From a pile of receipts to audited financial statements, accountancy advisor Grant Bateman says SMEs need to get on top of their records early on.

One of the benefits of operating in a zero-rate income tax environment is the reduced need to produce regular financial statements for income tax or other government departments. Whilst this sounds great in terms of a reduced level of administration, it can also mean SMEs are less disciplined when it comes to keeping formal books of account.

It still continues to amaze me how many businesses in the region – not only start-ups but more mature businesses as well – have little or no structure to their financial reporting records.

It’s important for an SME to know who the users of financial records could be, and why records are typically needed.

Records may be requested by:

  • Licensing authorities, when renewing trade licenses
  • Banks and lenders, whether for an overdraft, loan or other finance (even a car loan, for self-employed entrepreneurs)
  • Customers, as a means to prequalify as a service provider to larger businesses and government organizations
  • Suppliers, to enable credit terms instead of cash on delivery, for example.

Or records could be needed when…

  • Raising investment funds
  • Looking at a possible sale of the business
  • A partner is entering or exiting the business
  • There are partnership disputes or a business is dissolved
  • The business owner wants to track performance of the business.

With that in mind, how is a SME going to satisfy the need for financial information in all these circumstances, without a structured system in place?

SMEs usually go through these phases – and hiccups – as they build a record-keeping process…

  1. Start-up phase: As the idea begins to unfold into a real business the founder starts to keep a list of all expenses. Sometimes this is just a folder full of receipts!
  2. The organization begins: A process starts to take shape, trying to track the business using Excel or similar software. Invoices are generated using Word or Excel, separate working files are kept for banking, cash, customers, suppliers and employees. However, this usually leads to quite some disorganization and inefficiency, due to the number of separate files that have to be maintained and the time that takes.
  3. Growth spurt: The growth of the business creates competition for the owner’s/ founder’s time and the task increasingly gets pushed to the side, especially if it is a cumbersome, manual system. The books fall further behind and the job of catching up becomes too difficult a task.
  4. A need for financial statements (sometimes audited): Statements are requested for a supplier or customer, bank, investor etc, and there’s a mass panic to get the books in order. In the most extreme cases, this can suddenly become very costly. Delays in providing the information can lead to a lack of confidence by the user requesting the information… and potential failure of the transaction.

As well as the external users of the financial information, it’s just as important for the business itself to know who owes it money, how much money the business owes to third parties and how much money is in the bank.

A system without structure will quickly lose track of these key elements.

Key business decisions can only be made using reliable information about the business. Having financial records that are accurate and up to date are vital to this decision-making process.

Clearly, it’s important to have a structured accounting system in place right from the start, given that interested parties could appear at any point in the life of an SME and the ongoing business decisions that have to be made.

There are some very good, user-friendly small business accounting packages on the market, which are cost-effective and provide a high level of reporting capabilities relative to their cost.

In almost all cases, if you can use Excel, you can use a small business accounting package and dramatically cut the time required to maintain your records, giving your users confidence by being able to respond quickly to financial information requests.

The software can be used with minimal training and support if the business so chooses. However, outsourcing the function, either from the start or as the burden grows, has the potential to keep costs under control more effectively by leveraging a greater skill base relative to the cost, thus reducing the need for costly internal finance staff.

Grant Bateman is a member of the Institute of Chartered Accountants in Australia and Australian Institute of Managers and the Founder/ Principal of TLB Business Advisory Services, which provide accounting and a wide range of advisory services to small and medium businesses.

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