Why Professionals Say ‘NO’

Both public accountants and  lawyers in private practice depend on new entrepreneurs defying the odds to try and establish new businesses. However they are only too aware of the risks that anyone will face as an entrepreneur. In fact a key role is to understand the nature of these risks and to help mitigate them to some extent.

Lawyers practicing commercial law will help with legal structures and contractual arrangements much of which is designed to protect the business owner from his or her partners, other shareholders, suppliers, customers and even the government in the form of the taxman.

Similarly public accountants help ensure that financial systems are properly designed, that financial information is accurate, that the appropriate, tax-efficient legal structures are put in place, that tax and regulatory compliance doesn’t become a problem. They also use their experience to understand risk and opportunity found in financial information.

Since entrepreneurs depend on professionals to identify risk, they shouldn’t be surprised when lawyers and accountants seem somewhat negative. From the professional’s perspective there is almost no risk to them in recommending  against making an investment.  If you don’t make an investment, you cannot prove how it ‘would have turned out’ . If someone else succeeds with an investment there are always factors that differentiate their situation from yours.

The alternative situation – recommending an investment – is fraught with risk for the professional. The entrepreneur can expect  a large number of caveats from the professional to limit their (the professional’s) risk.

About Small Business in BC

Most of us – when we think of business, we think of large multinational corporations – and we see businessmen as the ‘captains of industry’. The truth is really quite different. Small business accounts for almost half (48%) of private sector  employment in Canada.

The situation in the US is very different. While the percentage distribution by size of firm resembles the distribution in Canada – the percentage of very small firms in the US is even larger than in Canada. The greatest difference though is in the number of very large firms – and more significantly – in the size of those firms.

In fact, large firms in the US account for about 64% of all private sector employment. Compare that with the situation in British Columbia – where small business (fewer than 50 employees) accounted for 56% of private sector employment. While small business is very important to the Canadian economy as a while, the relative importance increases as you move west from the Atlantic.

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What’s more, these ‘small’ businesses are really quite a bit smaller than we’re led to believe. Fully 90% of small businesses in Canada have fewer than 10 employees – and 80% have 4 or less.

About Small Business

When designing accounting or bookkeeping systems for a business, it should be clear that we need to match the system to the business’ needs and to the skills and capabilities of those who are going to work with the system. At best small companies hire bookkeepers to come in once a month to record batches of transactions. They are very lucky if they actually find a skilled bookkeeper, since these are a rare commodity.

So why is it that we typically saddle these poor companies with accounting systems that are meant to be operated in real-time by skilled bookkeepers?

It just plain doesn’t make sense to inflict a fairly sophisticated accounting system on an early stage business.  Anticipating what a business will look like in 5 years and creating a structure at the outset to accommodate the expected growth will almost certainly fail. That’s kind of like buying a made-to-measure suit for a 10 year old boy, and asking the tailor to measure his father to get the dimensions. There are a number of reasons why this approach will fail:

  1. Most of these businesses won’t exist in 5 years time
  2. The business may not be able to afford someone with the skills to operate a complex system
  3. A public accountant will charge at his or her professional rates to fix the system – if an inexperienced bookkeeper screws it up.
  4. The owner could spend too much time learning about – and tweaking – their bookkeeping system instead of working on the business.
  5. Simplicity encourages timely compliance (i.e. getting it done) – putting off doing the books is very typical of entrepreneurs
  6. Accounting software is cheap – but good implementations can be expensive
  7. It’s impossible to predict what the business will look like in 5 years.

The Cost of Professional Advice

The best professional advice is expensive, and you have to line up to get it. Hourly rates for highly-skilled professional accountants start at more than $300 an hour for a manager. For senior managers and partners, rates often exceed $600. Large, multinational companies are prepared to pay these rates because they know that the best advice is worth it, and they only pay for what they need.

These same multinationals ‘poach’ talent shamelessly from the ‘Big 4’ accounting firms to staff up their internal accounting and tax departments. So when the VP of tax for an international mining company calls up a tax partner at KPMG to discuss a tax issue, it’s more or less a discussion amongst equals.

Electronic Document Imaging (“EDI”)

EDI faciltates outsourcing.

It allows us to put documents in front of people instead of taking people to documents. Coupled with cloud-based technologies like GOOGLE Docs™ – it gives access to authorized users wherever they are in the world.

While the paperless office may still be a pipedream, EDI is an important step along the way to the paperless workplace. Paper is still important as evidence though. Standards for document imaging are evolving, but it still makes sense for most organizations to archive paper documents as evidence.

The Canada Revenue Agency (“CRA”) may still require paper documents as evidence that a transaction took place – unless you conform fully to the CAN/CGSB-72.34-2005 standard for Electronic Records as Documentary Evidence (available in paper format at major public libraries)

The CRA also publishes a guide to KEEPING RECORDS: (rc4409-9e)