In our experience, we have found it often happens that owners and management of Small and Medium Sized Enterprises (SMME’s) leave the “numbers” to the accountants and similar professionals so that they can concentrate on actually running their business. As a result, the benefit of how relevant, regular and timeous financial information can be a powerful tool to use in the efficient and effective running of a business is often overlooked.

 

Owners and management of SMME’s usually are aware that every company, close corporation, trust, and partnership are obliged to produce a set of Annual Financials Statements (AFS). The AFS is normally used to submit the annual return required by the Companies and Intellectual Property Commission (CIPC) as well as the annual income tax return required by the South African Revenue Service (SARS).

 

These AFS are only produced once a year, after the fact, and report on past events with limited in-depth details of trading. The timeframe for the production and issue of AFS completed by external accountants can be anywhere in the region of 2 to 12 months after year-end. The lack of detail and the fact that the AFS can often be prepared so long after the fact limits the usefulness of this information in making critical decisions within the business.  

 

Having monthly management accounts or reports produced may just seem like an unnecessary exercise and added costs that the business cannot afford, but there are various benefits to consider and given the opportunity, the benefits will often outweigh the cost.  

 

Some benefits to consider:

  1. Identifying variances

Regular reports that allow owners and management of SMME’s to monitor figures important to their business can identify major unexpected variances before they become an issue.  For instance, if the mark-up on goods should be in the region of 45% and weekly or monthly reports show it at 30%, this would alert owners or management to investigate and try to manage the situation immediately.  If variances such as this were only identified and investigated 18 months later, it could potentially cost the company in substantial losses of revenue and cash flow that the company may not be able to recover from. 

 

  1. Decision making

A well timed set of monthly accounts could provide valuable information to assist with decision making within the company.  For instance, if there is an opportunity to potentially grow the company, monthly accounts could give an indication if the company has the cash flow to take up the opportunity on its current reserves or if it needs to find suitable finance. Revenue and cash flow projections can also give an indication of whether the opportunity is worth the investment and if the company would be able to service the finance sought.    

 

  1. Cost control

Producing monthly accounts can assist a business owner to identify trends in the major costs related to their business. Month on month comparisons or even current month versus the same month in the previous years can highlight unusual cost fluctuations that require investigation and possible corrective action.

 

 

  1. Obtaining finance

In today’s business environment if an entity is seeking any form of short or long term financing, most potential financiers will require the last signed set of AFS as well as current trading reports (management accounts).  The ability to produce and submit required reports and figures timeously and the fact that the business owner is familiar with and can expand on the trading results and overall performance of the business will go a long way in improving the chances of obtaining said finance.  

 

  1. Cashflow planning

Every business is different and has its own unique cash flow trends and requirements.  Where some businesses will receive payment from customers upfront before having to outlay anything, others may have to wait up to 60 or even 90 days, after outlaying necessary costs to provide goods or services, for payment from customers.  Every business also manages supplier relationships and credit facilities differently. Some companies are in a position to negotiate and obtain credit from suppliers for up to 90 days, while other companies may have to pay suppliers COD.  This all forms part of the company’s cash flow requirements and needs to be managed closely.  Preparing monthly accounts including cash flow information will assist in identifying cash flow deficits and how best to match cash inflows and outflows. Cash flow reports can also help in understanding the timing of converting reported profits into positive cash flows.   

 

  1. Monitoring working capital

Monthly accounts may assist in identifying the working capital (capital a business uses in its day-to-day trading operations) needs or a shift in the working capital needs of the company.  For instance, the value of debtors outstanding may increase with no corresponding increase in turnover. This may be an indication that debtors are paying later and that there may eventually be a negative impact on the company’s cash flow. Working capital trends and needs highlighted by management accounts can guide owners and management as to where time needs to be spent on planning and managing these.

 

  1. Empowering management and staff

Sharing relevant parts of monthly accounts with key staff members can assist management and key staff to work together to address internal matters in an effort to steer the company in the right direction. This collaboration can make key staff members feel involved and valued as an integral part of the business. Monthly accounts can be a great visual tool to assist in discussing business matters with key staff members.

 

  1. Avoid unexpected trading results at year end

The preparation and effective evaluation of monthly accounts can assist owners and management in measuring the actual monthly performance of the business. The sum of the monthly reports should then be close to the actual trading of the company according to AFS if relevant and consistent accounting treatment of transactions is applied. If management accounts are not prepared, there could be a disconnect between how owners and management see the trading of the company and the actual results eventually reported in AFS.  

  1. Seasonal changes

Some companies have seasonal trade and the evaluation of monthly accounts can assist in identifying seasonal trends and being able to forecast and plan accordingly for both peak and off-peak seasons.

 

 

  1. Helps to plan dividend and other remuneration

Some business models require payment of dividends, performance bonuses or profit share on a regular basis. Preparing monthly accounts can assist management and other relevant parties to manage the timing and payment thereof. Waiting for AFS may lead to the company not being in a position to plan for and honour these effectively.  

If some of these benefits resonate and you feel you or your company could use more relevant, regular and timeous financial information, feel free to book a consultation with us.

 

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