Editor’s note: Lea Strickland is president and chief executive officer of Focus Resources.
CARY — Government grant programs such as Small Business Innovation Research (SBIR) often play a significant role in funding an early stage technology (biotech, software, medical devices, etc.) company’s proof-of-concept and product-development expenses. In comparison withequity funding, the SBIR grants are non-dilutive.
When compared with debt funding, they do not have a repayment obligation — as long as you are a qualified recipient and comply with the program, administrative, and financial requirements. That last bit — the “as long as you comply” part — is often overlooked, misunderstood, or ignored. All too frequently, it is ignored.
Grant recipients need to be aware of the implications of non-compliance with requirements imposed by the receipt of federal funds. If you like to play the odds, go to Las Vegas. If you are an entrepreneur building your business, then non-compliance isn’t a gamble you can afford. Consider the spectrum of ramifications of non-compliance, from having a particular cost disallowed (not reimbursed) to criminal penalties of the severest forms — jail time and fines.
For technology companies, another aspect of non-compliance is that it can impact your ability to retain ownership of intellectual property developed. This isn’t the government’s right of use that arises from the agreement. This is forfeiture to the government of the intellectual property.
Investment, Not Expense
Many early-stage companies can’t "afford" the expense of compliance. The fact is that compliance doesn’t have to have a high price tag — if you comply correctly from the beginning. Compliance begins with understanding all of the requirements. Government agencies making the grant awards are there to provide information on how to comply. They want you to comply. They can’t do it for you, but they can give you guidance.
If you are trying to "clean up" your non-compliance, then it can become costly. The longer the period of non-compliance, the more things you have to address and resolve. Some areas of non-compliance cannot be addressed by corrective action plans and retroactive reviews. Those areas may require repayment of funds or other “remedies.”
Lack of Knowledge, Not Lack of Intelligence
Early-stage companies often lack internal expertise on accounting, financial, and business management systems and controls. This lack of expertise translates into an inability to assess, develop, implement, and maintain properly the systems that satisfy requirements. It isn’t a matter of intelligence. It is a matter of training and education.
The keen minds that develop revolutionary technology aren’t often trained and experienced in the details of accounting and other "core" business specialties. The need to acquire these skills on an ongoing, regular or occasional consultative basis are expenditures that "take away" from developing the technology. Companies view them as optional, unnecessary, front- (or back-) office activities that add no value to the business. The reality is that under grants management, the "management" costs and are essentially requirements and are valid costs. Why? Because you must be capable of adequate management controls — including (or especially) in the financial/accounting arena.
Seamless Processes, Adequate Controls
The transactions your organization undertakes to document and record business activity are the same transactions. The differences reside in the mechanisms and the results of how the transactions are recorded. A properly designed and implemented business management system does not require appreciably more time to use. (If you are doing absolutely nothing or expending minimal effort in documenting what goes on in your business and the flow of funds, then naturally you will experience a noticeable increase. If you have no systems in place for tracking time and reviewing other aspects of transactions, then things are about to get more “administrative.”)
The business management systems (policies, procedures, reports, and controls) are part of the normal evolution of a successful, growing business. They do not have to be cumbersome. They do not have to bog down the organization. They do have to demonstrate that the organization knows how to manage its own operations, results, and funds received.
If you do not want to comply with the “strings attached” to government funds, then do not pursue government funding. If you decide to be strategic and go after this valuable source of funding, then know the impact and the upfront and ongoing costs to the business. Compliance cannot be delayed. While audits may not be mandatory at certain funding levels, compliance is never optional. From the first dollar received for funding, the compliance clock is ticking.