Overview
The role of the accountant in a new business venture has evolved far beyond crunching numbers. An Andersen partner explains key planning that new business ventures should utilize.
Accounting is more than Crunching Numbers for High Tech Companies
As big businesses continue to downsize, small companies are becoming increasingly important to the economy. In recent years, these companies have created eight million new jobs. Contrary to the common misperception that the marketplace is a black hole for small businesses, nearly three-quarters of company owners questioned for Arthur Andersen’s most recent survey of small and mid-sized businesses earned a profit last year.
In Massachusetts, the outlook has never been brighter for start-up and young technology companies. The state’s software industry serves as a good example. In each of the past five years, the software industry has enjoyed almost 20 percent expansion of employment, with total employment more than doubling. According to the Massachusetts Software Council, the state’s software companies last year generated more than $7 billion in sales. A high rate of capital consumption accompanies this rapid growth. The end result is cutthroat competition for capital.
Historically, start-ups and young technology companies have only looked to their accountants to manage their tax and audit needs. Today, accounting firms are performing a full range of services, from assistance with market research and business plan preparation to identifying sources of capital to finding qualified employees. While at first these services may seem incongruent, when you consider their impact on a company’s ability to obtain capital, it’s clear why companies turn to financial and accounting advisors to address these issues.
Developing a Corporate Strategy
The first thing any fledgling technology company must do is develop a market-oriented corporate strategy. It isn’t enough to have a good idea for a new product. Companies need to understand the dynamics of the marketplace and their place in it.
Formal market research is an important process that is often overlooked by young companies. Often, entrepreneurs rely on their instincts to identify new market opportunities and survey customers to gain insight into their opinions about the company’s products and services. Less frequently, however, entrepreneurs use more sophisticated market research techniques to understand what customers value and how their products and services compare. Successful companies continually seek information from the marketplace to develop strategies and action plans for the future. Many accounting firms offer clients research methodologies that measure and translate this information.
After determining the dynamics of the marketplace and how they compete, businesses must ask themselves, “where do we want to be in three years?” “In five years?” Company managers, using the market research as a starting point, need to develop consensus within the business about how their future should look.
Developing a Business Plan
Once managers have determined where they want to be in five years, they need to figure out what resources are required to get there and communicate this vision to employees and potential investors. To do so, start-ups must draft business plans and established businesses should update their existing plans. Without a plan, it is extremely difficult to obtain private financing from venture capital firms, private investors, or banks. Without capital, start-up technology companies can’t get off the ground and more established companies have a hard time growing.
Many technology companies needlessly develop extensive planning documents which may run as many as 90 or 100 pages. These documents explain in significant detail management’s view of the marketplace and the opportunity, how the company will compete, and the resources required to compete effectively. Often, however, the most important success factors are buried in the minutia. Potential investors want to read a concise business plan so they can quickly decide whether they are interested in the opportunity. Far more valuable to a potential investor is the Executive Summary Plan, a 10 to 12 page plan providing an overview of the opportunity, the company’s strategy, and the capital required to grow the business. The primary purpose of this plan is to help investors recognize a sound investment opportunity.