By David F. Carr
Growing companies tend to be focused on achieving more growth—not necessarily accounting for it. And who can blame their leaders for wanting to do more of whatever has brought them success so far? Yet in this global, hyperconnected economy, it’s easy for small-to-medium businesses (SMBs) to get too far ahead of themselves, creating complexity they are unprepared to manage or outrunning their cash flow.
For example, it’s increasingly common for startups and SMBs to open an overseas division, which may mean creating a separate legal entity for that part of the business, with accounting that needs to be tracked separately as well as consolidated into the records of the entire enterprise. “Very small businesses are outsourcing to India or doing business in Asia,” says Joe Knight, a coauthor of the Financial Intelligence book series from Harvard Business Review and an authority on financial literacy. “In general, the complexity of business is going way down-market—and often these businesses don’t have the tools to deal with that or the sophistication that’s required.”
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The good news is that delivering software via the cloud makes both enterprise resource planning (ERP) and enterprise performance management (EPM) software more accessible to businesses of all sizes, both in terms of price and ease of use.
And that can have an impact beyond overseas expansion. “If a small business can get access to the high-level tools that are used by the major corporations, they will have a huge advantage in terms of preparing themselves for an IPO or sale,” Knight says. “If you want to sell your business, you will have to be able to forecast and project and budget. Or let me put it this way: you will if you want to sell it for a lot more money.”
Growing businesses tend to start with the cheapest, simplest accounting software they can find and outsource the responsibility for managing the numbers to an accountant, Knight says. One fundamental thing founders often fail to understand is the difference between accounting, the accurate recording of historical, transactional data, and finance, which is more focused on forward-looking analysis: budgeting; planning; and making projections of income, cash flow, liabilities, and the value of the firm.
Yet it is the future of the business, not its historical performance, that investors care about when evaluating a growing firm for an IPO or as an acquisition target.
The problem with failing to distinguish between accounting and finance is that the two require different skill sets—and different software. Even after a business graduates from small-business accounting software to an ERP system, its leaders may fail to invest in financial analysis software—and in people who know how to get the most out of it. Because EPM software evolved to meet the complex financial needs of multinational corporations, they may consider it beyond their reach or requirements. So they use ERP for their accounting but make do with spreadsheets for financial analysis.
The forward-looking perspective that comes from financial analysis is all-important to an investor or a buyer, agrees Brian Moran, founder of the website Small Business Edge and an advisor to small businesses. “It’s not what your company has done but what your company can do for me, the buyer, that they care about,” says Moran. “If you can’t articulate that, and it’s your company, how much trust do I have in what you’re presenting to me?”
Whether you’re selling your company or just raising capital, you must have a compelling and convincing presentation about the value of your business, he adds.
And beyond making the case for acquisition or investment, failing to invest in financial analysis can be fatal to an SMB—particularly when it comes to cash flow projections, Knight says. Most businesses fail not necessarily because they aren’t profitable but because “they miss payroll, and everyone goes home,” he says. Your business will be in far better shape if it has an automated model for cash flow analysis—which, Knight observes, few growing companies do.
So Long, Spreadsheets
Until a few years ago, online advertising exchange OpenX was an example of an organization so focused on sales and product development that it was difficult to get attention for accounting and finance, recalls Michelle Alfonso, who recently left her post as vice president and controller at the company. Alfonso has built a career working with fast-growth companies at just about the point where they’re starting to consider an IPO or sale of the company, usually US$100 million in revenue or more, and she regards implementing Oracle Financials Cloud at OpenX as one of her signal achievements.
If you want to sell your business, you will have to be able to forecast and project and budget.” –Joe Knight, Coauthor, Financial Intelligence
When she joined OpenX in 2014, Alfonso already knew what a complete and integrated finance and accounting system could do for her company. A couple years earlier, in a similar role at foreign exchange aggregator FXall, she had worked to establish an efficient data pipeline between accounting and finance systems while gearing up for FXall’s 2012 IPO. Later, when Thomson Reuters bought FXall, finance professionals from the acquiring company offered praise for how the strength of those systems made the transition easier.
“We didn’t have EPM at the time the IPO plans were announced, but [implementing] it was the very first decision we made,” she says. Then she worked with the IT department to make sure ERP data would flow smoothly into the new EPM system. “On my final annual close, before I left FXall, we closed the books on Day One of the new year. That’s just crazy!”
After that experience, she says, “I thought, I can just do this wherever I go now! Well, I found out it is not that easy.”
When Alfonso arrived at OpenX, she observed that accounting and finance weren’t playing on the same team—as is common, they were separate organizations reporting to the CFO. Without software to help smooth the flow of data, the finance team was constantly complaining that accounting was too slow to deliver information. Meanwhile, company leaders were demanding sophisticated analysis as they evaluated acquisitions of other companies and considered options such as an IPO.
