Skip to 0 minutes and 0 seconds Now, hopefully, this isn’t the most exciting part of your job, but your product exists in a financial and a legal reality. So let’s take a few minutes and just talk about that interface. One of the things, the failure modes with finance, that you want to watch out for is that you’re not able to get the metrics out of the system that you need to understand revenue drivers or cost drivers. That may not be the only result that you’re measured on but it’s probably going to be relevant.
Skip to 0 minutes and 27 seconds So, if the accounting system is changing and the accounting people are like, hey, we need you to come to this meeting about your product and you’re thinking, I’m going to skip that meeting because it sounds super boring. Don’t skip it. We send them a few notes about how you look at your different revenue streams, cost drivers, whatever it is, in your results scheme that you want to know about, so that you make sure you’re getting the right metrics and you don’t cause a lot of rework or lose your access to those metrics. Revenue recognition, especially in digital is often a big thing.
Skip to 0 minutes and 59 seconds Make sure you, make sure you either understand the fundamentals of that or if you’re making a material change to the way that you price or package the product that you check for revenue recognition issues, I’m sure your accounting people will be happy to talk to you about them. Let’s just, in case you’re not familiar with it, let’s just quickly cover the difference between accrual versus cash accounting. There are lots of great resources, e-learning resources, resources online, and learn about this. We’ll just cover the absolute basics. Let’s say, Enable Quiz sells a prepaid subscription at $100 a month for an entire year to a customer. The cash for you is really simple.
Skip to 1 minute and 35 seconds It would just say, and let’s say this happens in January, this cash view is we get $1,200. Great. Very simple. The accrual of you is, well, you know, really were earning $100 at the end of each month. So, the accrual is usually the more kind of interesting and usually complicated part of the accounting because the accrual is really where you’re creating a narrative about what’s happening, the economic reality of the business.
Skip to 2 minutes and 1 second So saying that, you know, we got $1,200 this month isn’t really, I mean it matters, because cash may be very important to your company, but it doesn’t really tell the story or the fact that they paid us, but you know, we really don’t, kind of, own that money until we render this service out for the next 12 months. It’s not like they just paid us, you know, we handed them a widget and they handed us $1,200.
Skip to 2 minutes and 22 seconds And what if, you know, what if they have some kind of like guaranteed satisfaction thing at the end of the year or whatever those, those are things that you’re accounting team is having to grapple with to figure out how they recognize that revenue appropriately. The other dimension or accounting is managerial versus financial. Basically, this is managerial is inside stuff for your company to make decisions and financial is outside stuff to communicate with the public and often the tax authorities. So, this is something that you’ll probably be pretty involved in because it’s things like forecast and planning and internal views of profitability and revenue and things like that.
Skip to 3 minutes and 2 seconds And financially, you’ll probably be involved with as well, but they have a whole different set of audiences. This is, you know, there are standards for this but it’s mostly governed by what makes sense for the company. Here, since you’re interfacing with outside investors, this is where, you know, things like Sarbanes-Oxley and Gaap, generally accepted accounting principles, come into play because standards are pretty important. Investors need a relatively consistent view that they can understand of what you’re saying about the economic reality of your company. So, that’s a rudimentary view of the difference between these two things. With legal my advice is don’t punt.
Skip to 3 minutes and 41 seconds So, if you’re in charge of a relationship with say a partner or a big customer or something for some reason and you’re involved, don’t just leave all the material deal parameters like pricing or exclusivity, whatever it is, to the lawyers because their job is just to use generally accepted legal frameworks and manage risks. And they, certainly, just like any conscientious person, they can help make the deals and some lawyers may be very skillful at that but if you’re the one that really owns the substance of that relationship, make sure you work on the deal points and get them over to the lawyers.
Skip to 4 minutes and 13 seconds I mean, subject to your team’s particular take on how to do these things because I think that will help you get more of what you want and even if it’s kind of boring and you don’t enjoy negotiating, I certainly don’t, the right kind of participation here may matter a lot to getting the results that you want. So, not the most exciting thing in the world but those are a few views on how your interface with finance and legal may be important.
Skip to 4 minutes and 36 seconds The key thing is, understand what’s fundamentally important to those stakeholders and understand that early so that you have the right kind of focus around it and you don’t let it get to a point where it becomes a big mess for you or them.
You and your finance/accounting and legal teams
© Copyright Rector and Visitors of the University of Virginia