The financial infrastructure of startups transitioning from domestic to international scale is rapidly evolving into a significant strategic issue as opposed to simply an operational one. In many cases, what worked for a company in its formative years is ultimately unsuccessful due to the intricacies of competing with multi-entity structures in cross-border transactions and the various rules and regulations dictated by the firm’s investors.
One of the most significant factors a developing organization will encounter is the need to optimize their ERP platform or system. For many Israeli startups, this discussion usually focuses on two main platforms; NetSuite and Priority.
So, is this just a software comparison? No; it’s an issue related to the financial architecture of the organization and therefore selecting the wrong financial architecture can produce inefficient processes, reporting gaps, and compliance issues that will only worsen as the business continues to scale.
The Importance of Financial Architecture in the Early Stages
Many founders underestimate the impact that their financial architecture will have on their growth as a company until the growth demands a shift in how they perform their accounting and financial reporting. When this occurs, the expenses associated with re-establishing their accounting and reporting functions will be their highest costs as a result of their prior growth.
The introduction of global growth to any organization creates the following:
Multiple legal entities
Multi-currency transactions
Various tax jurisdictions (U.S., Israel, EU, etc.)
Consolidated financial reporting needs
Investor-grade visibility and governance
Once an entity does not have a solid ERP system to drive its finance function, the reliance on spreadsheets, manual reconciliation and disparate data to determine financial/economic conditions produces risks, delays and an inability to quickly respond to a business opportunity.
NetSuite – Built for Global Financial Standardization
For many companies that desire to expand quickly into other countries and markets with substantially more capital than those who start locally, NetSuite will be a natural choice.
From the perspective of a CFO, some of the advantages of the NetSuite platform include:
- Native Multi-Entity Consolidation
With NetSuite, companies with multiple subsidiaries can perform real-time consolidated financial results that include automatic currency translation and inter-company eliminations. This will produce reduced month-ending closing cycles and provide the company with the ability to maintain consistency across multiple legal entities. - U.S. GAAP and Compliance Readiness
When a company is entering the U.S. market for the first time, they require a comprehensive framework for meeting U.S. GAAP when preparing their financial statements, including the need to recognize revenue in accordance with ASC 606, prepare for a potential audit, and establish the necessary financial controls. - Advanced Reporting & Visibility
With NetSuite, senior executives will have the ability to utilize real-time dashboards, in-depth segment performance analysis, and drill-down analyses, allowing them to make more strategic decisions and enhance the quality of their board reporting. - Scalability without Replatforming
NetSuite can continue to be utilized to grow the company, from the start through the IPO, without any additional system necessary for financial reporting.
Key Consideration: NetSuite requires proper planning and financial ownership in order to achieve its organizational capabilities. Without proper configuration and governance over the usage of NetSuite, many businesses will severely underutilize the benefits provided by the NetSuite ERP.
Priority – Operational Depth with Financial Flexibility
Priority is a well-recognized solution used by many Israeli-based businesses; typically, these businesses have a diverse level of operational complexity around logistics, manufacturing or distribution.
The advantages of Priority are very specific, but can be very valuable when implemented under the right set of circumstances:
- Strong Operational Integration
Priority is uniquely suited for organizations that must have their financial operations tightly integrated with their inventory, supply chain, and production workstreams. - Multi-Company Architecture (One Database)
Priority allows companies with multiple legal entities to have all of their data within one database and have their data tightly integrated. - Strong Localisation & Flexibility
Many Israeli businesses are utilising Priority for operations within Israel, but that same capability exists for businesses located in markets outside of Israel, provided the appropriate configuration is established. - Cost-Effective Scalability
Priorities integration with U.S. GAAP and other regulatory mandates can be very beneficial for companies that have yet to fully implement a compliant U.S. GAAP infrastructure.
Key Consideration: As companies grow into the U.S., there will be additional layers of responsibility established to create consistency around financial reporting, tax regulations, and expectations set by investors that are consistent with the international market.
When deciding whether or not to adopt a particular enterprise resource planning (ERP) system, it’s important for startup businesses to postulate their decision as a choice between systems – i.e., either the company uses a NetSuite (NS) system or Priority (PR) system.
The appropriate ERP system will depend on those four pillars:
Company size;
Geographic location
Investor expectations; and
Business complexity
As it relates to many businesses today that use the PR ERP for operations but want to use the NS ERP for accounting, the key is not to use one system to replace another, but to evaluate the company’s overall finances.
CFO’s: Avoid These Pitfalls
Below are some commonly experienced issues or “pitfalls” faced by many Scaling Companies:
Delaying investment into the ERP system until the business begins to expand to the U.S.
The use of spreadsheets for consolidation at the group level
The use of multiple intercompany structures.
The misalignment of operations and financial data
The under-estimation of U.S Tax and Compliance complexity
These obstacles will create friction that will slow down growth and increase risk.
What Founders Should Focus
Consider finance to be a strategic function as large as the business. A proper ERP foundation will provide the following:
Accelerated and Accurate Reporting
Accelerated and Accurate Financial Information
Improved Decision Making
Additional confidence among investors
Increased ability to operate at Scale
Reduced Risk of Regulatory Compliance
This is not about over-engineering; this is about preparing a proper foundation to support growth and allowing you to avoid making last-minute, reactive decisions as a result of complex matters.
Key Takeaways
Both NetSuite and Priority are strong ERPs. The main difference comes down to the way that either system is configured or integrated into the overall Finance Strategy of a company.
As a CFO of an international business that is experiencing expansion, my goal for my company would be to assist in implementing and managing our financial systems, financial processes and reporting, so that we continue to be able to operate as expected.
Ultimately, once your business becomes established, having complete financial clarity will no longer be an option; it may then be viewed by majority of Companies as a competitive advantage.
