When running your business, it’s common to focus on the areas that come more naturally to you. While financial operations may be functioning for the most part, there are a few common mistakes that we have seen across businesses of all types. The core challenge lies in scalability, so the processes and operations should reflect an environment that will grow alongside the company.
Setting your business up for success involves addressing these six challenges before they develop into issues. Throughout this article, we’ll discuss these challenges and how successful businesses approach them to free themselves from accounting tasks and return to focusing on running their business.
1. Not Implementing Automated Controls in Expense Management
Automated controls for expense management in a business are an invaluable asset. They integrate seamlessly into your current processes, enhancing the speed and efficiency of expense reporting, approval, and reimbursement. More importantly, they provide control prior to the spending can even happen. These controls help reduce the amount of supervision and permissions needed for spending by pre-defining each individual’s roles, rules, and purchasing power. The defined expectations prevent difficult situations where an expense was not authorized or budgeted for, ensuring that your company operates smoothly without confusion.
Common Challenges Arising from a Lack of Automation in Expense Management
In the absence of automated controls, businesses face several challenges that hinder their efficiency and cost-effectiveness. Manual expense management often leads to delays, human errors, and even fraud. Employees may lose or forget to submit receipts, managers may not notice fraudulent transactions, and accountants may have to spend excessive amounts of time reconciling reports with bank statements. All these challenges can lead to an inaccurate view of the financials and a work environment that isn’t conducive to scaling.
Benefits of Implementing Automated Controls
The implementation of automated expense management yields numerous advantages. It improves accuracy in expense tracking and expedites processing times. Moreover, it fosters better compliance with company policies and tax regulations and enhances visibility into spending patterns. Instead of employees being uncertain about what they can and cannot purchase, expectations are clearly outlined and enforced through technology systems. With the need for financial supervisors to manually analyze expenses within their departments diminished, they can concentrate on more strategic tasks and eliminate the potential for human error.
How to Implement Automated Controls for Expense Management
In order to get automated controls for your business to reign in expenses, it is best to start by outlining the business needs and processes. Beyond the needs and processes, think about the challenges that have you have experienced so far – whether it is unauthorized spending, lack of oversight, or other difficulties. Then, choose an expense management solution that aligns with your requirements. This may include features like receipt capture, real-time reporting, policy enforcement, and approval workflows. With many technology solutions in the space (like Ramp, Brex, & Fyle), it’s easy to get a solution that works for your business.
2. Ignoring the Need for Scalable Financial Processes
In a rapidly evolving business environment, scalability is an essential attribute that can determine a company’s success. One of the most common financial challenges is the ability to handle a higher volume of transactions and accounting tasks without having to dedicate the same amount of time or resources.
Scalability doesn’t just relate to growing businesses but also to those undergoing contraction or facing cyclical changes. Having scalable financial processes in place enables a company to be flexible and responsive to changes, ensuring efficiency and cost-effectiveness at all levels of operation. Without the scalable approach, processes will have to be redefined and altered at each stage of the business.
Challenges Businesses Face Without Scalable Processes and Tech
Non-scalable financial processes often create bottlenecks that slow down the business’s overall efficiency as it grows. As the volume of transactions increases, manual financial processes become time-consuming, leading to errors and inefficiencies. Whenever someone steps in to manually lend a hand, there’s an increased chance for mistakes to occur.
Moreover, using non-scalable technology can limit the ability of the company to adapt to changing needs, such as increased data processing or reporting requirements. In the worst-case scenario, it can even necessitate a costly and disruptive overhaul of the company’s IT infrastructure and choice of technical partners.
How Can Businesses Ensure Their Financial Operations Are Scalable?
Businesses address this issue by leveraging financial technology that adapts to changing business needs. This includes investing in cloud-based accounting software, automated invoicing systems, or expense management solutions that can accommodate an increasing volume of transactions.
What Accounting Technology Should Businesses Consider?
