An outsourced or in-house accountant can provide the information private lenders need to make educated decisions about growth.

Successful entrepreneurs know their businesses will navigate several phases of growth. The same can be said of a newly formed private equity fund. Once it reaches a growth level beyond what could be considered natural, organic growth, the fund sponsor must start considering strategies that allow it to scale.

Why Some Private Equity Funds Fail

Before scaling up their business, private lenders must ensure they indeed have a thriving operation. The investment fund should not only be able to meet the daily demands and constraints of its cash flows but also should have a reserve on hand, which is necessary for growth.

Additionally, a fund manager should focus on what will help their fund survive. Although about half of companies make it to the 5-year mark, the other half fail. The most common reasons a small business or private equity fund might fail include:

  • Lack of market need. The private lender may have an excellent product or service, but there may not be a demand for it in their market or region. A market analysis can help determine which type of loan product or service a private lending company should provide.
  • Competition. Although there may be a demand for the private lender’s product or service, other similar service providers may oversaturate the market.
  • Strength of team. Fund managers who like to retain total control of their investment fund may spread themselves too thin. They may be reluctant to hire the right employees or bring in another partner with complementary skills.
  • Inability to obtain capital. According to the National Small Business Association, a quarter of small businesses cannot acquire the funds necessary to operate. Newly formed funds may struggle to get investors, lines of credit, institutional financing, or private loan volume if their financial records are not attractive or stable.
  • Managing costs. Private fund managers may avoid using third-party service providers to reduce costs. Although they may save money in the short run, they could lose out on the valuable, key benefits long-running service providers bring, such as strategic planning or tax planning to help reduce taxes.
  • Pricing. The fund will not be profitable if management prices the loan products or services too low. Likewise, setting interest rates and transaction fees too high may result in lost revenue and returns to investors due to lack of loan volume.

Focus on Investment Fund Strategies

It is common in companies with 10 or fewer employees for the owner to do it all—from generating revenue and managing employees to handling accounting, marketing, recruiting, and human resources. Fund managers may also spend a great deal of their time on daily recurring tasks and putting out fires, leaving little time to focus on the fund’s investment strategy, improvements in efficiency, and industry trends.

Instead of performing back office tasks, fund managers should concentrate on the overall structure of the fund and doing what they do best—finding investors and borrowers. For a well-managed fund to produce sustainable returns for investors, fund managers must efficiently balance fund size and deal flow.

There is one area, in particular, that private lenders should consider outsourcing to free up their time to work on “big-picture” business growth: accounting. Outsourcing the accounting function frees the fund manager to develop a new loan product or implement a new service line. It also allows them to focus on maintaining a pipeline of potential investors by making strategic network connections, developing referral sources, focusing on deal flow raising additional capital, and prioritizing other areas where their time and attention are of more value.

Bookkeeper Versus Accountant

So, should a private lender who’s made the commitment to offload the accounting function hire a bookkeeper or an accountant? The roles are often perceived as being synonymous, but there are subtle distinctions between the two positions. It is essential that private lenders understand those decisions before making a hiring decision.

Bookkeepers focus on organizing the financial data and recording financial transactions into the accounting software. They perform clerical and administrative tasks, manage business accounts, and maintain the accuracy of the data from accounting systems.

Accountants, on the other hand, provide the same clerical and administrative tasks as bookkeepers, but they also deliver a high-level analysis of the accounting data. Accountants give advice, create financial models, and analyze variables that influence financial success. They create financial statements and monitor the financial health of the investment fund. Accountants can make suggestions to help reduce costs, increase revenue, and monitor the financial stability of the fund.

Depending on its size, a fund may have both a bookkeeper and an accountant who work together to guarantee the investment fund’s overall success.

The Value of an Accountant

Startup Stage. During the startup phase, many private fund managers choose to oversee their fund’s financial records on their own. Although doing so might help reduce costs in the early years of the business, this decision could come at a high price—potential errors and lost future opportunities. Hiring an accountant can save the fund manager time and money through strategic planning during the startup of the fund.

Fund accountants can provide sponsors with valuable insights during the startup phase by:

  • Consulting on the best fund structure at the time of formation. Choice of entity structure (sole proprietorship, LLC, corporation, partnership) affects current and future tax savings for lenders and investors and helps reduce taxes when dissolving the fund.
  • Assisting with the fund’s strategic plan and financial analysis, ensuring the fund will be profitable.
  • Recommending the most suitable type of accounting, loan servicing, or investor management software.
  • Ensuring accounting procedures comply with government regulations.
  • Advising how to track routine expenses to reduce taxes.

Scaling Phase. Accountants play an integral role during a fund’s growth phase and are a valuable resource during its scale up. An accountant can, for example:

  • Provide accounting reports to help the fund manager make crucial decisions.
  • Analyze cash flow patterns to determine whether the fund has the financial resources to scale without reducing yields to investors, but also maintain adequate revenue to cover the costs of running the fund.
  • Create financial forecasts, allowing the fund manager to determine courses of action while scaling.
  • Prepare budgets to increase revenues, reduce costs, and monitor the fund’s financial health as it scales.
  • Provide advice and insights during mergers and acquisitions or fund restructuring.
  • Maintain consistent and stable financial records, making the fund attractive to investors and institutional capital providers, if the fund requires additional capital to scale.

Running a private equity fund comes with risks. Many new investments funds, without vision and planning, fail within the first five years. Fund accountants serve numerous roles as a fund scales up and can help beat the odds of failure. Their job is to provide important financial information and guidance that helps fund managers make educated decisions as they strive to build a successful private lending fund.