Category: risk management

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Revenue Recognition and closing the reporting GAAP

Revenue Recognition and closing the reporting GAAP

chartOne company earns what the other company spends.  This is business, and it seems like it would be pretty straightforward, accounting for the money coming in and the money going out.  But it is really not that simple when it comes to business finances and accounting for revenue.  With investor pressure to improve share prices and market pressures forcing greater competition, businesses have always sought out ways to make the performance look as good as possible – on paper even if not in reality.  It is this requirement to make the business look better than it may actually be that drives “innovation” in financial reporting, and encourages some companies to use whatever rules are available to mislead investors or paint a rosy picture for stakeholders.  When the balance is lost and financial reporting standards become so oblique as to allow regular and gross misrepresentation, it is time to change the standards.

There are numerous instances of fraud and scandal reported from the finance departments of big businesses, but instances of improper or misleading revenue recognition can happen in even the smallest of companies, and not necessarily on purpose.  It is important to understand that properly and accurately reporting business revenue and earnings isn’t done just for investor satisfaction, it is an essential part of describing business performance that any owner or manager must be able to rely on.

Generally Accepted Accounting Principles (GAAP) provide investors and business owners with some consistency in the financial statements they use to analyze company performance, but only minimally.  This is partly due to the fact that GAAP is based not only on some standards established by policy boards (the authoritative standards) but also on “generally accepted” standards, which are often not really standards at all but simply past practice that was found to be accepted.  Especially in the global economy where fewer businesses operate solely within traditional territorial boundaries – and where accepted reporting methods vary widely – having a single financial reporting standard has become more important than ever.

Make it so, Number One.

Now there are new rules from FASB (Financial Accounting Standards Board) and IASB (International Accounting Standards Board) which provide clear and detailed guidance for how businesses recognize revenues.  These rules are based on a consistently applied set of principles, no matter what sort of business is involved and regardless of where the business is located.

A focus of the new rules of revenue recognition centers on customer contracts, delving into the details of how earnings from those agreements should be recorded. Consider that many businesses combine multiple products and services into a single agreement, even though there may be several deliverables or milestones included.  This method of booking customer contracts allowed companies to report revenues they were not yet due as part of a total agreement, often resulting with inflated earnings reports.   Stakeholders would perceive that the company had reached one earning threshold, but the reality was something quite different and performance expectations were unmet.

“FASB and the International Accounting Standards Board (IASB) issued converged guidance on recognizing revenue in contracts with customers. The new guidance is a major achievement in the Boards’ joint efforts to improve this important area of financial reporting.”  http://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1351027207987

The new rules force an additional level of discussion, including a full set of disclosure requirements that will provide more information about contracts with customers.  Businesses must identify each promised deliverable and attached revenue or earning component, which helps to better understand how the revenue may be earned (and recognized) as the business performs on the various obligations to the customer.

Just take a look at some big ERP companies and the lawsuits generated from problems and failures in delivery – problems that might have been more clearly identified to investors and stakeholders if the tie between product sales and services to be performed were more clearly described.  In many cases, these situations exemplify the revenue recognition reporting problem, where large customer contracts and license sales were fully booked and recognized even though implementation services milestones attached to those license sales remained undelivered.

“2010 – JDA Software (i2) – Dillard’s, Inc.:  Dillard’s had alleged i2 failed to meet obligations regarding two software-license agreements for which the department-store operator had paid $8 million.” http://www.zdnet.com/blog/projectfailures/erp-train-wrecks-failures-and-lawsuits/12055

For private companies, reporting periods beginning after December 15, 2017 must follow the new guidance.  It may seem like a long period of time – from the decision to apply the new rules to the effective date – but the number of businesses the new rules will impact is large.  The FASB made a decision to delay the effective date because of the broad scope of organizations affected and “the potentially significant effect that a change in revenue recognition has on other financial statement line items.”

Business owners and their accounting professionals need to make sure that financial systems and processes are up to the task and can track and produce the detailed reporting these new rules require. For investors and analysts, the new reporting rules and detailed information they generate will go a long way towards minimizing the impact of innovative revenue reporting practices, and will hopefully bring a new level of believability and usefulness to business financial reports.

Make Sense?

J

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Small Business IT Governance: You really need it now

it-balancing-actBig changes are going on in the world of information technology and business.  Where social computing and  mobility are no longer purely consumer concerns, enterprise IT departments face a growing requirement to embrace user devices and access in environments which were once strictly and closely controlled.  Enterprise IT may be challenged when presented with user personal devices and demands for remote access to enterprise data, yet the governance of systems is generally well-defined and strictly performed.  In small business, however, the people, policy and process issues (collectively incorporated into “governance”) tend to be more organic, and the use of personal devices and open access is more frequently considered to be a normal part of the overall business IT profile.

