Newsflash: If a UAE SME lets its financial control become ‘financial out-of-control’, the risks can be existential
In a long career in finance and accounting, I reckon I’ve pretty much seen it all…. and, frankly, some of it was not very pretty!
For every role where my aim was to move an organisation’s finance function towards ‘world-class’, I had another role where the primary aim, at least initially, was much less auspicious – to dig a company out of large hole caused by a failing finance function. Indeed, it never ceased to amaze me how common it is for a company’s financial control to be more akin to ‘financial out-of-control’, even in well-known and sizeable organisations where you’d expect everything to run smoothly.
In retrospect, I believe that successes in reinstating basic financial control are more significant than taking an acceptable performance and moving it towards world-class. After all, a company formulates its plans and makes the associated decisions based on historical and projected financial results. If these results prove in time to be materially inaccurate or if its auditors feel unable to express an opinion on their reliability, then make no mistake about it, this can have grave, even existential, consequences for a company.
A serious problem within the finance function generally indicates a major deficiency within the finance leadership team and, as a result, resolving matters is unlikely to be possible utilising existing personnel only. In all likelihood, it will require a senior ‘hard-hitter’ with the requisite, knowledge, experience, gravitas and organisational skills to lead the process. SMEs are unlikely to be able to justify the cost of such a person on a full-time basis and as such they often look to an interim CFO as a solution.
The role of a finance function is typically twofold – processing transactions to produce financial information and producing management information to support business decision-making. The scope for poor control in the form of error, misstatement, fraud or inadequate information is substantial.
Instances of poor financial control are almost endless but below are some examples:
- a failure to perform all the necessary reconciliations to ensure all transactions are included
- not invoicing for all work performed to maximise revenue
- miscoding of transactions resulting in misleading information
- poor cut-off control resulting in misstatement of results for a period.
- inadequate tracking of commitments (e.g., contracts & purchase orders) resulting in understatement of costs in current period and nasty surprises in future periods.
- inadequate procedures to ensure goods and services have been properly ordered and fully received before making payment, potentially resulting in double payments, overpayments or fraud.
- a lack of detailed, relevant management information resulting in wrong decision-making
- a failure to project accurately resulting in inability to plan properly.
- a failure to retain adequate documentation for a tax audit can result in costs being disallowed for tax and a much higher tax bill ensuing.
To set about regaining adequate financial control, the process would typically involve:
- Obtaining buy-in from CEO, the rest of the management team and the finance team itself.
- Assessing current skills and capabilities in the finance function.
- Outlining a vision of how things will look (the ‘to be’)
- Map the current situation (the ‘as is’)
- Develop an action plan of how get from the ‘as is to the ‘to be’
- Prioritising’s what matters to get a clean audit opinion and to gain the maximum financial control for the effort involved. 20% of the effort will get 80% of the result but the whole process could take many months to complete.
- Planning to perform the monthly close quickly to allow maximum time each month to support business with improved forecasting and management information.
- Investing in the requisite information technology.
- Measuring key activity metrics and monitor improvement.
- Recruiting interim resource to catch-up on prior period inadequacies and first-class permanent finance personnel for any deficiencies identified in the quality of the future finance team
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