Startup Accounting Strategy for Action Accessories

Business Risks Facing Action Accessories

There are several significant risks facing this company that immediately need to be addressed. The major risks include the fact that the company has already violated a number of the premises upon which it was formed. Those premises are the close relationship with sunglass manufacturers, the product value, and brand development. Additionally, a risk assumed by the company is that they are providing an untested product through untested salespeople — individuals who have no previous ties to the company.

It is encouraging that Evan was able to establish a relationship with Mark and Judy Chen, and that is a good start, along with the fact that they would oversee operations in Hong Kong. However, the trust placed in Mark and Judy is double-edged in nature. If they do not perform their job efficiently, there would be no one to coordinate the manufacturing activities. Another significant risk facing the company is the "knock-off" look and feel of the sunglasses. The success of the company hinges on providing a quality product at reasonable prices, not on providing a product that appears disappointingly inexpensive.

The firm's marketing strategy does affect the company's accounting principles and practices, due to the fact that independent commissioned sales representatives will be charged with distributing and selling the product. An accountant should forewarn Evan and Nicki that an independent, commission-based sales force might mean lower expenses in the beginning, but that there is inherent risk involved in establishing a firm in that manner. Risks include the difficulty of tracking and maintaining inventory.

Marketing Strategy and Accounting Implications

Additionally, commissioned representatives are not employees, and certain rules and regulations must be followed regarding employee status. Representatives who hold exclusive rights to market and sell the company's products would necessarily need to be treated as distinct entities compared to individual sales representatives without those rights. Each category would have to be defined in a manner consistent with standard accounting practices.

The strengths of the business include the fact that a certain amount of money and expertise is already present. Evan has experience as a marketing director and was clearly successful enough to warrant share options each year. Nicki is a veteran merchandiser with major clients who can provide avenues to sales and revenue. Additionally, they have brought Brad on board with the accounting expertise to keep the company on sound financial footing. Some of the weaknesses of the company include the fact that they currently have no established brand name, no market presence, and no product of their own.

Strengths, Weaknesses, and Financial Reporting Considerations

Initially, the company will face a number of decisions regarding how to report various revenues and segments. On an ongoing basis, similar products will need to be segregated or reported in consistent manners. The company will also need to remember that disclosures for products and services that are not substantially similar must be disaggregated. While the initial product is sunglasses, the marketing plan does call for additional products within a relatively short period of time.

Choosing the correct accounting method is a decision that will affect the company going forward and should be addressed from the very start. Other issues may arise from the fact that the company is developing a sales force of independent contractors — this is always a complicated area, as the rules governing who is and who is not an employee are both stringent and, at times, arbitrary.