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Illegal Payroll Deductions for Employee Mistakes - DOC

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					Something Ventured

March 3rd, 2006

It’s So Basic

“Hey, don't write yourself off yet.
It's only in your head
You feel left out or looked down on.
Just do your best, do everything you can.” – Jimmy Eat World, The
Middle

After nine years of early stage investing in and around BC I have seen
a ton of things done wrong and a few things done very, very right
when it comes to managing the beginning few years of technology
companies. It is easy to write about the mistakes when you see and
do so many of them. As the Sinatra song goes, “And mistakes, I’ve
made a few...” After all of this learning, it seems to me that there are
some simple things that a company can do to set it up better for
success. Simple things that help avoid big mistakes. Not the hard,
strategic decisions on marketing, product development or capital
raising. Easy, simple things that so many companies fail to do well
and it ends up costing them down the road.

At this point, the writer pauses and thinks, “Hmmmm… Steven Covey
made a fortune packaging common sense things your mother would
tell you under a “business-speak” title.” Maybe I should leave you
hanging and tell you to read the book when it comes out. All I need is
a catchy title…

Forget it. I’ll leave the book business to Brody and Raffa.

I’ll save you the $24.50:

In sports, when a professional team gets in a slump, you here the
athletes talk about getting back to fundamentals or keeping it simple
when discussing how to break out of the slump. Nothing fancy, just
good old hard work on some basic premises. In a start-up, a slump is
never a good thing when you are chronically short of cash and your
last 10 minutes of success or failure could determine whether you get
any more cash.

So why is it that so many start-up slack the simple fundamentals for
running a business? What are they, you may be asking? Oh, just the
boring old processes and procedures… the back office. Accounting and
human resources. Sticking with the sports analogy, this would be
skating and shooting or catching and throwing, you know, the basics.
Without the basics, you can’t do the more sophisticated strategies in a
sport. Same in business.

I’m referring here to being very, very good at the basics. It is not
enough to have a chequebook as your accounting department and a
paycheque, complete with payroll deductions, as your HR procedures.
If you are going to be a big business, a world class technology
performer, you need to have a very good back office.

Let’s paint a typical scenario that I see in a technology start-up.
Entrepreneurs and engineers are the employees (sometimes they are
one in the same). They do the very rudimentary company formation
steps: hire a lawyer, incorporate, get a bank account, rent some
space, grab some computers and make a web site. The CEO signs all
of the cheques. Every once in a while, employees ask to be
reimbursed for expenses. One guy runs off to Staples, puts $500 on
his credit card, buys mostly for the company, but adds a nice desk
lamp for his apartment, which he rationalizes will help the business
and submits the total bill for re-imbursement. Crunch time for the first
alpha release means employees are working nights and weekends, not
documenting anything they are doing or how much time they are
working. Often at night, the “work” devolves into a frag fest on the
new HALO video game release. Contract workers are hired to help
with the deadline. They work at home and keep chunks of the source
code on their computers, even after submitting their work. The CEO
hires his wife as the “accountant” and doesn’t tell anyone, which is OK
because no one ever sees her or knows she is getting a paycheque.
The CTO pays for the development tools on his credit card, is
reimbursed fully (eventually) and takes the dev tools home to install
illegal copies on his computer so he doesn’t have to pay for them. In
fact, the entire office is running off of one copy of XP and one copy of
Office. Eventually, the bucket behind the desk of the CEO becomes so
full of invoices and receipts, it is indistinguishable from the trash can
and is accidentally recycled, leaving no paper records of the past year
and no electronic record because even the simplest accounting
software was not used. No one knows what a payable is or which ones
are beyond 90 days until the guy from the computer leasing place
shows up to re-claim the PCs.

All of the foregoing examples are real. Identities have been hidden to
keep the embarrassment at a low level. I have enough stories like
this, about the back office functions in a start-up, to fill ten columns. I
have done diligence on companies that existed for 5 years and the
accounting system in place was a chequebook and a bank account.
Cash in, cash out. It was seat-of-the-pants financial management of a
company with nearly a million dollars in service revenue. No formal
record keeping at all. Fraud? Embezzlement? Improper expenses?
Who knew? Only the CEO.

