No company can grow profitably over the long term without an accurate accounting system that helps managers understand and forecast results. Unfortunately, growing companies often get blindsided by two common mistakes, says Paul Parish, a management consultant with the Denver office of accounting firm Grant Thornton:
Failure to invest enough in financial systems. "Growing companies typically view this as an area in which to save money, so they hire too few people for the back office," explains Parish. "They also keep the salaries of these staffers too low, so they can't hire the most qualified people. And they usually buy the cheapest computer systems, which means they can't keep up with their own growth." Accounting problems usually don't surface until there's a failure to predict a cash-flow crisis or a bank rejects a sloppy application for a badly needed loan.
Lack of accounting supervision. If a young company lacks an experienced controller, it's essential to get an outsider (one solution: a chief financial officer from another company) to verify the accuracy of every aspect of the company's accounting system. Parish cites some danger spots: accounts receivable (bad debts may be carried so long that they can't be collected); inventory (poor tracking systems conceal tie-ups of cash); and accounts payable (aging bills may incur interest penalties).* * *