As the accounting technology landscape continues to grow every year, more and more solutions have been introduced that cater to each unique industry or nuanced business needs. Many businesses will choose to pursue cloud-based accounting software like QuickBooks Online that can handle an increasing number of transactions as the business grows.
In order to tap into the full potential of an accounting solution, extra care should be given to all the other financial operations needed to run the business. By introducing technology that handles bill pay, payroll, expense categorization, and more, the company can focus on analyzing the information instead of the constant work to make it available. Remember, the choice of technology should align with the unique needs and goals of your business.
3. Using Expense Categorization That Fails to Provide Guidance
Expense categorization should offer financial visibility into the spending habits of each department with precision and accuracy. However, if the categories are too broad or lack the ability to provide useful insights, the exercise may result in wasted time instead of adding value. To comprehend the impact of various business expenses, they must be meticulously linked to activities, departments, and other viewpoints that contribute to your understanding of the state of your business.
Improperly categorized expenses will render a cost-cutting exercise much more challenging to execute. While expenses might undergo marginal reductions, the productivity of the business might also suffer. Furthermore, it will be difficult to discern which business expenses drive the most revenue and thus deserve a higher investment.
For instance, consider the expenses associated with a marketing department. With only a high-level view of a few categories, comprehending the specifics and discerning which activities contribute to the business remains somewhat of a mystery.
If the same marketing department were able to split out expenses within each category, it would promptly reveal insights into activities that contributed to overall revenue and those that lack justification for continued investment. This process makes it simpler to establish a direct connection between marketing expenses and their impact on revenue or deals in the pipeline. Once you reach that stage, comprehending where to focus efforts and where to significantly reduce spending becomes considerably more evident.
Tips for Improving Expense Categorization
Simplifying expense categorization can be achieved with the right combination of people, technology, and processes. In general, the following steps will not only help streamline the categorization process but also provide the necessary details for future understanding.
- Reconcile Transactions as They Occur
It’s crucial to avoid letting this activity pile up, whether it’s being automated through technology or managed by dedicated resources.
- Clearly Outline Each Department and Budget
Lay the foundation by ensuring that every individual comprehends what expenses can and cannot be authorized for purchase. Initiate this early to define expenses from the outset, thereby sidestepping the need for catch-up work.
- Routinely Revisit Expenses and Ensure Categorization Aligns with Needs
The initial process is seldom the final one. As the business undergoes changes and your understanding of the financial landscape deepens, iterate and strive towards achieving the necessary perspective.
- Leverage External Support
Outsourcing bookkeeping tasks guarantees consistent handling of the work, usually at a reduced cost
What Are Common Mistakes in Expense Categorization?
Common mistakes in expense categorization occur when expenses are incorrectly assigned to the wrong department or category. Another typical error arises when the entire approach relies on various catch-all categories for expenses that don’t align smoothly with the current structure.
In both cases, departments can appear either inflated or deflated from an expense perspective, imparting an inaccurate impression of their performance. When expenses fail to align with existing categories, using “other” categories to encompass miscellaneous expenses further distorts the financial performance view across the entire business, causing each department to receive a disproportionately smaller share of expenses.
4. Overlooking the Importance of Cash Flow Visibility
Lacking a current understanding of the business’s financial state makes it difficult to plan for the future and accurately forecast performance. Maintaining a consistent overview of incoming revenue and outgoing expenses helps avert surprises and unanticipated business challenges that have financial ramifications.
Why Cash Flow Visibility Matters
As sales transactions occur and deals are discussed within the company, a general sense of overall performance emerges. Conversations about new deals around the office provide some insight into sales volumes and the sales team’s effectiveness. However, if it turns out there are issues with accounts receivable and new customers aren’t making prompt payments, that sense of success can quickly transform into concerns about cash availability. Gaining a clear and precise understanding of incoming payments, outstanding balances, and upcoming expenses is crucial for financial planning throughout the year. While this might seem obvious, the reality is that unexpected expenses are always lurking, and without devising contingency plans while managing accounts receivables, businesses could find themselves in a precarious situation. Given today’s challenging financial climate, which makes fundraising even more arduous, avoiding such situations is imperative.
