Arthur Andersen


Accounting is more than Crunching
Numbers for High Tech Companies

This edition of the Arthur Andersen section of the EM is based on the Fifth Annual Survey of Small and Mid-Sized Businesses conducted by the Arthur Andersen Enterprise Group and National Small Business United. The Survey is conducted in an effort to understand and represent the concerns of the nation's economic engine.

The Executive Summary of the Survey states, "The economic outlook for small and mid-sized businesses is brighter than ever. As the recession of the early '90s fades into the past, small and mid-sized businesses are gearing up for growth, focusing on the competition, and are expecting a blockbuster year."

If you would like a copy of the 1996 Survey of Small & Mid-Sized Businesses, please call Arthur Andersen at (617) 330-4170 or click the following name to e-mail Joseph Walsh:

Joseph Walsh, Arthur Andersen


By Stephen F. Hatfield
Partner, High Technology Practice
Arthur Andersen - Boston, Massachusetts

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.

Attracting and Retaining Key Employees

The third significant challenge facing start-up and small technology companies is finding and retaining employees. We've all heard the cliche that "our employees are our greatest resource." In the technology industries, this is especially true. There is a limited pool of top-flight talent, and companies are constantly competing, not just to attract that talent, but to hold onto it. Company managers live with the realization that their competition is always on the lookout to raid their stable.

According to the small business survey, companies are turning to new types of incentives to lure and retain employees. For instance, 62 percent of companies recognize the importance of rewarding performance through bonuses, commissions, and other incentives. In addition to rewards, companies need to offer progressive salary and benefit packages, including health, dental, and vacation benefits, as well as defined contribution plans such as a 401 (k) plan.

In early stage technology companies, the most common and valued employee benefit is participation in an equity-based compensation plan sponsored by the company. This benefit generally takes the form of options or grants to purchase common stock. Many companies will set aside between 10 to 20 percent of the equity ownership for non-founding employees and then allocate the option grants based on each employees position and contribution to future success.

Measuring Success for Technology Companies

For technology companies, the measure of success is not necessarily size. Rather, the key is the company's ability to adapt to market trends and ways of doing business. Only by addressing the three keys to success--strategy, planning, and employees--can companies make the necessary market adjustment. The technology marketplace is littered with failed companies that had fine products and competent management, but still failed because they didn't adequately address these issues in a timely manner.

This region boasts many of the country's most successful technology businesses, companies like Thermo Electron, Raytheon, and Arch Communications Group. Without exception, these businesses serve as examples of companies that have worked with their advisors to develop effective corporate strategies and business plans, as well as programs for attracting, motivating, and retaining their employees. - ###


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