The Essential Processes and Tools to Have in Place for Scaling Up
The speed at which companies can grow means they are often constrained by resources, creating a risk of producing inaccurate and slow financial data, alongside a lack of documented processes, that can weaken financial controls.
These constraints can also create additional challenges, including an inability to process large volumes of transactions, lowered staff morale, and difficulty in getting audits signed off, leading to making follow-on investment harder.
A recent high-profile example of what happens when companies get this wrong is S4 Capital. The publicly listed digital advertising and technology company was formed in 2018 and had already garnered a market capital valuation of several billion dollars.
However, a combination of poor controls and processes led to a $3 billion devaluation, close to a third of its initial market value.
Here are some tips to make sure your company is ready to scale:
Apply Accounting Policies and Standards
Early-stage high-growth companies are likely to have CFOs and FDs with a background in banking and corporate finance.
These individuals are skilled at financial modeling and raising finance but are unlikely to be familiar with accounting standards and tax rules due to not holding accounting qualifications from recognized accounting bodies.
It’s vital to put accurate and consistent accounting standards in place so that companies can fulfill compliance requirements and create meaningful management information.
For example, SAAS companies will need to pay particular attention to revenue recognition so that sales values from multi-year contracts are recognized in the correct period.
If unsure of the standards and regulations, you need to engage with a specialist accounting firm to seek their advice.
Documentation of Processes
Documenting accounting processes in a handbook or departmental guidelines helps in the consistent treatment of tasks, regardless of who is completing them. Also, it’s worth updating the handbook regularly (at least once per year) so that processes can be improved, and more in line with the complexities and size of the business as it develops.
Handbooks are also helpful for retaining knowledge when key finance team members leave the business..They should also be presented to auditors during annual audits to give firms visibility on processes and opportunities to advise if they can improve them.
In the current environment, the importance of cost control is heightened due to an uncertain and predicted economic climate.
This makes the fundraising market much more challenging for VC-backed companies, who may need to extend their runway by putting off further investments until market conditions improve.
Public companies are particularly vulnerable as the leading stock indices have plummeted in recent months because of macroeconomic factors like the war in Ukraine.
S4 Capital’s $3 billion devaluation is an extreme example of what can happen in today’s environment if you don’t have a tight grip on cost control. One of the many reported flaws of the advertising giant included finance team members editing invoices retroactively to reflect discounts but not similarly updating underlying transactions.
Leveraging a payables and spend management tool increases visibility on spend, helps support compliance requirements and streamlines processes, all the way from onboarding suppliers to making sure they get paid.
Pick Scalable Software
Picking an accounting software capable of scaling with a business’ finance function, enables companies to meet their needs today, in addition to being ready for the future.
S4 Capital also fell short here. They were still using accounting software suitable for SME businesses, even though they had scaled into a multibillion-dollar organization with multiple group companies underneath them.
When selecting accounting software, consideration should be given to whether it can handle multiple currencies, invoicing, group consolidations, and an increased amount of expenses and sales transactions.
On an enterprise level, companies may want to seek out an ERP solution that can also manage stock and general operations rather than just fulfilling accounting needs.
Automate Whatever You Can
Wherever possible, CFOs should use software and tools to automate workflows.
Workflow automation increases the speed of task completion, reduces the likelihood of errors, and generally requires less human input. By doing this, companies can scale without increasing their finance teams’ headcount and associated expenses.
Companies are likely already automating large chunks of their bookkeeping by pulling in bank feeds and capturing invoice data via OCR tools. However, automation can be increased further by integrating directly with payables tools to approve invoices and make payments without having to key in transactional data manually.
A simple control mechanism is segregating certain tasks, with a second approver.
This is a good practice for compliance and regulations and allows junior members to work on more high-profile and sensitive tasks, like journal entries and bank payments, which their managers can then approve to finalize.
It’s good to do this for risky areas, including journal entries and bank payments.
Lock Closed Accounting Periods
One way of protecting the integrity of data is to lock accounting periods when they have been closed, like when monthly management accounts have been finalized.
By closing out and locking accounting periods, you overcome the risk of finance team members entering or updating historic transactions, making reconciliations harder for future accounts and periods. When filing year-end accounts, this can be incredibly time-consuming due to finance needing to make adjustments so they can present their external accountants with opening balances that match up to the closing balances of the prior year.
It’s easy to delay introducing new controls and software solutions due to it being hard to find the time to devote away from business-as-usual finance tasks.
However, reviewing your processes and tools now will result in minimal lost time compared to putting this off in the future.