Accounting should not drive anything about a company, but accounting also should not be forgotten at the side of the road.
Many companies choose, correctly, not to focus much attention on proper accounting and reporting — until they first have a real, sustainable business. Later, however, finding the right balance of when to invest in accounting and reporting versus getting by for another year brings a difficult decision. Each company should follow its own time frame, but I think most companies could probably improve by investing in accounting and reporting earlier rather than later– if they keep accounting in its supporting role.
Benefits of Quality Accounting
Here are some benefits of investing in accounting processes when you are ready:
- Creates Value in an Acquisition or Transaction. Nothing hurts your credibility more than poor accounting. It can sabotage a deal. It can make external persons question everything. It can even appear ethically to be questionable when the numbers aren’t done well. Good accounting may not create a lot of upside in a transaction, but it will avoid major downsides.
- Saves Time Later — Accounting Fire Drills are a Waste of Time. Investing in accounting after an external party needs it usually becomes a fire drill and a very inefficient use of time and energy. Accounting is best done methodically by investing small amounts of time and energy over time rather than an all-hands-on-deck fire drill.
- Aligns Your Company with the Common Language of Business. For any external party, it helps them understand your business if your business uses commonly accepted languages of business. You can’t have your own language or description of your financial results and expect them to understand. And, you can’t expect them to adapt to your quirky ways of accounting — spend the effort to align the financial description of your business with the way the world works. Charlie Munger of Berkshire Hathaway says that “everyone knows that accounting is, at best, a crude approximation”, but it is an approximation done in the best way we can using common, yet imperfect, definitions.
- Stop Fooling Yourself. Sometimes I have seen companies think that they are doing better than they are because they don’t understand how the rest of the world will view their financial results. Or, they have convinced themselves over time that an odd way of counting revenue or profit is proper for their business.
- Helps You Manage the Business. If you don’t have good measurements, your analysis will be garbage in, garbage out. Many times the numbers reinforce what you already know. But, there can be insights and helpful hints that lie hidden until you have good numbers to reveal them.
- A Mind for the Numbers indicates a Mind for Business. The best entrepreneurs are rock solid with the numbers. They develop an instinctive feel for their business by understanding the numbers and the accounting on a deep level. If you think you are a good entrepreneur, but aren’t good with the numbers, my advice is to double-down and learn the numbers because it will make you even better.
Accounting Audits: Not That Expensive or Difficult
Once you have your accounting on the proper path, investing in getting an annual review or audit is an investment that pays off. It often isn’t that expensive. And it’s a chance to make sure your processes and philosophies are done as well as they can be.
My first audit happened as we were preparing for the Initial Public Offering (IPO) of Student Advantage in 1999. My start-up, The Main Quad, had merged into Student Advantage in 1997 and we were material enough to Student Advantage that we needed to be audited by PriceWaterhouseCoopers as part of the S-1 filing. It was very funny to have a big accounting firm auditing the financials for our tiny start-up two years after the fact, but it wasn’t that bad. I learned what they needed and how it was done, and have thought audited financials are a great investment for most companies ever since.