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Expert Advice for Medium and Midsize Businesses

Want to Grow? Here are Some Finance Rules You Need to Think About

Guest Author

By Steve Dalton, Senior Director, ERP Product Marketing, Oracle

Growth is the goal of every SMB. You want to attract investors, ramp up revenue, and enter new markets. Maybe you even have your eye on an initial public offering.

To plan for your IPO, or even attract funding from banks or venture capitalists, you need to prepare for the rigorous demands of the financial markets and investors. No matter which country (or countries) you do business in, the world of finance today involves lots of red tape, particularly for publicly-traded companies.

Here are some of the regulations you need to think about, and some advice on how to make your finances transparent—and compliant—enough to inspire investor confidence.

Start with the Securities and Exchange Commission

If your company offers or sells securities in the United States, the SEC is the public entity that protects investors through various activities including enforcement of U.S. security laws. It offers an online guide for small businesses for raising capital and complying with federal securities laws. For companies that have already gone public, there is also a list of statutes, rules and forms summarizing the main regulations for public companies. This is a great place to start.

Public companies based in the U.S. need to comply with U.S. generally accepted accounting principles (GAAP) and provide audited financial statements. Private companies don’t have to comply with U.S. GAAP, but many often do especially if they are planning to go public.

ASC 606 / IFRS 15 is an interesting exception to this rule, because private companies must comply with the revenue recognition standards by 2019—so let’s look at that, next.

ASC 606 / IFRS 15 Revenue Recognition Standard

Finance teams use the concept of “deferred revenue” to account for contracts that are on the books today but won’t be fulfilled until future periods. All that is about to change.

Starting next year, you’ll need to record “performance obligation” liabilities. This is the new approach mandated by the ASC 606 / IFRS 15 accounting standard. The new guidelines will affect all public companies—so if you’re planning that IPO, you need to start thinking about compliance now.

Even some private companies will be affected. By 2019, the guidelines will govern companies that are accountable to the public in some way—for example, government entities, credit unions, or companies that issue bonds and securities.

The biggest impact will be felt by companies in high technology, media and entertainment, communications, aerospace and defense, automotive, engineering and construction, pharmaceuticals and life sciences—in short, any company that works with complex contracts, that bundles goods and services together, or that typically has remaining deliverables even after the first major shipments are complete.

Country by Country Reporting (CbCR)

Corporate taxation continues to undergo a level of scrutiny that was unheard of even five years ago. Last year’s $14.5 billion dollar fine on Apple by the EU is a high-profile example, and the raid on Caterpillar’s corporate office sent shivers down the spine of many a CFO.

Emerging requirements like the Standard Audit File for Tax (SAF-T) will put further pressure on the corporate tax function, and globalization will continue to drive complexity—and increase scrutiny.

If you have plans to expand your operations into other countries, the stakes are high. Governments are cracking down on companies that use offshore operations as a tax shelter. Corporate tax reporting is now a board-level concern—and something that potential investors want to have confidence in.

Sarbanes-Oxley

Sarbanes-Oxley (SOX) has been in force since 2002. Then-president George W. Bush called it, “the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt.” The intent of SOX is to enhance corporate responsibility, improve financial disclosures, and combat corporate and accounting fraud.

Private companies don’t need to worry about SOX compliance, but if you’re planning to go public, you need to start thinking about the requirements.

There are specific SOX rules around public SMBs and when they must comply. The SEC has two categorizations: “smaller reporting company” and “emerging growth company.” These two categories have less onerous requirements, such as providing limited disclosures and not having to comply with SOX.

A company qualifies as a “smaller reporting company” if its public equity float is less than $75 million—or, if it cannot calculate its public equity float, has less than $50 million in annual revenue.

A company qualifies as an “emerging growth company” if it has total annual gross revenues of less than $1 billion during its most recently completed fiscal year and, as of December 8, 2011, had not sold common equity securities under a registration statement.

Future Considerations

With new laws, regulations and accounting standards continually being enacted, it’s nearly impossible for companies to keep track of them all. The burden of compliance, and the risk of running afoul of one of the many rules and regulations, continues to pile up.

Anyone in a finance department who must sign off on financial reports undertakes a personal risk. CFOs, controllers, and audit committees must certify that their financial reports are materially correct, and that their internal controls over financial reporting are effective. When you set your signature to paper, you’re signing off with faith and trust in your people and processes.

Unfortunately, people make mistakes—and processes are not always documented, nor verifiable.

This is where technology can play a critical role in your compliance efforts. SMBs that need to demonstrate financial integrity should invest in software that can automate recording and reporting of their financial records, as well as automate their risk and compliance controls.  

CFOs and controllers should look for systems that:

  • Provide straight-through processing, with exceptions flagged for review
  • Offer a comprehensive suite to manage all reporting and compliance issues—tax, revenue recognition, SOX, GAAP and more
  • Leaves an automatic audit trail for verification
  • Is cloud-based, so that it is always up to date with the latest functionality required by regulatory bodies

Technology will never fully replace human beings, and CFOs will ultimately remain responsible for the fiduciary duties of their SMBs. But with the right technology, you’ll be able to have more confidence that your company is following the rules—and potential investors will have enough confidence in your SMB to be willing to finance your future growth.  

GO for Growth with Oracle ERP Cloud and Oracle EPM Cloud.

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