The Top 6 Accounting Challenges that Family Businesses Face

Family businesses are a true gem! They are integral to the soul of our country and touch so many people’s lives in a way that’s unlike any other type of business. And, according to the US Chamber of Commerce, they also play a big role in our country’s financial infrastructure employing 63% of the workforce and generating 57% of America’s GDP. Of course, most family businesses are not nearly as large as the ones that have made it big over the years (like Ford, Chick Fil-A, Dell, Aldi, and Walmart). But, nonetheless, family-run businesses are still essential to our local communities, and always will be. That’s why we are particularly passionate about helping family businesses succeed! We understand that in family-run companies there are a lot of challenges that must be overcome to find success, and we want to offer the resources that help them along the way.
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Today we’re going to be addressing some of those challenges through a financial lens by looking at the top accounting-related obstacles for family businesses and discussing ways to address them.  

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​1. Lack of Accounting Experience
In many small family-run businesses (especially during the startup phase) someone is responsible for the bookkeeping and accounting work that doesn’t have an accounting background. While this may save on payroll costs, it can significantly hurt the business’s future success because accounting inexperience can lead to a lack of financial clarity around planning. While small businesses typically try to keep expenses as low as possible, this is one expense that family businesses cannot afford to forgo. Leaning on a professional accountant (either full-time or fractional) offers a way to leverage their experience to grow the company more effectively by improving cash flow, increasing profitability, and making the business more appealing to investors.

Advice: If you want to keep expenses down, instead of hiring a full-time accountant or bookkeeper, outsource the role to a domestic accounting company. A good accounting service provider can provide part-time accounting help across any areas where you need assistance like daily entries, A/R, payroll, and financial reporting.

2. Informal Accounting Practices
A lack of accounting controls and policies can lead to informal accounting practices that open the business up to fraud. The best way to mitigate fraud risk is to establish a formal accounting policies and procedures manual and then share it with all employees. Once this has been established, you can layer internal accounting controls throughout the company to safeguard business assets. By formalizing accounting policies and implementing internal controls you are adding order to an environment where there is inherently going to be some blurring and muddling of roles and the chain of command due to the personal nature of your relationships. However, precautions ranging from access controls and segregation of duties to asset audits and reconciliations aim to protect the business both from outside threats as well as threats within.

Advice: Remember, when working with family, you cannot simply rely on trust to protect your business. Take the steps now to prevent an issue from occurring, rather than waiting for a problem to arise and needing to deal with it later.

3. Inaccurate Expense Calculations
In family businesses not everyone who contributes to the work of the company gets paid (regularly, fairly, or at all!). For instance, it’s not uncommon for the owner not to draw a salary while the business is growing. And while this may work in the short term, incorrectly calculated expenses can negatively affect cash flow, stymying future growth.

But it’s not just payroll calculations that family businesses need to be cognizant of, they also need an accurate COGS (cost of goods sold) calculation that accounts for both direct and indirect costs. Without knowing exactly how much it costs to make a product or offer a service a small business cannot ensure that they are operating profitably. These cost calculations should influence pricing decisions to ensure the business’s future viability.

Advice: Lean on your accountant or third-party accounting company to ensure that all expenses are included in cost calculations to facilitate better business planning.

4. Fuzzy Decision-Making
Given their propensity to under-report expenses it’s no wonder that family businesses tend to fall into a trap of ill-informed decision-making. Without reliable financial figures to rely on companies are forced to make decisions based on gut feelings. Exacerbating the problem is the tendency for family-run businesses to make emotional decisions around strategic planning due to conflicts of interest or their personal stake in the company.
 
Advice: Bring in an experienced financial leader to assist in strategic decision-making so you can be assured that the decisions you make now will set your company up for success later. Our partners at CFO Selections offer fractional CFO consulting services for companies of all sizes in all stages of business.

5. Limited Financing Options
In some cases, family-run businesses may be limited in their options for securing external financing. Often, it’s more difficult to attract investors as well, especially due to the tax complexities that can exist for family businesses. However, staying on top of your finances is a critical component of looking more appealing to banks, private investors, and other types of financiers. Keep clean books, prepare key financial reports regularly, and prioritize accounting accuracy to maximize your funding options.

Advice: Form a strong relationship with a trusted banker or experienced consulting CFO that can help you to understand your financing options and work with you to get the capital that you need to grow the business.

6. Lack of Succession Planning
Family businesses often operate under the misconception that they don’t need a formal succession plan because when the founder or current owner steps away, it’s just assumed that the business will be passed on to the family members who are already involved in the business or the next generation. This couldn’t be further from the truth! In family-run businesses a succession plan is needed more than any other kind of business because there are so many different directions that the business transfer can take.

But business owners aren’t the only ones that need a succession plan. All key roles in the company should have a succession plan in place – COO, Sales Director, Marketing Director, Head of Business Development, etc. Even your accountant should have a succession plan! A formal success plan is integral in making sure that the business will continue some day after you’re gone.

Advice: Normalize the practice of planning for the future without stigmatizing thinking about leaving the company someday. Your future success depends on it! 

If you need accounting help for your family business, please reach out to us! We offer accounting services for small businesses to provide as much or as little help as you need. Our consulting accountants have extensive experience working with family-run businesses to offer and will work with you to meet your goals and address your specific challenges. Contact us for more information!