This month we are going to delve deeper into one of the critical success factors of businesses who are high performers from a financial perspective.
Systems, specifically accounting systems, are absolutely essential to the accelerated success of any business, be it large or small. Now before you roll your eyes in boredom or reach for the tweezers because plucking nose hairs would be more fun than reading about accounting systems, please bear with me for a moment. This could be one of the most important decisions you will ever make!
I give you this ironclad guarantee – if you are not continuously developing your accounting systems you are burning cash, you are flushing cash down the toilet, tearing cash apart right before your eyes. That is a guarantee in the strongest terms, no ifs or buts about it.
How can I be so sure of this you say? There are several reasons, please let me explain.
Firstly, we know accounting systems are not perfect and it is literally impossible for them to be. Therefore they never have been nor will they ever be perfect. The evidence behind this is the fact that we have an audit profession. In calendar year 2012, the audit profession raised in excess of $300 billion dollars in fees from around the world. You read correctly, $300 billion in fees in one calendar year alone.
If you’re not familiar with why the audit profession exists, its primary role is to test a business’s accounting systems and records. From their testing they then form an opinion as to whether the financial information for the business is a fair representation of the financial position for that business.
Share markets rely on this information to assist them in making investment decisions, and as such, public companies in Australia and other parts of the world are required by law to be audited.
Most small and medium enterprises (SMEs) in Australia are not required to be audited. It’s just our existing law. I’m not suggesting that any government should change the law so that SMEs must be audited, no more red tape and compliance obligations thank you!
What I am suggesting is that proactive and forward thinking SMEs will take the initiative and develop some focus in this area. The payoff will massively exceed your investment.
So a problem exists on a huge scale. Our research of and experience with SMEs tells us that the majority have no ongoing process for developing their accounting systems.
Those SMEs are missing out on significant payoff, and to double-edge the sword they are exposing themselves to undue risk – which means hitting the full flush button on the cash toilet.
What are payoffs then of continuously improving your accounting systems? There are many, let’s take a look.
Your accounting systems often link into your operational systems. By improving your accounting systems, you will improve your operations and your ability to manage.
By improving your management systems, processes and structure your business will become less reliant on you, the owner. Is more freedom from your business attractive to you?
With a better management structure in place, you’ll reduce the risk attached to your business. Would you like to have less stress in your life?
By reducing the reliance of your business on you and reducing its risk, your business will become more valuable. Would you like to increase your wealth because your business is worth more?
Improving your accounting systems improves the quality of your financial data. How often does your accountant sigh in pain at the thought of having to clean up your data so he or she can give you an accurate picture of where your business is at financially?
Would you like increased confidence because you’re making decisions based on good quality data rather than using gut feel or even a guess?
Documented systems and processes are a great internal tool. Would you like your team members to be more effective and efficient?
Your team members want to know what to do and how to do it. Businesses that can provide the ‘what’ and the ‘how’ are more likely to retain their valued team members. Is better retention of team members of interest to you?
Here’s an example of what we discovered when we began working with a business owner who had just taken over a 24-hour, 7-day a week service station and mini supermarket.
In terms of risk for a business like this, stock and cash rate highly on the risk scale. We reviewed the existing systems and discovered some big holes. To cut a long story short, the improvements made resulted in discovering one of the employees, the night shift manager, had been pinching cash.
Over 3 months he had stolen $9,000. Over the previous 12 months, he had stolen over $100,000. Here is a 21 year old earning a modest wage with a brand new sports car, two brand new motorcycles, $30,000 cash in the bank and a home entertainment system like you would not believe.
The police got involved and he finished up in jail.
Here’s the thing. Not only did he cost the previous business owner $100,000 in stolen cash, but he also cost the previous owner another $300,000 in lost business value – because the profit was $100,000 less than it should have been, that equated to a $300,000 reduced business value. Total cost to the previous owner – $400,000!
This is not an unusual or one-off event. This happens, in various forms, all the time. We have a list of these kinds of findings as long as a roll of toilet paper.
So I urge you, put the tweezers down and forget about plucking nose hairs in place of developing your accounting and operational systems.
The payoff will be worth it!