Impact of Mismanaged Finances: The consequences for SMEs
Posted On June 25, 2019
Source: SimplySolved Accounting & Tax Solutions
Good financial management is the foundation to reach profitability in any business. But as a start-up or small business, your first thought inevitably goes towards fast market launch and growing sales.
This emphasis can lead to major issues later if you under-invest in your financial management framework. It is frequently the case that as soon as businesses begin to grow, their accounting systems and processes to fail to scale and evolve at the same rate.
With the added compliance requirements for VAT to be considered, the risks are greater if unaddressed adequately.
So how do you identify these issues? And if they occur, how do you put actions in place to correct them and minimize any negative impact?
What could cause mismanagement of your finances?
As with any business issue, the first step is always to look for potential risks, identify the root cause of your issues and to understand how to control it.
Every business has its unique organizational procedures and specific ways it set up its financial model. This may have evolved over time or started with some planning but hasn’t been refreshed for some time. Nevertheless, there are some common causes of mismanaged finances that you can identify:
Time Constraints: When you’re overwhelmed with running the business, it is easy to focus on the urgent issues and defer your financial responsibilities. Deprioritising those accounting tasks and reviews may seem necessary, but the more you delay, the less accurate your financial management.
Resource Constraints: If you cannot afford to hire senior financial people, you will not have the personnel or the resources to deal with the bigger financial picture. And if your bookkeeping is focused on hygiene and compliance tasks, they won’t be proactive enough to help you provide a resolution either if you face challenges.
Process Discipline: Your financial model and system have to be clearly defined with an emphasis on clarity. For example, if you mix your business and personal finances, this makes managing your company financials far more complex and difficult. or if expenses are entered with delays, you may miss costs or cash flow obligations.
Technical expertise: Finance can get complicated especially with the changing regulations from VAT. Therefore, do you believe you have the right experience, training focus and IT capability to deal with running an evolving financial system?
Budget & Tracking: Financial planning and performance reviews are essential to conserve your precious cashflows. If you have not set and regularly measuring performance against budgets, it is likely you may face challenges in adapting to changing market scenarios.
What effect can mismanaged finances have?
Why is this a critical issue for urgent attention? In summary, if you are not in control of your finances then you are probably not fully in control of the business as a whole.
What effects can this lead to?
Poor quality and slow financial information: If your financial information is poor, you don’t have the reliable data you need to manage your business and key drivers effectively. Without these numbers at your fingertips, you cannot make informed decisions, your forecasting and projections are incomplete, and you will fail to act on potential opportunities and risks.
Cash flow problems: You are also more likely to have cash-flow. Negative cash flow is one of the biggest causes for new or smaller businesses failing within the first two years. In recent research by CB Insights, 29% of failed start-up founders blamed a lack of good cash flow. Improving your management of liquidity helps to secure your long-term future.
Compliance & Personal Risks: Poor control of your financial management can also impact directly on you as a director of the company. If compliance rules are not stuck to specifically under the VAT Executive Regulations, this could mean fines for the business (and possibly for you personally).
Credit Worthiness: Information may need to be available to banks, investors and creditors, poor compliance results and fines can have a destructive effect on your credit and attractiveness to investors.
Ability to adapt: There is the potential for your mismanaged finances to lead to a lack of agility and inability to seize on opportunities in the market. Your business needs a competitive edge and having resources to capitalize on opportunities can make a difference.
As a business, innovations in cloud technology and automation present enormous opportunities to create a sophisticated financial management model with minimal costs. Best practices are now embedded in platforms to reduce costs and deliver quick results, therefore there is scope to enhance and improve your financial operation.
Getting Back In Control
If your business is experiencing any of these issues, what is the best strategy to get back on top and ensure your business is set on a more sustainable trajectory?
Harness Expertise: As a business owner you are best placed to value your time and focus your expertise. If you get involved in executing complex financial changes, this can divert your focus and you may well not be fully qualified to do correctly and quickly without best practice support.
Plan For The Future: A cloud accounting system is an excellent way to improve your financial overview. Ensure you implement the right systems in place with the correct setup and reporting from the start. This can avoid getting into potential difficulties while creating detailed financial reporting and forecasting. Use your data to generate forecasts to plan your future strategic decisions.
Pause & Fix: If you’ve been through your finances and found issues, it is vital to take control and fix them permanently with some care. Do not be tempted to ‘sticky tape’ them: it’s vital to also review and update the processes that lead to these issues and to ensure it cannot be repeated.
Invest time now: You need to schedule a realistic amount of time to work on the problem and make your financial reporting an asset. Allocating sufficient time, and focus will save you time, stress and issues later. Finally ensure you have the best systems, tools and people in place to crack the problem, or it will cost you more when extra resources have to be brought in later.
This paper blog is authored by Haroon Juma, Managing Director of SimplySolved Accounting & Tax Solutions. The firm is ISO 9001& Tax Agent accredited, providing in services in accounting, consulting, tax, ERP or Accounting software implementation to businesses of any size spanning multiple industries For further information and assistance, he can be contacted at