Common accounting problems and solutions

Running out of cash is one of the primary factors behind startup and SMB failure. Failing to recognize and mitigate accounting problems could be the difference between a favorable and unfavorable exit strategy for founders and CFOs. 

Review these 5 common accounting problems and solutions to strengthen your strategic plan and insulate your business from the global economic contractions projected to continue through 2023. 

5 accounting problems facing startups and SMBs in 2023 

Fintechs are navigating the impacts of sluggish growth, staff layoffs, and tightening client budgets. Your 2023 strategic plan must consider how the current economic climate may impact your revenue streams, yield new client requirements, and exacerbate existing staffing challenges. 

We combed through Accounting Today’s annual industry survey to report on the top 5 accounting problems in 2023 and their potential impact on fintechs in the US. 

Waiting too long to switch accounting methods

Startups typically use the cash accounting method when first starting out. Money in and money out are booked in the month they occur, regardless of the actual dates of invoicing and services rendered. 

Accountants will tell you first: you’re not always getting paid on time, and the business frequently doesn’t receive payments in the same month you provide services.

As financial reports become more impactful, such as when debt and equity investment partners get more closely involved, cash accounting will only satisfy some of their due diligence requirements. After a short time, most businesses will need to transition into accrual accounting, which records invoicing and service transactions in the month they occur.

Why does the transition to accrual accounting matter? It offers a much more accurate financial picture of the company. 

The longer you wait to transition, the costlier it will be. 

Improper revenue recognition

Improper revenue recognition is the leading type of accounting fraud and accounts for 60% of SEC investigations. 

In a turbulent economy, founders and CFOs are under tremendous pressure from investors to prove they can weather the storm. By accelerating revenue recognition — which may violate GAAP standards — it can be easier to conceal trouble in the water when presenting financial performance reports to shareholders.

For a comprehensive understanding of the roles and responsibilities of a CFO, check out our article on the subject. 

Without proper accounting controls, startups are vulnerable to overzealous decisions, “cooking the books,” which could lead to regulatory violations, legal consequences, and fines.

Siloed financial and accounting teams 

Financial planning and analysis (FP&A) requires regular access to updated, accurate company financial data, much of which falls on the accounting team to maintain. When finance and accounting teams operate in silos, your business isn’t making the most of the brain power available to you. 

Outdated processes and technology 

Outdated processes and technology sap your staff’s energy and expose the company to undue risk.

If your accounting team spends most of its time on administrative tasks, these efficiency losses may result in critical financial trends going overlooked. It also increases the likelihood of user error. 

Further downstream, missed opportunities to mitigate these problems sooner come with opportunity costs that could negatively impact profitability. 

Even worse, storing financial data in unencrypted sources, such as spreadsheets, could unwittingly aid cyber criminals in their efforts to steal sensitive company data.

Sourcing CPA support 

If you hire an external firm or talent for your accounting needs, it’s important to be aware of talent shortages across the industry. Most accounting firms continue to reckon with a dwindling talent pipeline. Meeting client demands remains a major challenge.

What is precipitating the CPA shortage? Some allude to a dwindling pipeline of accounting graduates, but that doesn’t tell the whole story.

Burnout is pervasive throughout the industry. It’s common for accounting firms to overwork their staff, especially amid the demands of tax season. 99% of accountants have reported feelings of overwhelm, leading many to leave the profession. 

Review your staffing plans for the year and consider the busy season for accountants (January through April). Enable your CPAs to focus on the rigors of tax season — and hold onto other projects for the remaining 8 months of the year.

If you find a great CPA, hold onto them like your business depends on it. Ideally, you will work with a firm that can grow with you and advise on the best tax strategy for your increasingly complex circumstances.

Solutions to common accounting problems 

More accounting firm leaders feel optimistic about 2023 compared to last year. 

What steps are they taking to meet the moment, and how can you learn from their example to protect your firm from losses related to current market contractions? 

Consider how these big-picture solutions may help your startup or SMB optimize accounting processes in 2023. 

Replace outdated systems and processes 

Accounting firms anticipate spending 21% of their budgets on technology this year. At least half expect technology spending to increase later in 2023. 

Digital transformation can help your accounting team work more effectively, compliantly, and securely on behalf of your business. 

What role should technology play in your accounting department? The objectives should focus on automating repetitive processes, communication, and violation identification. 

When technology reduces these administrative burdens, accountants can focus more time on valuable advisory services. 

Your accounting team should have the capacity to partner closely with FP&A. Together they can generate critical insights into business performance. The results of their collaboration will help CFOs identify trouble in the water and take mitigation steps before issues reach a magnitude that could sink the ship.

Many accounting platforms and ERP solutions available today have built-in guardrails to drive compliance with rules and regulations, including GAAP standards. Transitioning manual accounting processes from spreadsheets to cloud-based platforms will help you assume a proactive stance and prevent bad-faith actions such as improper revenue recognition. 

Strategic investments in technology can also mitigate cybersecurity risks. Today’s accounting platforms worth their salt will offer end-to-end encryption and data security solutions to protect confidential company information and prevent unauthorized access to financial accounts. 

Prevent and address burnout

Neglecting the needs of your current accounting staff would be a strategic oversight — one that further compounds the issue of staffing shortages. 

It’s no secret that burnout is pervasive in the accounting profession. Addressing the conditions that lead to burnout should ameliorate retention outcomes. 

Consider implementing the following mitigations to support the well-being and longevity of your accounting staff: 

• Encourage accounting staff to take PTO when they need it.
• Create adequate coverage plans for tax season.
• Expand company-funded healthcare services to cover mental health.
• Improve company policies that directly impact workplace equity and employee well-being, such as parental leave, transparent pay structures, bonus programs, and retirement contributions.