It is a focus on defining controls and processes, and influencing the activities and attitudes of the people involved, which has become an essential requirement in small business.  Where management of information technology resources was not of great concern to the small business owner before, increased device and information mobility (removal of physical boundaries) and erosion of logical boundaries around personal and business computing have become a really big deal for everyone in business. Small businesses just don’t often have departments of people working on the problem.

Technology use in business has always come at a price, and as various influences continue to change how users interact with devices, applications and systems, business owners and IT managers will continue to face difficult choices between balancing security of information resources and providing a productivity-enhancing user experience.   Too many security barriers result in avoidance of security protocols, slow or immobile company computers result in users working on their own machines and portables, and restricting access for mobile users results in “shadow IT” implementations of mobile sync and other data access approaches.

Yet “shadow IT” tends to be the norm with many small businesses, where there are often fewer barriers to implementing solutions which address individual user issues or problems.  Lacking the resources or understanding to develop a strong plan for managing information systems and technology within the business, small business owners often consider the computer systems and computerized data to be tools to get jobs done rather than strategically valuable assets to be strictly controlled and protected.  These business owners are not recognizing the ever-increasing need to not simply secure business information, but to establish processes and rules which will govern how users and devices access and interact with the information and systems.

Enterprise IT departments have often viewed their small business counterparts (customers, suppliers, etc.) as potential points of vulnerability, an attitude which was once considered to be centered not on real assessments of the risk but more in terms of ego, level of sophistication, and hierarchy in the food chain.  In today’s world of real risk introduced by myriad technological and human elements in every link in the supply chain, enterprise IT conclusions regarding the risk potential of doing business with anyone – including small businesses – may not be entirely unfounded.  Whether it be commentary and information distributed by individuals via social media or malware or corruption introduced inadvertently (or not) via computerized interaction, there is the possibility of risk introduced with every system, person and process involved.  Enterprise to enterprise, these issues may be more often recognized and remediated; where the SMB is involved, not always so much.

This is a brave new world of computing, and there is truth in that even the smallest of businesses can “compete with the big guys” when the right mixture of technology and process is applied – for good or bad.  Technology enables businesses to be more productive, get more done with fewer resources and perform at higher levels. IT Governance in small business is no longer an optional area of focus, addressed only during infrequent discussions with the local contract IT guy when he comes in to defrag the hard drive on a slow computer.  Establishing the proper processes and controls to wrap around IT use in the business has become an imperative; a necessarily specific and considerate approach to how information technology is used within the business, who uses it, and what IT is composed of.

Just about every business, and most individuals, are connected in some manner via some type of network, representing a dramatic and dynamic change to the traditional composition of business IT and the landscape of vulnerabilities which threaten it.  The increased connectedness, capability and complexity of systems and networks requires a greater focus on overall IT governance – exercising authority and controls – as the impact (just like the information) can easily and unintentionally reach far beyond the boundaries of the individual business.

jmbunnyfeetMake Sense?

J

“People are nothing more than another operating system”, says Lance Spitzner, training director for the Securing The Human Program at SANS Institute.  “Computers store, process and transfer information, and people store, process and transfer information,”  How Hackers Fool Your Employees

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Accessing Small Business Leadership and Development Resources: More for the growing concern

Accessing Small Business Leadership and Development Resources: More for the growing concern

There are a lot of resources available for people who want to start a small business.  From business plans to funding websites to guides on entrepreneurship, the available pool of information on starting up and growing a business is huge.  So huge, in fact, that many small business owners fail to find the things they really need to help them grow the business, expand operations and hire more employees.  While entrepreneurship and starting a business is the first step, the economy grows and flourishes when small businesses grow and flourish.  This is why the site SmallBusinessLeadership.com was started in cooperation with the America’s SBDC.

Among the available resources for small business owners is the Association of Small Business Development Centers, or America’s SBDC.  These association offices are found throughout the country, and represent a wealth of support for small business which is, as we all know, the fuel powering the American economy.  A report authored by James Chrisman, PhD investigated the economic impact of the Small Business Development Center counseling activities in the US in 2010-2011, and found that the centers are indeed instrumental in supporting small business success.

