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Addressing a Growing Company’s Financial Reporting Needs

Feb 1, 2022

One of the challenges for many growing businesses is to recognize the need for more sophisticated financial information to enable better strategy development and decision-making. Many business owners remember how they dealt with their finances during the startup phase, perhaps using a simple spreadsheet when doing their own taxes. However, as the company grows, so does the need for useful financial information and management. We asked Aimee Conant, a senior manager in EisnerAmper’s Private Business Services Group to help us understand some of the tell-tale signs that a business is outgrowing its current financial reporting and what they can do going forward.

These signs will vary depending on the business’s stage of development as well as the specific needs of the entity in question.

Let’s walk through a very simplified development cycle, highlighting the positive points of progress. Recently, we worked with a software engineer who has created a new software development business. The point of inception is when the startup business owner takes their vision through the first step of becoming something more. It’s important not to lose sight of this vision because it creates a bond between the new business owner and their business. From this point on, it is never merely work to them. As the startup begins to grow, everything is new and a bit bumpy. Knowing that the business will eventually have to file a tax return, the owner purchased a general ledger package that links with the bank and credit card accounts and has some simplified expense apps. The engineer was not checking the activity very frequently, and there were not a lot of transactions each month. Reconciliations of the accounts are being done quarterly and required more clean-up at the end of the year. This works for a short while when things remain simple. At this point, the business is using the numbers to monitor cash flow and file a cash-basis income tax return.

However, little things started to build up that are taking away from the time our client devotes to his key role of running the business. Too much time was being spent doing administrative tasks, so he hired a programmer to help move development along and an administrative assistant to help manage the calendar and answer the phones. The engineer now has more financial management tasks by adding payroll, more layers of insurance, additional taxes and so on. At this point, our engineer needs to step back and ask: “Are we going in the right direction? Where is my time best spent? How do I get back my time to do what I know needs to be done to nurture and grow my business?” It’s at this point our engineer realized that the cost of bringing on a bookkeeper to help handle the financial management is far less than the benefit derived from giving him back the time to focus on business growth. A good bookkeeper (or outsourced bookkeeping service) can help with day-to-day financial management and work with financial advisors on some of the more mundane financial needs, freeing up the engineer to focus on planning, opportunity assessment and development.

Our client identified a new technology that will significantly improve his business. However, it’s cost-prohibitive until revenue and resulting cash flow can catch up. How can the business afford this? While exploring the option of a loan, the bank required some form of financial statements to review prior to issuing the loan and had certain annual covenants that must be met. Thus, it became time to hire a controller. While a bookkeeper has a handle on the day-to-day transactions and some of the basic accounting needs, a controller is needed to navigate the nuances of specialized accounting frameworks needed for financial statement reporting such as IFRS, U.S. GAAP, or FRF for SMEs. The client also met with a lending institution to see what the requirements would be to take out a small line of credit. While the line may be small, the lender senses risk due to a limited borrowing history. The lender is very cognizant of the small business owner’s costs for a full-fledged audit. It decides to accept annual reviewed U.S. GAAP financial statements issued by a CPA. With this knowledge, the business owner can discuss these requirements with his financial advisor to help determine key experience and knowledge requirements when looking to hire a controller. If the business is using an outsourced accounting service, it often includes outsourced controller and CFOs services; many can provide a full outsourced accounting and finance team.

To ensure success, talk with your financial advisors to make sure you are looking for the right knowledge and experience when hiring. Don’t hesitate to ask them to review a job listing or candidate resume. Having a system and personnel in place that match the needs of the business will save time, frustration and money. While financial management staffing is a significant investment, having qualified staff will ultimately save time in trying figure it out yourself and the expense of having to hire an outside specialist to fix any issues.

Once the client procured the funds needed, his business took off. Many doors are opening, and the business is growing rapidly. The engineer is now discussing future plans such as an interest in acquiring a few promising startups, maybe selling the business, or even considering going public. These activities will add new layers of complexity to the financials of the business. At this point, a CFO should be in place to help drive and guide the financial side of the business. What started as a vision has become a reality. The engineer now needs to decide whether to stay at the helm with the help of C-suite first mates or to cash out and turn it over to other capable hands.

Wise business owners pay attention to the growing needs of their businesses, invest in the right people and processes, and ensure that they can maintain focus on the things that matter: vision, productivity, quality and profitability.

RISE (Real Ideas to Stimulate Engagement) - Q1 2022

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Aimee Conant

Ms. Conant is a Director in the Private Client Services Group with over 10 years of public accounting experience. She provides advisory services for privately held businesses and individuals.

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