From the very beginning of any business, hire an accountant. Get a
financial system in place, even if it is a $300 Quickbooks software
package. You need a bookkeeper to enter all of the payables and
receivables and an accountant to create a real time system to allow
you, the CEO, to know what is happening with cash. It also must be
“accountable”. You need signing authorities and review of major
expenses. You need to set up procedures for expense reporting and
policies about who purchases and what expenses are allowed
{Purchasing policies are critical to managing cash and are the most
often overlooked aspect}. You need someone to go through expense
reports in gory detail and match the reports to the policies. If you are
in a big company, all of this sounds like kindergarten basics because
you have these in place. Exactly. You are a big successful company
because you executed on your plan and execution does not happen
without best practices in your back office.

In the beginning you don’t need a full time controller or even a
bookkeeper. These functions can be outsourced as well. But be sure
you set the policies and understand the procedures across your
company before you just hand off the responsibility. I’ve seen
companies with contracted accounting and outsourced payroll
processing have problems getting an audit done because they failed to
let every employee know the policies and the rationale behind them.
It’s not enough to create a back office, you need to have everyone in
the company understand who is accountable and what they need to do
to make the company accountable.

Human resources is often mistaken for hiring and firing only. So a
start-up CEO has that covered under their role with a small number of
employees. Documentation in HR is as important as in technology
development and accounting. How are people hired? How are they
evaluated? How are bonuses handled? How is firing handled? What is
the difference between “for cause” firing and layoffs? How is the
payroll handled and who looks after the payroll tax adjustments?
What are the job descriptions and who handles the updating of these?
What about confidentiality, non-compete and disclosure of know-how
and intellectual property? Can the employee moonlight? Can they
work at home? What is the policy about playing games, surfing for
personal things on company computers and network, pornography or
hate mail, instant messaging? Who enforces these policies? Does
anyone at the office know even the most basic tenets of the Employee
Standards Act that governs, and in some cases supercedes, the
policies you are making up? Who does the benefits for your
employees? What’s the procedure if your lead programmer is checking
into a substance abuse program and he wants to take a month off in
the middle of your crunch time? What happens if the dev team gets in
a fist fight on your company premise and your QA lead has a broken
nose?

Yikes. You had better be scared about HR. It is the absolute last
senior hire of any start-up. You need someone to look after these
issues and deal with the all-too-human aspects of running a
technology company in which people are your greatest asset.
Outsourcing the “hard” HR aspects (benefits and payroll) are easy.
The hard part is trying to go part-time or not at all when it comes to
all of those “soft” HR issues that can lead to complete destruction of
your company if not managed. A very good, experienced operations
person with HR experience but a broader knowledge of development
and/or accounting is the perfect hire early on in a start-up. It helps
you focus on the product and the tough strategic parts of your
business. If such a person exists, grab them because it saves on the
hiring of two or three specialists in the various aspects of the company
back office. Part-timers are usually a cash-saving choice in the
beginning as well.

Get the basics in place right from the beginning. Investors will be
hesitant to invest if the company lacks the basics. Investors should do
enough diligence to find this out. Especially VCs, who turn your
company upside down and shake it before investing. You can’t
execute on the growth strategies if your back office is an anchor.

Letters From Last Time –

{Ed.} This is a letter from the founder of Creo, who happened across
my column about the sale of Creo (Learning Latin With Creo) a little
less than two years after it was posted…

Erratum: a Latin word meaning a small error in otherwise excellent
article. I did not choose Vancouver by throwing a dart at the map- far
too dangerous a procedure considering the vast empty spaces north of
here. I chose it the way I do all major decisions in life: consulting a
palm reader. Now, if you believed the dart story there is no reason
you would not believe this. Seriously, and for sake of accuracy: I
chose Vancouver by following the isotherms on the world map and
looking for an English speaking place located on a warm isotherm that
has no mandatory army service (I was serving in the Israeli army at
the time), as well as nice scenery. Canada has a wonderful reputation
anywhere in the world and that was a factor as well. Being the
decisive type I told all my friends that I'm moving to Vancouver and
will spend the rest of my life there. So far so good.

Cheers, Dan

				
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