On March 31, 2004, the FASB issued an exposure draft (ED) called Share-Based Payment. This ED would eliminate APB 25, and would amend FAS 123 and FASB Statement No. 95, Statement of Cash Flows (FAS 95), making the expensing of stock options mandatory. If adopted in final form, the ED would require public companies to report compensation expense related to stock options and other forms of stock-based compensation based on the “fair value” of the award at the grant date, thus eliminating for them the option to use APB 25. The ED also contains extensive new measurement guidance, including a preference that companies should use a lattice or binomial approach to value stock options, rather than the more commonly used Black-Scholes option pricing model. In addition, the FASB proposes several other significant changes to FAS 123, most notably in the following seven key areas: 1) Treatment of forfeitures, 2) Attribution, 3) Employee Stock Ownership Plans (ESOPs) and Employee Stock Purchase Plans (ESPPs), 4) Income tax effects, 5) Modifications to outstanding awards, 6) Non-public companies, and 7) Transition Rules.

Anthony: When do you expect the new rules to be approved? And when will companies start implementing them?

Is it preparing a budget? Writing a business plan? Developing a financial plan? Completing those hair-raising multicurrency expense reports for international business trips? Or is it that one tedious chore I generally see entrepreneurs abhor – keeping time?

In this article, I’ll give you 11 reasons why it’s important that you and your team keep track of time, using what’s commonly called a timesheet. I hope that once you’ve read the article, you’ll appreciate that the benefits from successfully implementing this business practice outweigh its costs and annoyances by a wide margin.

1. Producing financial statements. You’re probably used to seeing your income statement mostly in the “management” reporting format. This is a format generated by your accounting software according to your chart of accounts. It provides a detailed breakdown of your revenues and expenses, line item by line item, to help you closely manage your financial operation. However, you’ll undoubtedly need to prepare a more succinct GAAP version for “external” reporting, which summarizes your results in one revenue and 4 expense items: Cost of Revenues, Research & Development, Selling & Marketing, and General & Administrative.

   This is the typical format used in financial disclosures by publicly traded companies. The “external” format is derived from the “management” format by allocating each line item using certain allocation variables. As the members of your team tend to wear a variety of hats simultaneously (consulting, R&D, marketing, etc.), you’ll want to break down their time by activity in order to perform the allocation of certain accounts, and generate the “external” income statement.
    

2. Tracking Project Development Costs. When you decide to undertake the development of a certain project, it’s because you have performed a preliminary study that has shown a desirable return on investment given the expected costs, revenues, and resulting cash flows (at least I hope you’ve done such a study). As you start the development efforts, it’s important to quantify the actual costs incurred in order to detect any deviations from your preliminary study which would suggest a more or less favorable profitability outcome. These costs will include, to a large degree, your team’s time on the development project in question.
    
3. Measuring Costs for R&D Tax Credit. Some of your research may qualify for R&D tax credit. It’s important to collect cost data, including labor costs, for such research projects to substantiate the dollar amounts claimed as a credit on your company’s tax return. Due to the technical and time sensitive nature of this point, I urge you to consult with your tax advisor on the types of research that qualify for R&D tax credit, and on methods acceptable by the IRS to substantiate related costs.
    
4. Billing Accurately. If you’re bootstrapping, consulting services can be a welcome source of revenues. You may be billing some of your consulting projects on a time & material basis, which calls for an accurate tally of your staff’s time in order to generate precise billing for your clients.
    
5. Recognizing Revenues. For some of your consulting projects, you may be recognizing revenues according to the percentage of completion method. This method requires that you monitor the period costs of the projects in order to derive the corresponding revenues. And if you are in the software business, these period costs will be comprised, to a large extent, of labor costs incurred in connection with those projects. Because your staff typically works on multiple projects, you’ll have to isolate those hours that relate to each percentage of completion project.
    
6. Staying in Tune with the Team. In an early stage start-up, you’re likely to know exactly who’s working on what and when. However, as your venture grows and your time away from the office increases, you’ll need to have a mechanism that allows you to frequently monitor whether the members of your team are spending their time consistently with the overall objectives of the business. A time tracking tool will allow you to identify any deviation so you can take corrective action to refocus your team’s efforts.
    
7. Providing Reliable Input for Cost Accounting. What is the cost of an advertising campaign, a trade show, a beta release or performance reviews? You can create project codes for these types of activities and collect time and expense data to analyze their underlying costs.
    
8. Tracking Time Off. You must keep precise accounting of time off – vacation, personal time off, sick leave, etc. This allows you to compute correct accruals for the benefit of your staff and for financial reporting purposes. It’s hard to imagine tracking such information without regular input from a time tracking system.
    
9. Triggering Pre-Burnout Warning Signs. Working hard in a start-up is a way of life. But overdoing it could lead to burnout, a highly undesirable outcome for employees and the company alike. A time tracking report could supplement your personal vigilance in providing early warning signs of potential burnouts.
    
10. Compensating non-exempt employees. If you have non-exempt employees on staff - i.e. employees paid on an hourly basis - you are required by law to monitor their work hours in order to determine the overtime component and compute their pay accordingly.
     
11. Measuring Software Capitalization Costs. You may elect to capitalize some of your software development costs upon advice from your auditors. As a result, you will need to capture these costs, which are primarily labor related.

If you don’t like timesheets, chances are your team doesn’t either. For this process to be successful, it’s critical that management and your entire staff understand it and appreciate its operational importance. You’ve got some selling to do!

Once you implement a time tracking system, make sure you collect the data relentlessly. Create a follow-up mechanism to deal with the occasional and chronic laggards until you collect every single timesheet. Perseverance is key.