Michael Doan

Yesterday the SEC’s Division of Enforcement sought voluntary production of documents from Green Mountain Coffee Roasters, the maker of the single-cup Keurig brewers. At issue is Green Mountain’s revenue recognition policy. Green Mountain is a publicly traded company with a market capitalization of $4 billion and is audited by PWC, so it most likely has a revenue recognition policy in place.

Smaller companies, particularly privately-held companies, probably don’t have a written revenue recognition policy, but they should. Revenue recognition is always a hot-topic with the SEC and it should be hot topic with any business owner. Revenue recognition under generally accepted accounting principles in the United States is a complex area where even seemly simple transactions can open some very complicated recognition rules.

Companies should maintain a written revenue recognition policy for each of their products or groups of products (if they are homogeneous). Having a well written policy is the first step in ensuring that revenue is recognized in a consistent manner on a company’s financial statements. When I’ve written revenue recognition policies in the past, I’ve generally followed this outline:

1. Describe the product or group of products
2. How and where the product will be sold.
3. How and when the earnings process is complete.
4. References to any accounting literature
5. The journal entry to record the revenue and/or deferral of revenue and supporting accretion schedules.

Because each product or transaction is so unique, it’s very difficult to devise a standard “check-the-box” approach to determining revenue recognition and it’s probably ill-advised. Many companies have well-trained and talented accounting staff that can go through all the complex revenue recognition rules to write up a policy. In the event that they don’t have the expertise or resources (mainly time), hiring a certified public accountant to perform a SAS 50 engagement (reports on the application of accounting principles) is also an option.

Note: SAS 50 was later amended by SAS 97, Amendment to Statement of Auditing Standards No. 50, Reports on the Application of Accounting Principles. It’s also known by the less sexier name AU Section 625.

This evening I attended an AccessEN event. Kristen Manger, CEO of Webvisible was the guest speaker. Her presentation was about how her company survived 2009, one of the most difficult year for many companies. Not only did her company survive, but it met its operational goals and raised $20 million from venture capitalists in the last quarter of 2009.

During her presentation, she said one thing that really stuck out: even though Webvisible is a privately-held company, she and her team run it like its a publicly-traded company. Not only does the company have their financial statements audited annually by Ernst & Young (Kirsten, if you want more value for your money, call me — who the hell are Ernest & Young anyways? Never heard of them), but they have their financial statements reviewed quarterly.

Kirsten is running her business like she means it. She is putting the right infrastructure and talent in place. There’s no mom and pop mentality.

Many business owners ignore the realities of their business. They spend more time being the technician in their business rather than the CEO — the person with the vision for the company and the person who puts all the pieces together. As Michael Gerber, author of The E-Myth, says, business owners spend too much time working in their business instead of on their business.

Business owners are so concerned with product development and sales that they do not pay attention to the infrastructure: accounting, human resources, technology, and building key management.

A business owner that is not intimate with the numbers and whether those numbers are accurate are going to have a tough time attracting investors or convincing a bank to extend it a line of credit or loan.

Business owners who don’t know the difference between EBITDA and net income are in trouble. Those who don’t understand the interplay between the balance sheet, profit and loss statement and the statement of cash flows are in trouble. These business owners simply don’t know their business.

The same goes for human resource issues. Many business fail at correctly classifying their employees between exempt and non-exempt or know the criteria that separates an employee from an independent contractor.

Does this all sound overwhelming? It does because it is. A business owner needs to understand these things, but they don’t have to be an expert in them. Outsource the talent that you don’t have but just understand how it all fits back into your company.

As with all new businesses, money is tight but that doesn’t mean that you can’t buy a little help here and there when you get a chance; buy a little advice at a time just to make sure that you’re on the right track.

Small business loans are hard to come by these days because banks are being more cautious about their lending practices. When banks do loan money, they often require the borrow to meet many financial and non-financial covenants. One such covenant is a requirement for the borrower to have their financial statements either reviewed or audited by a certified public accountant (CPA) (either a sole-practitioner or a firm). This is a cost that many small business owners are either not aware of, or forget about, when they are calculating the cost of borrowing money.

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