Suggestions for Enhancing Cash Flow Visibility
- Integrate Accounting Technology Across Each Department
For a more accurate representation of a business’s cash flow, its accounting systems should be interconnected with the broader business operations to present a comprehensive performance overview. As transactions, sales, and other financial activities unfold, the centralized database updates and reflects the ongoing performance.
- Minimize Manual Processes
A simple shift from accepting checks to requiring digital payments can save time and streamline the information flow related to payments. Identifying manual tasks that consume unnecessary time and rectifying the processes accelerates access to real-time financial data.
5. Doing the Bookkeeping Yourself
Every month, essential accounting tasks need to be performed to ensure compliance and sustain business operations. It’s inevitable that tasks like payroll, tax withholdings, and bookkeeping entries must be addressed weekly, monthly, or quarterly.
Given the recurrence of these activities, it’s not practical to assign internal resources to handle mundane and repetitive tasks, particularly when there are more valuable endeavors they could be dedicating their efforts to. Unfortunately, it’s not uncommon to witness CPAs, CFOs, or even CEOs devoting their time to day-to-day bookkeeping, instead of focusing on strategic initiatives that could bring greater impact.
Negative Outcomes of In-House Bookkeeping
Apart from impeding more substantial projects beneficial to the entire organization, there’s a significant cost consideration. Enlisting individuals with highly specialized skill sets for such tasks often results in work being completed at a rate far above the market value. Given the extensive training and time investment required to become a CPA, relying on that skill set for bookkeeping is impractical. Imagine a scenario where a founder handles bookkeeping; they’re unable to focus on their strengths as a business leader and, instead, must acquire a skill easily outsourced.
Another crucial aspect to factor in is the opportunity cost of delaying strategic initiatives. Whether it’s a finance department member or the founding CEO, certain company-benefiting projects necessitate advanced skills and dedicated time. Any time not utilized for opportunities to advance the business leads to frustration and hampers growth. There’s never a situation where a business leader wishes they’d spent more time on bookkeeping instead of pursuing their next strategic initiative. Which leads us to…
6. Poor Time Management within Your Company
Neglecting proper time management within your business organization can have profound financial consequences, potentially resulting in revenue loss. Inefficient allocation of resources, delays in crucial tasks, and the mismanagement of priorities can collectively hinder your team’s ability to seize growth opportunities, respond to market demands, and deliver products or services on time. These inefficiencies can lead to decreased productivity, missed deadlines, and dissatisfied customers, ultimately impacting your bottom line by undermining potential sales, customer retention, and overall profitability.
Guidelines for Effective Time Management and Strategic Task Delegation
The optimal approach to ongoing financial operations is to evaluate the skill sets within your organization, identify process bottlenecks, and then determine which tasks can be outsourced. By eliminating repetitive tasks from the weekly workload, the team can concentrate on initiatives with more significant impact while maintaining an efficient cost structure. The first step is grasping the process and understanding the business’s requirements.
How Can Businesses Identify and Reduce Time Spent on Non-Strategic Tasks?
Conducting a time audit across the finance department will highlight recurring activities for each month and quantify the time invested in each area. This visual representation makes it easier to pinpoint areas where excessive time is allocated and identify preferences for energy allocation. Following a successful time audit, the team can devise plans to bring in external assistance to manage financial operations and construct scalable processes aligned with broader business needs, transcending mere convenience for accountants.
To avoid these common challenges, partnering with financial operations experts is the most effective strategy. An ideal partner should possess a comprehensive understanding of each business, encompassing both operational intricacies and industry insights. This understanding allows for the development of a tailored blend of people, technology, and processes, designed to optimally handle ongoing accounting tasks while enhancing overall procedures.
At Decimal, we adopt this approach to help companies circumvent challenges in their financial operations and provide customized support. Amid the plethora of options for outsourced bookkeeping services, it’s prudent to select a company that truly grasps your business, aiming to provide value through bookkeeping without adding unnecessary stress.