When Should You Build a Back Office?

“No time left for you” – lyrics from the song No Time by The Guess Who

I tend to blog about recurring points made in meetings and conversations following the belief that if I hear the same topic from a few people in my little world, maybe there is something happening on a larger scale. So, in the last few weeks I have had the occasion to meet with four different early stage investors (A round types). As is my normal approach, I asked each what were trends they were seeing in potential investees. Expecting to hear the typical “investors have unrealistic price expectations” or “business models that were not viable”, I was shocked to hear three of the four raise concerns regarding the inadequate development of prospective portfolio companies’ back offices. I could not believe the lack of appropriate (pardon my accounting jargon) overhead had even made it into the list of the top fifty items that concerned them. I must admit it was consistent with what we see in the market; almost every early stage company we see has no time (or money) left to even think about their back office.  Being somewhat intrigued by all of this, I decided to probe a little deeper.

What each mentioned was their disappointment in being able to get answers to the most basic of financial diligence questions, never mind being upset that there were no processes in place to track Key Performance Indicators (KPI’s). While none admitted to “passing” on an investment due to this shortfall, I did get the distinct impression that it was seen as a bigger negative than I thought. So what is the problem?

The back office (or overhead) is something most early stage entrepreneurs have no desire to spend either time or money on. As the lyrics to this song go “on my way to better things.” Most believe there is always time to backfill later and a back office does not drive revenue. I cannot tell you how many projects we do reconstructing financial information at a cost many times what some basic processes could have easily covered in the first place. My concern is always how many bad decisions may have been made because of incorrect or incomplete information? As one investor stated “if they spend no time understanding the business now, what are they going to do as it grows; will they see the information indicating changes that are required before it is too late.” This is not just data clean up; it is lost opportunity.

Here is the good news; reasonable solutions are available at least in the NY Metropolitan area. There are flex work solutions for accounting staff, CFO’s and experienced mentors and advisors who can point you in the right direction as well as reasonably priced tools. You just need some help from your advisory team and they can get you on the right track. I would never want a client not to get financed because his or her back office was a mess. Please do not allow a controllable item like this prevent you from achieving your goals. The time to fix it is now.

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