Among the findings is an analysis of the contribution SBDC long-term clients made to the economy, finding that these businesses “added $6.8 billion in incremental sales and 75,166 new jobs to the nation”.  The investment in helping startups and entrepreneurs also demonstrates clear success, with “59.2% of all pre-venture clients” starting a business within one year of receiving counseling from the SBDC.

But the success with SBDC isn’t all about starting up and expanding business– it’s about retaining people (jobs) and sustaining revenue, too.  With economic challenges facing every business owner, the ability to simply maintain the operation at existing levels often becomes the biggest job of all.  In this area the SBDC also performs well for business clients, and estimates that “83,268 jobs were saved and $7.3 billion in sales revenues were maintained as a result of the [SBDC] counseling”.

And talk about fueling the small business economy!  Businesses need financing and capital to operate and grow, and as a direct result of the assistance they received from the SBDC “approximately $3.3 billion in capital” was raised by SBDC business clients, according to report estimates.  Not too shabby when you consider the difficulties many businesses are having with obtaining financing through commercial banks and other funding sources.

There is no argument with the value the SBDC brings to the small business community.  What may be a challenge, however, is finding those resources and getting involved with the information and people who can really make a difference for a business owner in a particular region or area.  While there may be SBDC counselors in the area, there is no guarantee that there’s an easily searchable website or method of gaining a little DIY education without making an appointment.  SmallBusinessLeadership.com addresses this challenge by providing location-specific access to SBDC and other resources for business owners who wish to find experts and insight relating to their particular locale or situation.  Additionally, visitors to the site can explore the varieties of content made available from SBDC offices and small business experts, ranging from success stories and case studies to tips for marketing the business, approaches to improving business process support, or even finding technologies or services to solve specific business problems.

Starting or growing a business isn’t something you do alone.  It takes a committed team from the development of the first idea through to the hiring of employees and expansion to new locations.  Working with America’s SBDC and leveraging the knowledge and resources available via SmallBusinessLeadership.com, business owners across the country will find new ways to build stronger foundations for the business, and to develop leaner and more sustainable operations than ever before.

jmbunnyfeetMake Sense?

J

smallbusinessleadership

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My Love/Hate Relationship with Partner Programs

My Love/Hate Relationship with Partner Programs

originally published on LinkedIn
 

I love Partner programs. You know, those business opportunities to get involved with a product or solution and earn revenue selling it to your customers. Particularly when the opportunity is attached to something you already do for a living, a partner program can represent a way to gain new competencies, new customers, and new revenue streams. Then again, I hate partner programs just a little bit, too.

When a business becomes a business partner, there’s an expectation that something will occur that benefits both participants (hence the word “partner”). Each side is supposed to benefit in some manner from the relationship. In the case of the partner program, the expectation is that the partner will sell the product or service to customers and gets compensation on sold deals in return. There may be marketing, lead generation, reseller pricing, training and other elements involved, but the relationship is generally one of “you sell my stuff and I’ll comp you for it”. The manufacturer gets more sales, and the partner gets products that customers buy, meaning revenue for the partner and the manufacturer. Sounds like a good deal.

Here’s why I hate partner programs at times: they tend to shift the focus from what a customer needs to what the partner can earn revenue on selling. For a product or solution-based business, this may not be a bad thing, as the business is in the business of selling product. For a consulting business, however, it can be quite problematic if the consulting team isn’t clearly focused on meeting the customer need rather than pushing product.

There’s an old saying that “if all you have is a hammer, then every problem looks like a nail”. Some consulting firms inadvertently fall into this situation, where they have their favored solutions (perhaps solutions they earn revenue from selling), and they automatically try to apply that solution to each and every customer engagement, whether it makes sense or not.

This happens time and again and not just with consultants, but also with accounting and bookkeeping professionals. Having developed an understanding for, and processes and procedures for working with, a particular business accounting product, the firm tends to make that product a standard recommendation for all clients. In this case the firm may not be literally reselling the solution for revenue, but has certainly “partnered” with the solution in the context that their ability to earn revenue becomes directly tied to the solution they want their client to purchase.

Partner programs can be hugely valuable to both the manufacturer and to the partner channel, and the value of having skilled “feet in the street” supporting and promoting the solution has been proven many times over. But accounting professionals and business consultants should take care when considering their possible participation in these types of programs, and be realistic about how that relationship fits in to the nature and quality of the service delivered to customers. The program may fit well with the needs of the practice, driving new revenue opportunities in new or existing areas of business. On the other hand, it may end up being a distraction, turning the focus from providing great client service and satisfaction to selling a product or solution just to earn an additional buck on the deal.

jmbunnyfeetMake Sense?

