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January 24, 2023

The Lessons Every Growing Business Should Take from the FTX Collapse

FTX

Last month, John J. Ray III, FTX’s new CEO, testified before the House Committee on Financial Services. Ray explained that FTX was “unusual” in that it had “no record keeping whatsoever.” He noted that FTX used QuickBooks, an unusual choice for a multibillion-dollar company, saying, “QuickBooks, a very nice tool, but…”. The fact that FTX was still using QuickBooks as its accounting software drives home a message we’ve been putting out there for years — there’s real danger in waiting too long to move to a real business management application. Every growing business can learn something from FTX’s failure. Here are our top takeaways.

1. Internal controls are essential

QuickBooks is the most popular entry-level accounting application in the world — and for good reason. It’s inexpensive and relatively easy to configure. That makes QuickBooks a viable option for companies just getting started, those closely held within the family, and those with simple accounting processes.

QuickBooks unfortunately lacks the internal controls that are essential for growing companies. At least by the time you hire your first accounting employee, you’ll want an application that enforces internal controls, such as separation of duties, controlled access to the application, expense preapproval and verification at a minimum. A robust internal control structure helps to:

  • Provide reasonable assurance about the reliability and accuracy of financial information
  • Identify and resolve any discrepancies or errors in financial statements
  • Promote greater transparency and accountability throughout the reporting process
  • Prevent fraud (Here’s looking at you, FTX.)
2. Manual workflows stifle workflow & profitability

As companies enter — or prepare for — a period of rapid growth and expansion, they typically hire additional personnel to keep pace. Increasing headcount isn’t bad, except if you’re hiring primarily to keep up with manual workflows. For example, if you’re hiring additional administrative support to rekey data from one application into another and key in employee expense reports or hiring additional finance personnel to maintain spreadsheets to support your reporting efforts. In that case, you’re siphoning capital away from your growth efforts.

How many of your organization’s workflows could be automated with the right business software? How could you better allocate your human capital resources if they were automated? Mr. Ray indicated that FTX employees would exchange invoices and expenses on Slack — this is not the type of automation we’re referring to.

3. Visibility provides fuel for strategic growth

As a company expands, diversifies, and becomes more operationally complex, it needs accounting software that flexes with it. The company’s owner, CEO, and management team need deep, real-time visibility into every aspect of the business. Management needs to understand more than just what’s going on in the company. They need the visibility to predict what may happen tomorrow. An entry-level accounting application cannot deliver that visibility, but a robust, multi-dimensional one can.

FTX’s embattled founder and former CEO, Sam Bankman-Fried claimed he was unaware of many of the company’s financial shenanigans and outright fraud. We certainly cannot blame QuickBooks for that level of incompetence (or malice). However, we can say that it would be impossible to provide deep financial insights into a company of this size and complexity using QuickBooks.

Waiting is risky

If you think you’ve got plenty of time to move from QuickBooks to a more sophisticated accounting application (like maybe you’re only at $1 billion), keep in mind that FTX was only three years old at the time of its collapse. The longer you wait, the more fraud risk you expose. Compound that with decreasing efficiencies caused by manual workflows and poor visibility into trends and opportunities, and now might be the right time for that move.

Would things have worked out differently for FTX if it made the switch sooner? We’ll never know that, but we can say that had the company made the switch earlier, Mr. Bankman-Fried surely would have had more difficulty claiming he was in the dark. 

BT Partners works with growing companies across a broad range of industries ready to implement a modern, cloud-based financial management solution — and we can make it easy. Suppose you’re moving from QuickBooks to Sage Intacct, for example. In that case, we loop in a partner of ours, Platform Transition, who specializes in data conversion and has completed more than 900 such conversions. Reach out with your questions.

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