“When I first arrived, people were producing reporting and analysis in Excel—that’s what most companies do, unfortunately,” Alfonso says. While accountants and finance pros are comfortable with spreadsheets, she worried about too much copy-and-pasting of numbers, with manual adjustments. “I couldn’t be sure that everything was in the right buckets and we weren’t double-counting anything.”
To sell company leaders on upgrading their accounting and finance software, however, Alfonso had to move the focus beyond her own unease with the current processes. She convinced them that the company was wasting too much time working around the shortcomings of its systems. With the right software, she insisted, “you can spend the extra time running your business, growing your business, instead of doing all that ad hoc stuff.”
Having a cloud software option to recommend helped a lot, she says. Having experienced on-premises ERP and EPM implementations that could cost US$500,000 to US$1 million and require a 10-year commitment to realize their value, “I was shocked by how cost efficient it was to move to Oracle Cloud,” she says.
Another huge benefit of adopting both ERP and EPM in the cloud was that OpenX skipped the step of having to organize an IT project to integrate them—more of the data mapping happens automatically, in the background. And once OpenX made the transition to the cloud, the speed of its reporting and analysis changed dramatically. Previously, it could take a half day of work to make a journal entry and run through all the adjustments necessary to generate an updated report, Alfonso says. Now, that same process takes under three minutes.
In addition, once finance department staff could get their numbers on demand, they “acted much more like partners” with her accounting team, Alfonso says, “where if they spotted something unusual they would say, ‘please check into that—and let us know if we can help.’”
Managing Complexity Steven Van Houten, CFO at the Rancon Group, says he was motivated to implement Oracle Financials Cloud when the business became too complex to manage without an integrated and scalable financial management solution that could meet the needs of a global company. Founded in 1971, the company currently controls thousands of acres of residential, commercial, industrial, self-storage, and resort properties. Rancon operates a network of real estate businesses, including investment, development, operations, brokerage, and escrow organized around more than 100 legal entities.
Now that we have this platform, I’ll never have to tell my executive team that our accounting system can’t do something. We’ve got the foundation to adapt to whichever way we take our company.” –Steven Van Houten, CFO, the Rancon Group
“We had done all of that on the back of QuickBooks,” Van Houten explains. “That meant logging in to multiple instances of QuickBooks and depending on spreadsheets to analyze and reconcile our financial and accounting data.”
Having worked with enterprise software in previous roles at large homebuilders, Van Houten knew what he was missing. But the company had had a bad experience with its first attempt to implement an enterprise financial system, before Van Houten joined in 2011. He didn’t revisit the issue until 2014, when the economy was on the upturn and he became aware of what Oracle was offering in the cloud.
With the cloud, “a small business like Rancon can have an ERP system that gives it the same tools a Fortune 100 company has,” Van Houten says. “Now that we have this platform, I'll never have to tell my executive team that our accounting system can’t do something. We’ve got the foundation to adapt to whichever way we take our company.”
While it’s difficult to generalize about when a business should make the jump to enterprise-class accounting and finance software, Van Houten says that for him the moment came when he and his staff were doing more and more work in spreadsheets to overcome the shortfalls of their existing applications. “That’s what made it crystal clear to us that we did not have software that supported the complexity we were trying to take on.”
Marching Toward a Strategy
Marc Hadd, engagement director at US-Analytics, says many of the consulting firm’s SMB clients have a similar story of great complexity even at a modest size. “In oil and gas, for example, not every company is Exxon-size. Quite a few are run by a lean corporate staff plus field engineers, and yet they do joint ventures with other firms and may operate in multiple currencies.” This means their accounting is so complex that handling it with spreadsheets is too difficult and error-prone—especially when there are products, and cloud solutions in particular, made to address this challenge. The cloud is the paradigm shift—run small and lean, but act big.
The cloud has allowed companies such as Oracle to deliver capabilities as modular services for specific needs, Hadd says. “It means I don’t have to swallow the entire ERP as if I was on premises,” he says. “At that point, why would I design my firm in an inefficient manner if it means I’m going to have to retool later?” The cloud allows the SMB firm to scale and implement the needed level of financial transaction systems. The modular nature of the cloud allows the SMB firm to complement ERP with EPM tools. Now the firm can design its systems with the end in mind, while making a modest initial investment.
Whether your business plans to go public, get acquired, or raise money, having a robust and repeatable process for financial analysis puts you in a position to be more successful in the first place. When talking to investors, Hadd says, “I can be fully prepared to answer questions about my growth, my needs for capital, and my spend.” A professional presentation shows why your company is worth investing in, he says. “I’m showing that I have a business strategy and I know how to march toward that strategy.” More than just providing presentation capabilities, a solid financial analytics process permits the SMB to react to the marketplace. It flattens the organization’s communication hierarchy—leadership, analysts, and customer-facing employees can consume the same data and collaboratively make decisions.
Illustration by Wes Rowell