Article by listed accountant Enid Smith
Every entrepreneur understands the need to make profit. After all, isn’t that the point? And in order to get your business to the size that it currently is you’ve had to go through all of the pain of agonizing over a weekly and sometimes daily cash flow forecast. So you’ve got that down pat too.
So now that you’ve got that mastered it’s all good right? Wrong!
There is significantly more to financially managing your business. Controlling your Balance Sheet is not only about prudent financial management. Preventing fraud is another crucial component that can only be ignored at your peril.
Besides the obvious debtor and creditor management your Balance Sheet has lots of potential ”blind spots” that you need to be aware of. These are areas that owners and senior managers avoid either because they are in unfamiliar territory or because they assume that everything is in order.
A simple example here is that an expense mis-posted to the balance sheet will look like an asset. This obviously paints a picture that is completely misleading in terms of the financial state of your business.
Fraud is a very real and wide spread phenomenon in small to medium size businesses. Typically businesses this size have weak internal controls as they have insufficient financial expertise at the right skill level to provide guidance on the basics that should be in place. This is understandable given the limited budgets that SME’s have but don’t let it happen in your business. This is the place where you have invested your blood, sweat and tears.
Fraudulent financial transactions are most easily hidden in areas which are more complex and accounts which are not regularly reviewed, both characteristics of the Balance Sheet.
It is crucial to understand all areas of your Balance Sheet, especially the areas that you may normally shy away from. If you haven’t managed to fully understand an asset or liability then it is vital for you to spend additional time with your finance resource. If this not sufficient to gain clarity then it’s time to get a detailed review and explanation from an external senior financial expert.
Question your finance department often and rigorously. Occasionally request detailed reconciliations of Balance Sheet accounts and the supporting documentation.
If only one person both prepares and presents the financials there is a lot of opportunity for misstatement or fraud, even if your accounts are audited. Spend a bit more on having an independent financial manager review the accounts every month – it may cost you a lot more if you don’t!
