28 October 2006
by Randal Godden, Chairman and CEO, at TEC South Africa
This article was first published in Real Business, a supplement to
Business Day which appears on the third Monday of every month.
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 dependant 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 dependant on the caliber
and integrity of their senior accounting person. 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 loop-hole, 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. |
|
