Last year was a year filled with initial public offerings. Almost 1,000 companies went public in 2021 which is more than double the amount from 2020 (Time). With so much market activity, your company may have thought about going public as well. Although ultimately the market decides if you’re ready to be a publicly-traded company, this article provides an overview of five key areas to think about before you submit the S-1 registration filing with the SEC.
1. Close Procedures
Having good close procedures ensures that revenues and expenses are recorded in the proper period. Oracle defines close procedures as “all the financial and accounting processes that regularly occur in a business leading up to, and including, closing the books on the preceding month, quarter or year” (Oracle). With close procedures, the goal is to strike a balance between accuracy and timeliness so that the company will be prepared for the demands of public reporting. If your team had 30 days to close the previous month, they would probably be very accurate but untimely. Conversely, if the team could close the previous month’s books in a day, it would likely be inaccurate. Somya Munjal, CPA, founder and CEO at Youthful Savings and managing partner and founder of CPA for the People LLP, stated that, “I have a 10-day rule, ten days after month end is a good rule before presenting close information. You need to set expectations, manage upward if you are getting pressured, and explain what it takes to get the numbers done right” (AICPA). If you are struggling to follow the 10-day rule, one of the best ways you can speed up your close procedures is by automating routine processes. Tools like Python, UIPath, or Excel Macros can assist you in manual data cleaning and preparation associated with closing the books.
It’s imperative that you really understand your business and the products or services you sell. As a publicly-traded company, you will be expected to provide guidance on key financial metrics to Wall Street. If you can’t model and forecast your revenues and expenses effectively, the Street will begin to lose faith and your stock price will suffer!
For example, GlaxoSmithKline is a health science company that has been publicly traded for almost forty years. On February 3, 2021, the company reported earnings per share of $0.62 which was 8 cents lower than the consensus forecast amount. Consequently, GSK’s stock dropped 11.43% after it failed to meet expectations ((GSK) Earnings Report Date | Nasdaq). Accurately forecasting revenues and expenses helps your company maintain credibility with its investors.
3. Define Accounting Policies
Up to this point in your company’s journey, your auditors have likely assisted with many of the complex accounting decisions as you’ve operated under AICPA private company audit guidelines. As a publicly-traded company, this assistance from the auditors approach will no longer work. A public-company audit, conducted under the oversight of the Public Company Accounting Oversight Board (PCAOB), is more stringent, meticulous, and casts a wider net due to the lower materiality threshold, all with an accelerated timeline (Embark). To help your audits go smoothly, make sure that your company has its own policies and procedures in place and that those on your finance team thoroughly understand them.
4. Spend Management
It’s important to have software in place to manage your spending. This will simplify your purchase order approval process and enable you to better track spending and manage your accruals. Spend management is important because it provides transparency and control over your cash that can help you reduce risk, drive growth, increase profits, and be more efficient across the board (Procurify). There are plenty of software companies such as Coupa and Bill.com that can help you streamline this process if you haven’t already.
Having good controls in place will help you and your team feel confident about what you’re reporting as well as lower the risk of misstatement due to fraud or negligence. Moss Adams recently highlighted a few areas that you may want to visit before going public. The common errors they identified were a lack of clearly defined processes and controls, a lack of adequate headcount, a poor segregation of duties, and a lackluster enterprise resource planning system (Moss Adams).
One way that you can help defend yourself from inaccurate financial reporting is making sure you have sufficient accounting headcount. At least 39% of smaller companies have self-reported ineffective Internal Control over Financing Reporting (ICFR) since 2013 (Audit Analytics). One potential cause of this problem is that some companies go public with fewer than 5 people in its accounting department. Having that small of a team makes it extremely difficult to manage the finances of a public entity as well as ensure proper segregation of duties. Your scrappy mentality has likely served you well up to this point. However, it’s probably time to hire a few more accountants and internal auditors to make sure you’re ready to face the pressures of Wall Street.
In conclusion, the market will ultimately decide if you are ready to be a publicly-traded company. Although this article can’t cover every detail that should be considered before going public, it paints a picture of some key areas to focus on as you consider this important decision in your company’s future.
Information gathered from a personal interview with Roger Worth, Director, Business Development at Connor Group.