J

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Justifying the IT Budget: the Cost of Not Spending

it_spend“Competitive and ever-increasingly sophisticated in the marketplace”[1] describes a company positioned for long term business survival.  Complacency takes the business nowhere but into irrelevance-land, which I think we can all agree is not where most business owners wish to end up…  it makes selling the company slightly more challenging.  Even in markets which were once firmly held to be localized are now open to new – and new kinds of – competitors, due in most part to advancements the development of information technology (IT) as well as how it is applied.  These days, competition is globally facilitated rather than locally, and it’s becoming the standard approach.  Welcome to the cloud.

New paradigms in IT capability and use are spawning huge shifts in what were broadly recognized normal or traditional business approaches.  This realization has created the need for businesses to radically change their view of IT investment and the value of IT within the organization and operation.  Yet IT is rarely an area which gains a strategic focus for investment within most businesses, and is frequently considered to be like a pencil or a particular chair… something the business needs but which has little impact on the company’s ability to compete better.  Au Contraire, Mon Frère:  Information technology is at the heart of business competitiveness, but justifying the desired investment is the great challenge.  Maybe it’s because the focus is always on the great benefits to be achieved with the spend, rather than looking realistically at the impact of not doing it well or at all.  Especially with information technology, there is a large potential cost to be paid for not spending adequately.

While business operations are sustained through IT involvement, economic pressures continue to weigh down business interest in funding IT operations. (which is weird, as there is a lot of evidence that the good bet is on those who do just the opposite). This regular spending reduction and cost control plan has good intentions of reducing the overall cost of business operations. The unfortunate reality is that operations are less efficiently sustained and are even more frequently unable to create or manage any level of growth. Reducing all IT spending is only useful when profitability is also improved and quality is maintained, unless it is an effort to simply stay afloat as revenues decline (and it’s recognized that quality will decline as well). But reducing costs does not help the business seeking to remain competitive in a rapidly changing marketplace, and pulling the pins out of the department primarily responsible for at least keeping things currently in operation operating serves only to chip away at the once-solid foundation. It’s a real problem, this difficulty with increasing interest and justifying increased funding for business information technology. And it all stems from the inability of organizations to clearly and with tangible benefit cost justify the investment.

It is this justification – demonstrating IT investment as a strategic asset presenting an advantage over competitors and positioning the business for future success – which requires effort and analysis to fully describe. Information technology is not a set of servers and software, and it is not websites and portals. It’s not click thru rates or SEO scores. Well, it’s all of that, but it is none of that. There is so much to consider and incorporate, and there are many degrees of success which might be experienced along the way. Information technology is a fundamental requirement in each and every business, and dependency upon it is increasing at a startlingly rapid pace, yet we still can’t quite figure out how to put it all on paper with provable numbers.

It might be easier to forecast in little departmental or functional pieces, but that doesn’t provide a total picture of the enterprise. And it’s often really difficult to quantify the impact of not doing something, or doing it only OK rather than really well. When this data does present itself, it often comes too late and in the form of a comparison to the competition, revealing where the business just didn’t meet the mark as compared to others in the same space.

It all boils down to businesses coming to the realization that information technology investment must be made on a continuing basis. The justification for IT funding must be made, and that justification must necessarily be balanced against the potential implications and impacts of not implementing. This is the only formula which can ultimately describe the value of IT investment in the business.

Make Sense?

Read the entire article on LinkedIn

https://www.linkedin.com/today/post/article/20140624161243-633314-justifying-the-it-budget-the-cost-of-not-spending

 

[1] A model for investment justification in information
technology projects: A. Gunasekaran et al. / International Journal of Information Management 21 (2001) 349–364
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Good Habits for Healthy QuickBooks

Keeping_QuickBooks_HealthyUsing a QuickBooks desktop product is pretty simple – you install it and then you run it.  For many users, it’s just that easy and uncomplicated because they don’t need 3rd party integrated software, they don’t sync their files to other computers or services or try to share their QuickBooks data, and they remember to exit QuickBooks and back their files up each and every time they use them.  On the other hand, many QuickBooks users experience quite a lot of frustration with the product – frustration which may often be the result of a poor practice when using the software.  QuickBooks has been engineered over many years to be as simple to use as possible, but at the same time has grown to be a product with lots of features, add-ons and extensions.  Users have also found ways to make QuickBooks do things it wasn’t really designed to do, this truth being one of the good things and the bad things about the product.  When it works, it works great.  When it doesn’t work, it’s beyond frustrating.  It is a shame that a lot of the problems users have with solution may be rooted in the habits and behaviors of the QuickBooks users themselves.

