The history of accounting starts when the history of business begins. Keeping track of money paid and received was probably the task for which writing itself was originally invented. That makes it doubly unfortunate that so many family business leaders seem to be afraid of accounting.
At many family firms, accounting is viewed as an unimportant activity. It may be handled by a family member or long-time employee who uses little more than a spreadsheet — perhaps even only a pencil and yellow pad — to track and manage the organization’s finances.
One study of small and medium-sized enterprises found business leaders had knowledge gaps in basic accounting matters such as product costing, break-even analysis and working capital management. Without improved skills and practices in these areas, the authors found, businesses were making ad hoc decisions without adequate analysis, placing profitability and even firm survival at risk. In fact, failure to address risk management was one of the core accounting failings identified in this study.
Probably the first move family businesses should make to improve accounting practices is hiring an experienced in-house accountant. They should also develop relationships with outside accountants. The combination of in-house accounting personnel and external advisors will encourage adoption of improved processes.
Next, family businesses need to update accounting technology. Even if they’re not running the business out of the proverbial shoe-box, many family businesses have not kept up with evolving accounting technology. An Excel spreadsheet is no substitute for modern full-featured business accounting software.
One of the reasons often cited for accounting inadequacy is that the standard tools aren’t suitable for the unique challenges the family business faces. There is some truth to this, as comparisons of family and public business accounting practices and outcomes show fundamental differences.
One difference is that family businesses have less need to manage earnings than public firms, which must meet earnings forecasts in order to satisfy analysts and larger numbers of shareholders. Another is that majority shareholders in family businesses may be more likely to be less than scrupulous when allocating personal expenses to business. In general, family firms are less transparent about their accounting practices.
The bottom line on family business accounting practices is that they can generally stand considerable improvement in personnel, technology and processes. However, keep in mind that what works well in public companies won’t necessarily work as well for family firms. When hiring a staff accountant, selecting an outside auditor or other external accounting, choosing technology or deciding which processes to implement and how, it’s important to get advice from a source familiar with the special needs of family business.
From the earliest evidence of accounting in Egypt more than 5,000 years ago through the invention of double-entry bookkeeping in 14th-Century Italy to today’s world of cloud-based accounting software purchased by monthly subscription and available anywhere with an Internet connection, family business and accounting have grown up together. With such a long joint history behind them, there’s no need at all for family businesses to be afraid of accounting.