Like a lot of people, you probably have just finished getting your new year resolutions and goals underway so you won’t start reviewing your finances until June starts (some won’t start until after 30 June). For many SMEs, June is too late to consider the consequences and do anything about it. In my corporate assignments, the first day of the last quarter signals a quantum increase in the scrutiny of actual vs. budget vs. plans. That scrutiny takes the form of questions like ‘are you on track?’, ‘what are you doing to stay on track?’, ‘can you go better?’, ‘what risk management plans have you got?’, ‘what are you going to do to make plan?’ etc. SMEs don’t have finance departments that act the devil’s advocate and your accountant is going to be in demand so access is going to get difficult. So WHEN and HOW you start to focus on your business year will make the biggest difference to your bottom line. Here are some things you could consider starting and doing right now to ensure that the year end process doesn’t give you headaches. Make sure you get the right professional help with any of these ideas.
Cut-off procedures
When the financial year comes to an end, it is particularly important that you have a proper cut-off point for the company’s operations. Therefore, you should:
- Ensure your suppliers provide you with the relevant invoices for all purchases and expenses for the period up to the end of June.
- Identify your work in progress or sales not yet invoiced and raise the relevant invoices for the period up to June 30th.
- Identify all of the following to confirm that they are correctly recorded:
- pre-payments received from clients
- prepaid expenses to suppliers
- cost accrued for which no invoices will be received before the year end
- stock levels at the year end for goods or work in progress
Reconciliation with clients and suppliers
It is important that your records, as well as those of your clients and suppliers are accurate, particularly if the transaction needs to be declared as part of a due diligence or compliance process.
- You could ask for extract from their records containing information regarding your joint transactions. This will allow you to compare their records to your own and identify any errors or misstatements.
Profits are Likely
If you’re forecasting a profit, you may want to start thinking about the implications of the result. For example:
- Do you have any past tax losses to be utilised?
- Will your cash flow situation allow you to meet your tax obligations?
You may be able to legitimately reduce your levels of profit by:
- ensuring your accruals are indeed reflected in your results
- incurring extra expenses – especially ones you have been delaying
- identify potential bad debts and make the necessary provisions – if you do write off bad debts don’t forget the GST adjustments
- ensure all of your fixed assets have been depreciated correctly in accordance with tax legislation
- review your list of disallowable expenses. Some of them maybe due to a lack of supporting paperwork. You have time now to put some effort into requesting the full invoices from your suppliers
Losses to date
You’re forecasting a loss for the year so you may want to start thinking about the potential business implications of the result. For example:
- Is this expected because of your business stage?
- If not, can you fix the loss situation for the longer term?
- How strong are your cash reserves?
- Are your creditor levels much greater than your debtors?
You should start reviewing your results in depth with a view to identifying areas of improvement and taking corrective action. You may be able to legitimately increase your levels of profit by:
- Ensuring any services rendered or goods delivered are invoiced before the year end
- Delaying expenses planned until after the first of July
- Ensure that investment items are capitalised as an asset on the balance sheet rather than treated as current expenses
Once you’ve done this work you need to keep a vigilant eye on your budget and cash flow forecasts over the coming weeks and days.
Plan for next year
Even if all of the above is in good order, these disciplines always help you reflect on your business performance. Here are some steps you may want to take to improve on your performance:
- Prepare the budget for the coming year
- Review your credit terms with suppliers and customers and make changes if required
- Arrange credit facilities with your bank if you anticipate cash shortages
- Reduce costs on areas identified as excessive in the current year
- Implement new internal control systems to address weaknesses identified