Bad software use habits will cause problems whether the software is installed on the user PC or whether it’s being managed by a hosting service provider.  Certainly there are some issues that hosts may mitigate, but the following is a list of good habits for keeping the QuickBooks software and data healthy and working that should be standard operating procedure for any QuickBooks user, whether QuickBooks is being hosted or not.

Keep the company file in good condition.

I cannot stress enough the importance of keeping the file in good condition.  What’s the accounting and financial data worth, after all?  A little time spent taking care of the file can save on a lot of time and headaches trying to reinvent the information. A QuickBooks company file is really a database, and is a rather complicated framework for keeping track of all sorts of related information.  Anyone who has used QuickBooks desktop products for a while understands that the data file can get screwed up for a variety of reasons, and it is no fun.  Yet QuickBooks has utilities to verify and rebuild data files, so it makes sense to periodically use them to check for problems.  Like a check-up with the doctor, these utilities can help diagnose issues with the data file before they become really big issues.  Another good practice is to back up the company file to a “portable” once in a while, and to then restore it for use.  This process can not only validate the integrity of the file, it also helps condense and “condition” the file.  Particularly when using a hosting service, but also when just running local on the PC, conditioning the data file once in a while can help prevent data corruption and/or loss (of data, time, productivity, revenue).

Close the company file and exit QuickBooks once in a while, would ya?

Users who leave their computers on all the time are missing out on the fun of letting their machines reset and do a POST (power on self-test), which means the machine or operating system could have an issue and the user wouldn’t recognize it until the machine was powered off and then restarted.  For this same reason, programs and their data files should be closed when not being used – so they can run through their own startup and validation routines before you use them.  Also, leaving the program open means it is active on the computer, and leaving the data file open means that it’s available (read=vulnerable).  A random bypasser accessing the computer, a program crash, a machine crash… loss of power or a kitten running over the keyboard could all result in catastrophic damage to the application and/or data.  It’s just better for all involved if the files and programs are closed when not being used.  Maybe use a screensaver with a password, too.

Don’t try to use QuickBooks with a VPN (virtual private network) connection.

Just because a user can connect their remote PC to the office network doesn’t mean the PC will work like it’s in the office.  In the office, it’s a Local Area Network, and the speed is fine enough to allow multiple computers to share a QuickBooks company file in multi-user mode.  When there is a remote PC connected via a VPN, it’s usually a Wide Area Network connection, meaning that the network has been extended to include the remote computer, but that network connection IS NOT fast enough to allow the remote user to open QuickBooks along with others in the network.  QuickBooks multi-user access only works on a local network (where local means the machines are all “local” to each other – on the same LAN).  When QuickBooks is hosted by a service provider, the QuickBooks stations and the data files are all located inside the host’s network, making it all LAN stuff.  The only remote part of it is sending the input and output (display, printing, keyboard and mouse) information “over the wire”.  This is why a hosting model works when the app and data are hosted, but doesn’t work when only the data file is hosted.

Use Automatic Update, not Manual (but DO update).

Features change, new technologies must be supported, and user expectations adjust based on a wide variety of influences.  What this means is that software products will necessarily experience change over time and users will be expected to update them.  The first release of any new product is rarely flawless.  It’s during that first introduction to a volume of users where many issues are found, making the v1 release of a software product something many people try to avoid. Yet there are still lots of folks who just can’t wait to have the newest thing, even when it comes to something like software patches.  Regardless of how much they may put at risk, these folks want each and every patch and update as soon as it is available somewhere.  These are the users who end up debugging the software for the rest of us, so I guess we should thank them.

For most users, however, it makes sense to wait until the software has been out for a bit and those initial issues identified and corrected, perhaps bypassing v1 and going straight to v2.  If the product will allow, that is.  QuickBooks has this great (or annoying, depends on how you look at it) feature that can tell users when there is an update available.  This “automatic update” feature checks with Intuit to see if there are updates available for the product, and then tells the user they can download and install them.  Generally, Intuit pushes these updates out only when they’ve been debugged and are deemed ready for volumes of users.  If people want to get an update before Intuit pushes it out, they may be able to obtain it for manual installation.  This is not the recommended method of handling QuickBooks updates; for most users, waiting until the product tells them it’s time to update is best.

Make sense?

J