Families and family offices are always experiencing transitions, and navigating these events successfully makes all the difference in how well the family accomplishes its long-term goals. Families who keep their wealth together longer than just two generations recognize the need for successful transitions. This includes the importance of choosing the right software and processes to manage increasing complexity and planning for future generations.
One often-overlooked challenge is whether the family has prepared the family office infrastructure for an initial transition, such as the sale of a family business. While suddenly having substantial liquidity can be daunting, it is also straightforward to deal with it. It does not take long, however, for increasing complexity to manifest. This is the point at which people, processes and procedures are critical to success—and where failure can raise its ugly head.
Wealth creators often store everything they know and do in their heads. They understand the ‘what’ and the ‘why’ of their investment decisions, know where their cash is at any moment, and simply can work without extensive systems.
One very wealthy individual had zero support staff, did his own investing, and kept enough cash around to pay bills, make purchases, and manage his houses. He used his checkbook as his accounting system.
His next generation will be challenged by this lack of structure and documentation. They will lack the understanding of the wealth generator’s thinking, not to mention the extreme challenge of estate tax compliance when there is no information reporting system available.
Basic Accounting Tools Fall Short
In most cases, the first systems families use to track activity are very simple and based on checkbooks and Excel spreadsheets. Fairly quickly, there is a natural upgrade to QuickBooks Online or similar accounting tools. Most families stay with these initial systems for way too long, eventually finding themselves doing significant manual reporting via spreadsheets and not leveraging technology any more than when they started.
This is also the riskiest phase from a malfeasance standpoint as it is hard to track reconciliations and cash movements among numerous entities.
Common symptoms of challenges facing the family using inappropriate systems include:
- Having numerous separate entities with financials that can only be consolidated manually.
- A lack of timely reporting.
- Extreme manual reconciliation processes.
- Devoting way too many resources to creating the reporting needed to manage the family’s spending and wealth.
Despite throwing resources at the accounting processes, there is usually a significant delay in receiving reliable information in a format that makes sense. On top of these challenges, there is limited ability—at times no ability—to access information on a real-time basis.
And many family offices hang on to these initial systems far beyond their useful life because they see the pain of change as very high without understanding the significant downstream benefits. Growing complexity with multiple trusts, LLCs, other investment entities, multiple homes and households, and extensive portfolio investments can grind these systems to halt.
Technology Tools and Benefits
This brings us to the next significant transition—adopting and implementing a technology stack that can reduce time, energy, and costs to provide sound, comprehensive, and timely reporting. Family offices resist this change, to their detriment, because the technology cost appears expensive. However, the enhanced internal controls, ease of slicing and dicing information, and reductions in personnel expenses create savings that more than compensate for additional technology costs.
For example, visualize a technology stack that would allow the following:
- Integration with banking and credit card providers with minimal manual intervention (and virtual reconciliations).
- Cost and investment allocations across entities in one entry.
- Intercompany accounting.
- Consolidated reporting and separate entity reporting within one application.
- Dashboards with daily balance reporting.
- Ability to aggregate custodian detail.
Wouldn’t this make your accounting more accurate, timelier, and useful?
Choosing a more sophisticated financial management software for your family office operations can lead to powerful advantages:
- Comprehensive reporting. A sophisticated family office financial platform allows family members to customize dashboards and reports, and to gain deeper insights about investment performance and opportunities.
- Unified visibility. Consolidating results from different investment classes provides real-time insights while improving financial management and planning.
- Integration with other tools. Some common integrations that benefit family offices include investment management reporting, bill pay, expense management, and payroll.
- Stronger controls. Sophisticated reporting tools help mitigate the risk of fraud or errors while saving considerable time in the reconciliation process.
Sensiba is a value-added reseller for Sage Intacct, a cost-effective software solution that accomplishes all the above “next transition” accounting and reporting requirements. Sensiba’s Outsourced Accounting Services and Family Office Practice can be your accounting department engine by doing all the bill pay, accounting, and reporting using a Sage Intacct technology stack. For less than the cost of an accountant, you get the best in reporting and an entire accounting department serving your family.
To learn more about the many ways outsourced accounting and Sage Intacct can improve your family office administration and reporting, contact us.
