The price of a numbers review can save a bundle

Owner managers and entrepreneurs do not always get the numbers

A large proportion of our coaching and mentoring activities are conducted with small to medium sized enterprises, which are predominantly managed by owner-operators or entrepreneurs. On the whole, owner managers come from either a trading or sales and marketing background or, alternatively, from an operating base, including technical innovation, production or engineering. Although they understand the numbers, finance and accounting tend to be their weaker business and management areas.

As a consequence, they are very dependent on their financial and accounting staff for adequate systems and accurate reporting. Depending on the size of the organisation, they usually cannot afford to hire a top-notch Chief Financial Officer, but rather opt for a senior accountant or perhaps a solid bookkeeper.

In most cases, these organizations also have very limited external audit involvement, mainly cost justified and, in the majority of cases, an annual review only. In fact, where the business is a CC, audits are effectively non-existent.

As a result, the manager of the business is dependent on the caliber and integrity of their senior accounting person.accounting

How can they be sure, however, that the books are well managed and the results accurate, and truly reflect the performance of the business?

In a recent instance, a head accounting manager resigned from a medium-sized company with annual revenue of around R100 million after one year’s service. It was subsequently discovered that the books were a “shambles”, with no reconciliations of accounts, and in particular inventory, for the prior year. The discrepancies are still being analysed but it seems likely that the discrepancies will be in excess of R1 million, which will have a significant impact on the business’ results.

This lack of proper process as well as unacceptable accounting practice creates a significant loophole, or weakness, in the required level of controls. At the very least, it will cause discrepancies in the regular accounting reports, making the information on which management decisions are based unknowingly suspect. But it also creates a control weakness in the system, which invites fraud or malfeasance.

To obviate this potential pitfall, a regular monthly accounting review process is essential and should be ideally conducted by an external professional who not only reviews the monthly accounting statements, such as profit and loss, balance sheet and cash flow, but also carefully reviews the monthly reconciliations of all balance sheet accounts in the general ledger. This includes but is not limited to accounts receivable, accounts payable, inventory, the Vat control account and any salary or payroll control accounts.

In most instances, the entrepreneurial manager will not be capable of conducting this review alone, and will need to find a trustworthy professional to assist.

In addition to improved control, it will also ensure an adequate review of the month’s results with appropriate discussion around exceptions, concomitant decision-making and action planning to course correct the business.

Although this will undoubtedly add a few thousand Rand per month to the overhead, it will provide added protection and control, peace of mind and more clarity of regular management accounting information.

On balance, it seems a small price to pay for the benefits provided.

**(First Published in Real Business)

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