Can we write off a government-backed receivable?

November 2011

"A government agency in California has owed us money for almost three years now, and they keep making lame excuses. It seems weird to write off a government-backed receivable, but I could really use the tax deduction this year. Advice?"

Mike: You can certainly write off any receivable that's three years old and that you're unable to collect. If California is finally able to pay its bills, of course, you'll have to record the payment as "new" revenue.

Before writing off the bill, however, you should make one last attempt, in person, face-to-face, to find out if it's truly uncollectible (and why). Governments work on annual budgets and typically can only spend for costs in this year’s budget. Your bill may have busted the budget for that year and has been put into the “let's hope we can pay this next year” folder. If that’s the case, see if the agency can find some way to roll it forward to the current year. I'm sure the agency employees you worked with are deeply embarassed by the situation and will help put pressure on their accounting staff.

Are deferred legal fees a good idea?

September 2011

"A big-name law firm has offered to help get our startup off the ground and will defer 50% of their fees until we're cash positive. This seems like a heck of a deal, but is there something I'm overlooking??"

Mike:It's not unusual for professional service providers, like your law firm, to offer discounts to early stage companies. They're investing in you with the expectation that you will flourish, turn cash-flow positive, and begin to pay their regular rates.

However, letting clients "defer" fees is a little unusual. The big problem here is that ultimately you are on the hook for fees, and will have to record this liability on your balance sheet. I suggest you pass up this offer and simply ask them to waive some of their fees until you can afford to pay them in full. Otherwise, you can expect an urgent call just before the end of the firm's fiscal year (typically December 31) asking for payment.

Should an audit committee get involved in cost control?

July 2011

"I'm on my board's audit committee, and I recently discovered--mostly by accident--that the CFO approved a $20,000 executive jet rental to bring the sales team back from a trade show. Now the CFO, the CEO, and the VP of sales are mad at me for 'micromanaging.' My feeling is that these guys are spending shareholder money way too freely, and it's my job to raise this issue. Who's right?"

Mike: As a general rule, audit committees don't get involved in approving day-to-day expenses. The one exception is the CEO's compensation and expense reports--but in this case it looks like the big spender was your VP of sales, backed up by the CFO.

Where you do have authority is in the area of spending controls (setting expense policies and limits, requiring others to approve invoices before being processed for payment and dual signatures on large checks), combined with budgeting and reporting on actual performance vs plan. If the company's travel policies are so loose that they include executive jets, you absolutely have the right to blow the whistle. Have your HR person look at the company’s travel policy and report back to the board whether it's in line with industry standards.

And keep looking around for other stupid, possibly reckless spending decisions. Very often, it's the CEO who sets the tone for wild spending. Assuming he's a shareholder, he needs to understand that he's wasting his own as well as the company's cash.

Should I approve a non-standard health benefit?

May 2011

"This morning my CTO told me her primary care physician was changing to a 'concierge model'. This means she'll have to pay $1,600 annually to continue seeing her doctor, and that's over and above her current insurance coverage. We pride ourselves on providing full medical coverage for our employees, so I'll probably approve this deal. But what happens if other employees start asking for non-standard benefits like this?"

Mike: I'm sure you'll see more of these requests over the next year or two. The “concierge” medical practice model is becoming more common as doctors try to deal with shrinking reimbursement rates and overcrowded waiting rooms. Once you set a precedent for paying for concierge plans, it's inevitable that most of your employees will sign up--and the cost will be huge.

In fact, this might be a good time to re-think your open-ended policy of covering all employee medical expenses. Even if you're determined to pay 100% of everyone's insurance, it probably won't surprise anyone if you begin to set limits on other medical expenses, such as co-pays and elective procedures.

How do I self insure?

May 2010

"I've heard that companies often save money on employee health insurance by paying smaller claims directly. That sounds interesting, but how does it actually work? Will doctors and hospitals agree to send their bills to us?"

Mike: When companies self insure, they arrange for an outside firm--typically an insurance company that's already dealing with doctors, hospitals, and labs--to administer the program. The administrator pays all the bills and then submits a consolidated bill for payments and processing fees.

This arrangement works best if you have healthy employees who ordinarily spend much less on medical expenses than you'd pay for conventional insurance. You can also buy regular insurance coverage that kicks in for large medical expenses (say, in excess of $20,000 per year per employee).