Executive Summary
Growing tech firms usually prioritize their product development and growth over back-office functions. That can leave finance functions behind until they ultimately become a hurdle for the company's scalability, risk mitigation, decision-making data and growth. It's important to understand the risks of an underdeveloped finance function and develop an approach to standardize and streamline the work. To make the most of a lean team, assess finance technology with a cross-functional perspective and create a road map that will carry finance into the future.
Spare a thought for those understaffed finance teams out there.
Many of them work in the tech industry — and why is that so? “In any technology company, the overall focus tends to be on product development, growth and innovation,” said Grant Thornton Business Consulting Partner Ron Gothelf. “Back-office functions take a back seat.”
This issue begins at the start. “Investors are much more willing to invest in efforts that lead to new products rather than efficiency in back-office operations in the early stages,” Gothelf said, but then the story turns. “As organizations scale, it becomes challenging to have accurate forecasts and analysis. That can lead to a backlash, with a need to really focus on boosting the efficiency, effectiveness, accuracy and even staffing of the finance function, especially if organizations are looking for an equity change or infusion.”
Yet, it’s hard to build efficiency in a climate of constant change. “When hypergrowth occurs, companies haven’t standardized their front office processes — how they are going to bill, collect, invoice,” said Grant Thornton Business Consulting Senior Manager Jon Bell. “Ultimately, that can lead to accounting and finance teams feeling understaffed because their work is highly manual.”
Growing technology companies often experience a speed of change that demands more from their lean finance teams — but it’s important to keep finance from becoming a limiter. When finance functions struggle beneath a burden of manual processes, they can limit business growth and even introduce risks.
Risks
Most technology companies are in a race to innovate, but lagging finance processes can introduce risks along the way. “Tech companies spend a lot of energy in their product development and customer engagement processes, but the finance and accounting processes will catch up with them if they’re not addressed,” Gothelf said.
When financial information at technology firms is poorly maintained or disconnected, it can introduce risks for revenue, compensation, fraud and decision-making. In revenue, contracts can be built around conditions that finance cannot accurately track, bill or report for compliance. In compensation, complex contracts and delayed data make it difficult to ensure fair and timely compensation for sellers. Fraud can arise when manual processes in small teams cause noncompliance to go undetected. Finally, without comprehensive and timely financial data, leaders lack the information they need to decide business priorities and strategies.
Revenue
“The focus on product innovation and on development sometimes even leaves the ability to collect and bill for products and services behind,” Gothelf explained. “All the time, I talk to finance and accounting teams at tech companies that say that they don’t even get to see contracts before they’re executed — and then, they have to figure out all the revenue recognition and billing.” The impact can be that companies are unable to properly bill, collect, perform revenue recognition and complete financial reporting.
Apart from the risk of missing revenue, revenue recognition issues can lead to noncompliance with GAAP. “If accounting and finance isn’t brought in early, it can be hard for them to account for some of the complex relationships in contracts,” Bell said. “That’s a big risk, as well potential audit adjustments and restatements.”
Fraud
The complexities of tech industry contracts and manual finance processes can leave room for a range of errors, unintentional and otherwise.
“With smaller finance and accounting functions, there’s usually less of a focus on internal controls,” Gothelf said. “That can lead to financial discrepancies and even, in some cases, fraud or mismanagement of funds. At a minimum, it can cause inconsistency with company policy. If finance is not an automated area and it has low staffing, these things can slip through.”
Compensation
As companies grow, incentive compensation can be an important part of the growth engine. Accurate compensation requires accurate and timely financial information.
“When you make sure to invoice the right amount, collect the right amount and capture the discounts, you need to make sure that people are compensated in the correct way,” Bell said. “If you’re doing manual billing, with a lot of rebates or adjustments, that’s where the complexity seems to come in. That affects upstream salespeople’s compensation.”
To motivate sellers, you need a sales compensation model that is clear in its structure and implementation. Unclear incentives are ineffective incentives, so clear and timely information can have a direct impact on driving growth.
Decisions
Clear and timely information is important for driving decisions at all levels — especially decisions about growth.
“There are risks related to the timeliness of data and when you can make decisions,” Bell said. “Accounting and finance are often forced to be very reactive to a lot of manual adjustments or manual estimates, and that can lengthen the close cycle. With that, you’re lengthening the availability of information — so, the company can’t make timely decisions,” Bell said.
Often, information is delayed because it has not been correctly structured and tracked up front. “If the front of the business is making decisions about what you’re going to sell versus what you’re going to offer customers for free, and accounting and finance isn’t brought in at the beginning, then how is your support structure going to work?” Bell asked. Some companies establish products, services or pricing models without configuring them in the financial reporting system. Even if they capture payments, leaders lack decision-making information for the future. “You’re not able to drill down into the details, to see true profitability. That’s a risk to the business.”
