working. The “We’re successful, so why look at how we’re doing it?” attitude can be a costly mistake, one that has closed many businesses. Take the time to make sure you are doing business the right way and getting the details right. Having the tax man, the government auditor, or some other “interested” party suddenly in your business and demanding not only information but also dollars can be the final curtain on a successful run. Grow, grow, grow your business—but get the details right. It is well worth the effort and finding the right team members to have on call when you need them.

©2008 Focus Resources Inc.

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[1] Third parties may take the form of public interest groups concerned about research efforts that include animal research subjects, pollution/emissions, business practices; investors, lenders, or business community members; competitors; potential strategic or collaborative groups; and the market in general.

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