Outside of the actual product or service your business is selling poor financial control and management can often by a cause of business failure. It is essential from the outset of your business that you invest the time and resources to ensure that there is good financial control and at a minimum there are good bookkeeping practices in place. If you are a growing family business which is a few years into your business journey now might be a good time to take stock of what your current processes are and consider if they are still fit for purpose.
Some of the more common mistakes that SME’s will make when it comes to bookkeeping and financial control would be:
1. Overall Governance
Many SME’s do not have in place a process of formally approving purchase invoices for payment, reconciling till readings to lodgements (in retail), reconciling the bank account or having adequate control over stock. Each of these areas should have basic controls in place to safeguard the assets of the business. These items become even more critical as the business grows and you pass on responsibility for certain tasks to other team members.
2. Monitoring Performance
The majority of SME’s do not monitor the financial performance of the business on a regular basis. This means that they continue to do the same thing over and over again without knowing if it is producing the right results. Consider what the key indicators are for the business – e.g. sales, gross margins, unit volumes – and design a process to monitor these regularly. All businesses should be able to monitor sales by week which will create good data over time which can be used to base decisions on.
3. Cash Reconciliations
Cash businesses (e.g. retail, hospitality) are inherently more risky. There is the obvious increased risk of fraud but in addition the nature of the business means that revenue will pay more attention to this type of business also. The key control over cash for such a business would be the daily till readings (Z reads). There may be occasions when genuine business expenses get paid from the till during the day (consumables, sundry costs etc.). These should always be kept to a minimum but if unavoidable they need to be clearly documented with a valid invoice from the supplier. As these transactions are effectively happening outside of the Accounting system it is important that there is a method of reconciling the net cash to what actually gets lodged to the bank.This movement from gross to net will have to be recorded in the business accounts and also will give the business owner control and comfort that all money recorded in the till is accounted for.
4. Profits v Cashflow
These are two entirely different things and a business should not fall into the trap of thinking they are the same. A business that gets paid upfront for its work or a retail business with credit terms from suppliers could well appear to have positive cashflow at certain times of the year but this does not mean it is profitable. The supplier credit terms in this case may well be disguising losses. This is dangerous as without proper monitoring it is only when cash runs out that the problem surfaces.
5. Not seeing Value in Accounting
There is huge value to be had by investing in the bookkeeping and accounting function. This needs to be seen as an investment and not a cost. It can add real benefit to the bottom line and if you partner with the right service provider their goal will be to help you grow your business and profits.
For more business advice and news check out our resources page.