The risks extend from today to the scalability and growth of the business in the future. “As tech companies grow, they will face a lack of scalability overall if their finance function is too understaffed or underequipped,” Gothelf said.
Technology can help finance teams overcome the risks of today while maintaining agility for tomorrow, but only if companies address common standardization issues first.
Standardization
Technology companies know that the best solutions can fail without good data. Many tech companies have standardization issues in both their financial data and solutions.
“They might have good product designs, but they lack operational data to really manage the business,” Gothelf said. “That certainly leads to inefficient decision-making and it can also hamper bringing in AI and other technology to support your processes. When you don’t have a robust finance backbone, that will challenge your ability to use AI and other technology to make your finance function more efficient.”
To build that backbone, companies often need to resolve inconsistencies across isolated solutions.
“I think a lot of companies are very quick to automate some parts of their processes, but then there are still manual aspects,” Bell said. When these manual aspects remain, they can slow down results so that companies don’t achieve the full value from automations. Other times, teams just automate one process that’s within their control. “Often, they look for a discrete process to automate, and they use a best-of-breed solution for that. But then, they end up with five or six automation solutions that don’t pair well across their technology landscape.” Gothelf added, “These problems become exacerbated if there are acquisitions or inorganic growth.”
To streamline finance and accounting functions, companies need to identify and standardize divergent solutions and processes. “You need to truly standardize processes first, versus trying to automate an ineffective or inefficient process,” Bell said. “Then you can identify where you want a best-of-breed solution or where you can use a tool that works across multiple areas.” This analysis helps companies integrate solutions to maintain and deliver consistent enterprise data.
“Think through how the processes are really supposed to operate,” Gothelf said. “It’s a matter of understanding what processes need to be supported, the criticality of those, and the technology you have in place — to determine if it’s appropriate for the future direction of the company.”
Then, you can plan an approach for how technology will help empower your finance and accounting teams. “It’s OK not to deploy something today, as long as there’s a plan for when it needs to be deployed as the organization grows,” Gothelf said. “It’s a matter of having a road map that aligns the growth of the company with the technology that’s supporting the finance function.”
Approach
“When you’re looking at finance automation, make sure you look at how a solution will integrate holistically with others in the full process,” said Grant Thornton Technology Industry Leader Andrea Schulz. “Beyond discrete siloed solutions that solve a particular problem, look at how it’s adding more efficiency to the whole.”
Some technology companies need to assign a role to apply this perspective. “Often, the IT side of a tech company is focused on product development and is led by more of a CTO than a CIO,” Gothelf said. “So, the burden really might fall on the finance function itself to do the assessment of the appropriate technology stack. I see that very often, and it takes a different mindset to focus on efficient back-office operations versus front-office operations.”
Cross-functional
Your assessment of finance automation needs to consider integration across the back office, front office and other functions. “You might come up with different solutions for what you want to automate and how to fix the problems,” Bell said. “When you look at it cross functionally, that will also allow you to scale better and not quickly outgrow the automation that you’re putting in place. Work as a group to find better solutions, create a better tech stack for the organization and make sure that you’re not working against each other.”
Companies can use this approach to plan finance modernization into key points in the company’s overall growth. When financial modernization stays on track with the company’s priorities, timelines and budgets, then it is less likely to limit growth or create risks.
Road map
“The importance of having a road map is critical to guide the company,” Gothelf said. “For example, I have a client with nine people right now — and in six months they’re going to have 300 people. So, we’re developing a road map for what initial technology will be and what they’re going to need as they grow. We’re prioritizing the elements of the tech stack and identifying what they can do manually — it’s conscious decision-making versus just evolving the finance function operations. Those operations, processes and technologies need to match the appropriate size and strategic plan of the organization, to have growth.”
“That way, you’re scaling appropriately,” Bell said. “It doesn’t necessarily mean investing in people; it could mean investing in processes, technology, data or other factors. Think about how you minimize cost while also maturing with the company.” Gothelf added, “You’re also mitigating risks.”
Scalability, risk mitigation and the need for clear financial data are issues that innovation-focused investors can understand. “Even though investors are looking at the product or the customer base up front, they need good numbers when it actually comes time to monetize,” Gothelf said.
Investors could see that this clarity and scalability are especially important for tech companies with explosive growth potential. “You could come to the point where AI is supercharging your top-line growth, your revenue’s surging forward and you’re getting more sales — but your back office becomes the limiting factor,” Schulz said. “It hasn’t evolved to handle your new scale and support the growth that you’re experiencing. For investors, that would mean making sure that you have the right tech stack in place to handle and empower the organization to grow.”
Contacts:
Partner, Business Consulting
Grant Thornton Advisors LLC
Ron is a Partner in the Grant Thornton Finance Modernization Practice leading the U. S. Finance Transformation Capability and the Central Region Finance Transformation Practice.
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