The AMS Rapid Diagnostic® is a comprehensive tool used to assess the financial health of companies and nonprofit organization. While every organization has its own particular financial policies, processes and procedures, smaller organizations can be particularly challenged keeping up with industry best practices since they lack the resources of larger organizations. Based on our work performing Rapid Diagnostic® finance and accounting assessments for dozens of nonprofits, emerging and smaller middle market companies, and our consulting work with hundreds of other organizations each year, we have put together a list of “The 7 Sins of Ineffective Finance and Accounting Teams”, which outlines the most common issues that we typically see.

Hiring People without the Appropriate Level of Technical Accounting Knowledge

One area where we see companies struggling is technical accounting. Most organizations can handle basic transactions, but a smaller team is more likely to lack the in-house expertise to handle complicated accounting techniques. Some major areas where we routinely see a knowledge and technical know-how gap include revenue recognition, equity accounting and stock-based compensation for for-profit companies. For nonprofits, most organizations do not have sufficient knowledge around restricted fund accounting, cost allocation and state and federal contract compliance.

Inadequate Cash Forecasting Tools

Another area where many organizations routinely struggle is cash forecasting. Cash forecasting, or cash flow management, allows organizations to predict future levels of liquidity. Organizations may not have a consistent, steady level of revenues or expenses, so predicting future cash flows and making decisions without insight into future cash availability can be a challenge. Organizations should continually revisit and readjust their forecasts throughout the year; we recommend weekly for organizations where cash is tight and no more than monthly where cash shortfalls are not an issue. All forecasts are based on knowing the normal rhythm of the organization and anticipating when events should happen. This all starts with good budgeting and continually updating as new knowledge is gained.

Not Instituting Proper Internal Controls

A third issue that our consultants regularly see is a lack of internal controls. Adequate internal controls require segregation of duties, documentation of procedures and proper analysis of accounts and financial reports. A small team typically makes it hard for an organization to have the personnel required for proper segregation of duties, and a lean team usually lacks the bandwidth needed to accurately analyze accounts and reports. The most common problem with smaller organizations is when too much control resides in just one person and the same individual is tasked with preparing vendor checks, signing those checks, making deposits and reconciling the checking account. These duties must be segregated, even if that means having someone outside the accounting department performing them. 

Accounting Systems that are Poorly Implemented or Not Updated to Meet Changes in the Organization

It starts with the chart of accounts and ends with financial reports. It is very difficult to get good quality financial statements in a meaningful format if the chart of accounts is not properly designed and structured to reflect the true operations of the organization. However, even if the chart of accounts and financial reports are structured properly initially, most organizations change over time and the financial reporting needs to change with it. The primary reason for poorly structured or poorly implemented accounting systems is an inexperienced internal financial management team. The team may have not done it before and the organization may suffer for that lack of experience. Most organizations also need to periodically upgrade their systems, a piece of the process that often gets delayed in favor of other projects. Not upgrading an accounting system when an upgrade is needed can open up an organization to a variety of risks, including bugs, security issues and changes in regulatory rules.

Not Fully Utilizing an Accounting System

Poor utilization of an accounting system is often related to lack of training. Accounting systems are designed to record every business transaction, and when used correctly, they can generate important strategic reports that help management make important decisions. However, when the accounting system is inadequately utilized, staff tend to use work-arounds. They will create manual processes to get the work done.  The usual tipoff is that staff rely heavily on Excel spreadsheets rather than the system for reporting. Perhaps the chart of accounts isn’t correctly set up or users aren’t entering all the necessary information – it becomes more tedious or even impossible to generate reports with any meaningful information. Poor utilization of automated accounting systems typically leads to manually generated reports, yet another example of less-than-ideal internal controls. 

Too Many Systems – No Strategic Plan for Infrastructure

As organizations grow they tend to make decisions to purchase new software based on the problem of the day rather than thinking about the whole infrastructure. We often see organizations employ multiple systems that do not speak to one another, which creates road blocks for good communication and reporting. When too many systems are used, the organization needs to bridge the gaps with manual processes. This causes errors and, of course, a lot of extra work. Often accounting managers that are caught in this trap are constantly falling behind. When information is requested, they have to do a lot of extra work. If an integrated systems infrastructure had been developed up-front, fewer manual processes would be necessary.

Not Training Your Accounting Staff

The roles of senior accountants, treasurers, and controllers have changed significantly in the past decade. With new business regulations and more complicated systems, accounting employees need a higher level of training just to stay up-to-date. Many organizations are not significantly investing in training for their accounting and finance team. This ultimately hurts not only the employees, whose skills stagnate, but impacts the business itself. 

While the above list is by no means all-inclusive, these 7 sins are the most common problems that we see. Overall, many of the problems that organizations continually encounter can be prevented with the right expertise and a proper distribution of resources. Not every finance and accounting team is going to have all the answers, but knowing when to get help is always a good first step.