Tech companies can quickly outgrow back-office processes, leaving them with a patchwork of manual tasks and spot solutions that stretch to cover functions like finance.
“When tech companies are in a hyper-growth phase, their technology investment goes to customer-facing solutions,” said Grant Thornton Technology Industry National Managing Partner Andrea Schulz. “The back office usually gets neglected.”
Even if companies have the funding to invest in their back-office functions, they often don’t have the time. “The mindset is typically, ‘Let's just deal with it using manual processes. Instead of spending time to take a step back and look at automation, we're going to use people to solve for these problems,’” Schulz said. This can make sense, if a company doesn’t know where its growth will take it. Companies don’t want to commit to standardized systems if they’re still in a state of dynamic change.
But every month still comes to an end, and the financials still need to be closed.
The financial close requires a range of back-office functions to produce analyses, reports and other metrics. So, companies find ways to cover the financial close and, in the latest Grant Thornton CFO survey, 85% of leaders said their financial close processes were at least “fairly mature and sufficient.” However, only 5% said no improvements were needed.
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Inflection point
Mid-market tech companies are at an inflection point, with both technology and the public markets. “Yes, you have generative AI, but you also have a whole suite of automation technologies that you can be adopting in your tech stack,” Schulz said “Coupled with that, we have the public markets that are rewarding efficiency right now — they are really turning their attention to how efficient are these companies with their growth. That's why now is a good time to pause and really ask, ‘Am I doing the most efficient activities for my business operations?’”
“It’s about making smaller investments as your mid-market tech company stands today, versus trying to solve for a much larger issue in the future as you grow and as the technologies really jump ahead.”
Your finance function might be working, but it needs to be scalable and efficient. “A mid-market tech company might be looking to be the next emerging giant out there,” Schulz said. “It's about making smaller investments as your mid-market tech company stands today, versus trying to solve for a much larger issue in the future as you grow and as the technologies really jump ahead. You have to start developing interfaces between your systems to make sure things are talking to each other and ensure they don't have duplication of effort — because, once you've reached a certain level of growth, it's hard to go back.”
“As a company grows, you reach a point where the number of bodies that you need to throw at a problem isn’t a linear increase,” said Grant Thornton CFO Advisory Managing Director Ronald Gothelf. “It starts to move toward exponential. That’s an inflection point and, at that point, it becomes critical to have an efficient process supported by efficient technologies and appropriate integrations between different systems,” Gothelf said.
“I think it requires tech governance,” Schulz said, “making sure that you have someone who is actually on the ground with a roadmap and a vision for what the tech stack should look like, and what system integrations you need, for automation and scalability.”
As companies consider the tech strategy and governance that applies to the finance function, they might encounter a familiar question.
Build or buy
“Now is a critical inflection point for many tech companies to invest in the back office, and companies need to realize that investing in the back office is very different than investing in customer-facing development,” said Gothelf. “A lot of organizations will try to take the same people who are supporting the customer-facing functions and point them toward the back office.”
“You do want to make sure you have adequate connections and that you collect the right data,” Gothelf said. “But there’s usually a middle ground, because the reality is that there are proven applications and technologies that are already designed to support these back-office functions.”
“Tech companies often feel obligated to build software themselves,” Schulz said. Before tech companies commit to a finance tech initiative, it’s important to consider a range of factors that will affect solution development, integration, maintenance and more.
Timeline
Your financial close cannot be rescheduled, delayed or cancelled. It needs to happen on time, every time. Yet, the development work for your finance technology might never feel as important as the development work for your customer-facing products.
“I see a lot of companies that say they’re working on their back-office technology, but it's constantly getting deprioritized because of customer-facing systems," Gothelf said. “They're in this never-ending loop of ‘We're working on it,’ and they never quite get to it.”
When in-house teams do make progress on finance technology, it can be insufficient. Customer-facing development usually employs agile methodologies for introducing incremental capabilities, but finance functions don’t need incremental improvements as much as they need comprehensive dependability. Incremental releases can be the best approach for some software, but they can fail to address the larger issues of scalability and inefficiency across an organization’s disconnected finance systems.
“Think about, for instance, supporting debt covenant reporting even before a company is public, or supporting the latest tax implications.”
Expertise
If your team has the time to build back-office support technology, make sure it also has the expertise. Developers need experience in understanding how back-office systems integrate and how data will need to support new needs as your organization grows.
“Think about, for instance, supporting debt covenant reporting even before a company is public, or supporting the latest tax implications,” Gothelf said. “People who understand the back office can foresee the information that will be necessary, and the packaged back-office solutions are built to incorporate many best practices and provide the reporting you’ll need.”
“This is especially critical if a company goes through an IPO or going public — make sure that you have the types of controls necessary for reporting requirements, whether it's debt covenants or public reporting regulations,” Gothelf said. “The packaged solutions already have controls built in to support them. For custom-built solutions, it's important to develop the control elements in addition to developing the functionality.”
Boundary systems
It’s also important to ensure you have the right controls in place when financial transactions bridge from the front office to the back office. “You can get your cost of compliance down, if you actually have the appropriate internal controls over those boundary systems,” Schulz said.
Those conversion points can come under scrutiny from both a cost and risk perspective. “If you’re building a solution, you need to know about the back office versus front office in the context of your internal control environment,” Schulz said. “There's a lot more attention on boundary systems.”
Investors
Investors might be wary of do-it-yourself finance solutions. “I have a client now that is getting major investors, and those investors are asking whether there are adequate controls in the back-office systems — because they're looking at performance, results and timeliness of reporting” Gothelf said.
“Those investors want investment in the back office so that finance can close the books more quickly and they can see the results and have confidence in the numbers,” Gothelf said. “One investor is essentially saying ‘It takes you a month to produce your financial results, so we don't have confidence in them. We need you to reduce the time it takes for your close, and make sure you have adequate controls over the close, so that we can feel more confident.’"
Whether you are building or implementing finance technology, make sure you can demonstrate the controls and generate the information that stakeholders require — for financial reporting and planning.
“What KPIs are important to your investors, and your management teams?” Schulz asked. Think about how your solution can help you to both report the past and plan the future.
Tech company leaders understand the importance of a long-term tech vision, and the strategy that brings a vision to life. However, many don’t have a long-term tech vision or strategy for their back office. Gothelf cited one company that has a mix of solutions, saying “They don't even have a tech architecture for their current back-office environment, because they’ve only focused on customer-facing systems.”
To ensure that your back office can continue to support your organization in the long term, you need someone with a CIO perspective to define how back-office applications work together. “What is the target architecture?” Gothelf asked. “What is the roadmap to get to that target architecture for the back office, including integrations and avoiding the duplication of silo-selected applications in the tech stack?”
Without a back-office architecture, your organization could be risking its efficiency, scalability and business decisions.
“You're going to impair your management team from being able to make fast decisions, if your competitors have already evolved their back-office tech stack,” Schulz said. “It's just the timeliness of information where you could see yourself slow down relative to your competition. That’s the biggest risk right now.”
“Tech companies, by their nature, need to be nimble,” Gothelf said. “The financial close is just a simplification term for all of the various analyses and reports, evaluating the business and business direction through a number of different metrics. By improving the close and having better information to make decisions in a more timely way, you have an advantage over a competitor who doesn't have that same kind of information.”
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