My previous post was on the art of forecasting, which generated a number of comments on the blog and via other channels.  After continuing to read more about Groupon’s accounting theories, I thought a quick follow-up on “backcasting” might be appropriate.

Let’s say you’ve made it through the startup phase and have achieved some major momentum.  There’s perhaps that next high-value institutional round, and then with luck an IPO as well.  The bigger you get, the more investors are interested in real numbers and the less they care about your use case (formerly known as your “story”).  In fact, as I have written before, businesses often become worth less when valued on actual financial results than on their promise, so I guess the trick is to sell on the vision but buy on the numbers.

The computer industry has always made the honor roll of creative accounting.  One of the early landmarks was a Texas-based company called DataPoint that counted as revenue any system moved from one end of its warehouse to another, even if no customer was on the hook to pay for it.  As I recall, that company had a respectable product line and became public on real performance, but, after a while the quarterly earnings pressure forced management into the “desperate man” conundrum.  Busted.

Software companies in particular mastered the art of “revenue recognition” at times most fortuitous for reporting purposes.  If you made a $500K sale on December 31 for a 5-year license, why not show all that revenue in the current year and kick the can down the road for next year’s sales quotas to be made elsewhere?  How about those 20% annual maintenance contracts?  Might as well book them upfront too and not be too concerned about matching the fulfillment expenses three years out with the revenue of today.  And then there are development contracts that are “in progress.”  No auditor is going to be able to assess how far along you’ve gotten with millions of lines of code toward a finished product, so you can just about pick any percentage completion number you want and show the revenue accordingly.

Enron and WorldCom were very late to the party when it came to creativity with the books, and those of us in with software backgrounds should stand by our rightful inheritance of inventing that art.

Enter the 90’s, and perhaps the most interesting case (no intended reference to Steve “Case”) of all was AOL not expensing all those “coasters” we got in the mail daily.  Under some theory the cost of those was capitalized.  Time Warner and Ted Turner paid the price for that later on.  So did the United Nations.

Now we have Groupon making famous the acronym CSOI – Consolidated Statement Operating Income.  That seems to mean that expenses associated with that income are irrelevant and should not be used to evaluate the investment.  Forgive me, but I can’t believe their tax return would be calculated in that manner. 

So, take heart, if you survive the worst of the startup phase and get to the universe of real numbers, you don’t have to adhere to any standards of accuracy!  If you don’t quite make the goals for the quarter, just invent some new metric and flout it to your investors.  Maybe it’s RIWHEC, Revenue If We Had Enough Capital.  I hear that a lot.  How about CFASWCMTN, Can’t Find A Salesperson Who Can Make the Numbers.  I hear that too.  Or even PS, Payroll Smayroll, who cares if we pay people when we are really in the business of producing pretty financial statements?

I have owned about 90 cars in my driving lifetime, from a 1928 Buick (no I did not buy that new) to a 1988 Ferrari Mondial to a variety of Porsches, Corvettes, Alfas, and even pickup trucks.   I also owned a Collector Car Price Guide called the Gold Book (sold to Cox Enterprises) with about 58,000 entries.  I bought that business from its retiring owner, automated it, and kept making up the numbers like he had.  However, I was pretty darn accurate when measured against actual auction sales.  So, I’m going to my friendly banker and add $2M to my Net Worth for AAT, Accumulated Automotive Trivia.  If he asks me the value of a Talbot-Lago SS or a Delahaye 165 with bodywork by Figoni et Falaschi, I can answer those questions.  That qualifies as an asset, right!

<Talbot-Lago photo from Peterson Museum in Los Angeles – I recommend you go>