In fact, you would expect them to scrutinise their numbers even more closely than they would do in the good times when business is buoyant.
My own experience in the turnaround and restructuring market tells me that the reverse is too often the case due to the inability of many MDs to read the bigger picture of what the figures are telling them.
The latest annual Credit Check report by ABN AMRO Commercial Finance, based on research data from 200 accountants reinforces that SMEs struggle to understand what the figures mean – and therefore miss early warning signs that the long term health and sustainability of their businesses is threatened.
More than half (51%) of accountants surveyed believe SMEs do not feel in control of their financial affairs and almost two thirds (64%) report that many of their clients do not set aside enough time to exclusively focus on financial management. Just 15% of clients discuss financial affairs with their accountants on a weekly basis whilst 41% relegate those conversations to a once or twice yearly event.
I suspect a majority of the discussions may only be prompted by a crisis. If, for example, the firm suddenly loses its largest client to a competitor, the impact may not hit the bottom line immediately. In a misguided effort to shore up the gap, the SME may take on new business purely to feed turnover, not profit. If the situation persists over several months, it could spell financial disaster.
A forward thinking SME will have a strategy in place that would safeguard the company against over reliance on a single large client and a financial adviser that will ask all the ‘What if?’ questions in advance.
If professional help and advice is only sought infrequently, the business could be in the red months before the issues are properly identified and addressed.
Sound financial management rests on having experienced, proactive people in place and for the business owner to be asking the right questions – and checking a few critical numbers – on a weekly basis. Some advisors encourage bosses to check their incomings and outgoings on a daily basis – a precaution which is more necessary in sectors such as retail.
Businesses that are large enough to require an audit will have a financial advisor or an FD to spot the danger signs. Smaller companies will not require – nor can they afford – this level of expertise and resource. In my experience, many smaller businesses have accountants who may not be close enough to the company to flag up when:
· Cash flow is tight
· Creditor days are stretched
· Suppliers remove credit from the business
· Sales are diminishing
· Margins are being eroded
· Commissions are taken on for cash not profit
· Staff are leaving
· Competitors are taking market share
The financial health of a business is fundamental to its survival and success. SMEs that remain financially ignorant for prolonged periods will inevitably pay the painful price.