The Theory of Constraints is a business management approach proposed by Dr. George Friedman at the University of Southern California. According to his theory, a business constraint is anything that interferes with the profitability of a company or business endeavor. Project-driven firms can improve profitability by moving beyond the constraints of their basic accounting system.
Small project-based firms experience the constraints of their basic accounting systems when applying for a line of credit. Banks usually require GAAP compliant reports for evaluating a company’s financial health and credit—yet, most basic accounting systems, such as Quickbooks, are not GAAP compliant. When a company expands to multiple locations, it may need to treat each entity separately. A basic accounting package may be needed in each entity. But this means that the corporate accounting office must spend twice as long consolidating and verifying data and reports for the month-end close. These are these are just a few examples of constraints a basic accounting system places on a company’s profits and growth prospects.
In this article, we’ll look at three major constraints of basic accounting packages that hold project-driven firms back from improving profitability. We’ll specifically look at QuickBooks, a very popular entry-level accounting package, that can constrain corporate growth.
Signs You May Be Outgrowing QuickBooks
Challenges in Functionality
- QuickBooks is not efficient for multi-entity companies that need to track each entity separately yet still provide consolidated reports.
- Complex revenue-recognition contracts are difficult to manage and track in QuickBooks. New compliance standards for revenue recognition for firms are GAAP complaint magnify the limitations of QuickBooks in this area.
- QuickBooks files are limited in size. The Enterprise Solutions system tops out at 1.5 GB. Once you’ve reached the maximum, you must decide whether to upgrade again or shrink the data file by removing years of history.
- Performance slows considerably as file size grows.
- QuickBooks Enterprise Solution has a 30-person limit on the number of simultaneous users it supports. As you approach this number of users, you should be aware that you are close to outgrowing Quickbooks.
- QuickBooks is excellent at slicing and dicing data along common business accounting methods. But if it becomes necessary to export the data from QuickBooks to manipulate it on a separate spreadsheet, you could be losing efficiency and control. A more robust accounting platform should be able to automate data analysis and reporting functions entirely in the system.
- Complex real-time project accounting for professional services or consulting firms is beyond QuickBooks’ capabilities.
- When a business grows to the point where five to 10 people are logging transactions simultaneously throughout the day, mistakes and corrupted data can occur.
Compliance and quality
- QuickBooks is not GAAP compliant. When companies employ GAAP, it makes their financial reports consistent and comparable. This helps key stakeholders (investors, creditors, etc.) make informed financial, credit and investment decisions. As companies grow and seek lines of credit from banks or funding from sophisticated investors, they need to provide GAAP compliant financial reports which Quickbooks does not support. In addition, note the previous discussion regarding the new compliance standards for revenue recognition that private and public companies must follow.
Project-driven firms improve profitability
While basic accounting systems may have trouble meeting the expanding and complex needs of growing businesses, that doesn’t make the decision to switch an easy one—even if you are one of the businesses quickly outgrowing Quickbooks. The fact is that there’s never been a better time for project-driven firms to update their systems. Companies of all sizes leverage the cloud to affordably expand capabilities, increase automation, create greater efficiency and mobility, and prepare for ever-changing business conditions.
Companies that find the greatest advantages in moving to cloud-based business applications do so on a single platform with applications based on a common data set. Many growing companies are turning to Microsoft Dynamics 365 Business Central to connect all the core elements of their business. Project driven firms can now harness the power of a professional service automation (PSA) system called Progressus.
Progressus PSA is built on Dynamics 365 Business Central allowing data to naturally flow between the two programs. Together, they provide the capabilities needed to manage all processes in a company, including resource management, project management, sales and marketing, and financial management. Progressus and Business Central provide professional service and project-based businesses a complete cloud-based PSA solution. Firms of any size, operating in any geography are empowered with role-based clients optimized for any browser or mobile device.
Watch this brief video to learn more about how D365 Business Central and Progress help project-driven firms improve profitability.