Partner of Eventus Advisory Group, LLC., helping companies meet their CFO, Finance and Accounting needs with fractional teams.
Last year, I wrote a series of articles on what companies at different stages should focus on in their finance and accounting functions. (You can read those here, here, here and here.) The stages I chose were broad and provide a general framework of what might be needed at each stage, but reality is always more complex.
For example, does a Series A company always need less finance and accounting support than a late-stage private company? The answer is a nuanced “it depends.” In this article, I want to share some overall thoughts on investing in your finance and accounting support that apply regardless of company stage.
Who Doesn’t Need To Invest In Accounting And Finance?
It’s OK not to invest in accounting and finance if your business doesn’t need it. From my perspective, there are two types of companies that don’t “need” to invest in finance and accounting. Type one is a small company, regardless of stage, where revenues and expenses can be easily tracked with basic accounting software. The owner or founder might take a few hours a week to manage the finances, and a tax accountant might assist at tax time.
The other type of company, no matter how large or complex, is one where the owner just doesn’t care about the power of good finance and accounting. Many business owners are perfectly happy with the status quo, especially if it is a business that is providing the lifestyle the owner wants.
One could argue with them about the importance of better controls, the collection of data for reporting and forecasting and improved cash management, but unless they want to achieve better performance, none of that will convince them to invest. Usually, it takes a severe crisis for these owners to see the value of investing in accounting and finance, and sometimes, they see it too late.
Who Invests In Accounting And Finance Support?
On the other side of the spectrum are owners and founders thinking strategically about the value accounting and finance bring to their business—at every stage of growth. These managers understand that good accounting is the foundation for financial success in the long run. They think about the foundational systems and processes that will accommodate their growth and invest in measuring and managing them regardless of industry or company stage.
But the question remains, where and when should you make those investments?
If your business is in this latter bucket, there are three areas that need a commitment, not just a function: expense management, revenue management, and analysis and reporting.
Imagine you started a company with a few friends and have complete trust that their spending decisions are in line with the overall goals of the firm. What happens as the company adds new employees and outside projects? Will trust still be the guide for managing expenses?
For a startup with little revenue, managing expenses is the focus of the finance function, but it should not just be about correctly recording them. Investing in the finance function makes sense when your burn rate and runway are limited by your available capital or if you have outside investors who expect you to account for your spending.
Now, you just received $15 million in Series A funding. Based on your expenses, you believe it will be two years before you need more capital, assuming no revenue. What happens if inflation increases all your expenses? What if a supply chain problem slows down your sales fulfillment, but your expenses stay the same?
Burn rates aren’t static. You need to invest in systems that can help you keep on track and keep your investors happy. These systems can be cheap and easy to use—becoming more complex as your company grows. More importantly, they are part of a philosophy for managing your business. Too often, companies don’t see the value of planning, analyzing and managing expenses until it’s too late, and the money is gone.
If it doesn’t already, your company will eventually have revenue. Once you have revenue, you’ll want to invest in accounting and finance because with revenue comes invoicing, collection, accounts, refunds, discounts and more.
How much investment is needed is proportional to how complex all these processes are at your company. The smart manager will look to have efficient systems and processes set up to properly invoice, collect and account for every dollar the company earns. Knowing how much revenue a company is generating is the first step in determining profitability at every level.
Analysis And Reporting
Financial planning and analysis provide insights that identify risks and opportunities and aid in budgeting and resource allocation. There are three basic components of good FP&A: high quality, accurate data from your business, solid models from which to extract insights, and collaboration to execute the recommendations derived from the insights. The caveat, however, is that investing in FP&A is a commitment to collect good data, analyze it effectively and use it to make better decisions.
Good financial reporting helps businesses understand how they are performing and make necessary decisions moving forward. Excellent reporting includes not just historical information, but also forward-looking scenarios. It is a set of “if this, then that” recommendations that managers can review to determine the best way forward.
It’s OK to prioritize other areas of your business over accounting and finance, if you don’t need it. If you do, a strategic manager will see investment in finance and accounting as the key to the longevity and health of the business regardless of growth stage.
Great companies operate from a framework rooted in strong finance and accounting. But none of it will matter if it isn’t used. If your reports and analyses gather dust, are rarely reviewed or just “check the box” for investors and auditors, you won’t get value out of finance and accounting, no matter how much you invest.