It takes 1-2 years for a company to get a grip on its finance fundamentals. This is the job of an early stage company’s finance and accounting team. The close. Reporting. Budgeting. To be sure, these aren’t simple processes. They take significant time to set up properly, even with AI tools to help.
But once the fundamentals are in place, your company will inevitably reach a crossroad. If you get to this point and you don’t ask the right questions, you risk falling into what I like to call the “Reporting Trap”.
Two Sides of the Reporting Trap
The reporting trap starts innocently enough. A new request from your Controller, a new question from the Board. The walls of the reporting trap grow slowly over time as the requests for more information pile up. Eventually you feel trapped by a level of complexity that burdens the team and wastes time. There are two areas where I see this happen most:
Getting obsessed with accounting accuracy: Every prepaid gets amortized no matter how small. Every expense gets accrued no matter how trivial. The chart of accounts keeps getting bigger and bigger. This obsession is usually driven by the finance and accounting team, not the CEO.
Getting obsessed with FP&A: There’s a “bridge” or “walk” analysis for everything from revenue to gross margin to cash flow. Variances versus last month, last year, and budget are explained down to the dollar. Don’t get me wrong, FP&A analysis is crucial for understanding your business. But there’s this tendency to think that by analyzing every variance, and doing so every month, you’ll learn something new. The truth is, after a while, you don’t. This obsession almost always comes from the executive team or board.
The Impact Problem
The problem with these obsessions is that they have almost no impact on the business. They don’t make the company more efficient. They don’t drive growth. They don’t even protect the company from a black swan event. They just don’t matter very much. What they do is keep your finance and accounting team busy while giving the impression of progress and competence.
This phenomenon has been studied extensively (Selznick’s Institutional Theory, Parkinson’s Law, etc). The core idea is: work expands to fill the time available and that expansion tends to lead to complexity that pulls focus away from what really matters.
Finance and accounting is particularly prone to this, because:
- There are lots of principles and procedures to follow
- There’s an endless supply of KPIs and metrics to evaluate and report on
- The goals of finance and accounting are often unclear or poorly defined
The Solution: One Simple Question
To avoid the Reporting Trap, you need to refocus your finance and accounting department around impact. This means that the work you do should help the company make decisions. Full stop.
The next time you feel the urge to make your books more accurate or you get a question about historical variances, ask yourself a simple question:
What’s the business decision we’re trying to make?
This should be the mantra of every finance and accounting department. When there’s a clear answer, you’re on the right track. If you find it hard to answer this question, you should ask yourself if the work will have an impact.
Consider these strategic questions, for example:
- Should we spend more on marketing?
- What’s the best way to boost revenue growth?
- How do we improve cash flow efficiency?
- How can we reduce operating expense by 10%?
If your work supports an answer to these questions, you’re on the right track.
About the Author
Karsten Loose is co-founder and Managing Partner at Karlon Group, a fractional finance and accounting firm that helps companies build, scale, and optimize their finance and accounting functions. Karlon Group works with companies across SaaS, consumer, manufacturing and technology, offering a full suite of finance and accounting support tailored to each client’s changing needs.