Quality in the Numbers …23rd September 2008
I recently had lunch with a long standing associate and good friend, Bob Westrip. Bob is a former banker and now works with businesses helping them to develop and become investor ready. Bob told me that one of the major banks was increasingly expecting it’s customers to have an annual external audit, regardless of the fact that it might be well below the £5.6m turnover threshold.
Under normal circumstances company law only forces a company to have an audit when its turnover reaches £5.6m.
This is I feel quite an interesting development, and perhaps reflects banks general concerns in the current climate about the risks associated with their lending. However, whilst it might tick a box as far as the bank is concerned, it is questionable if the business concerned really gets any value out of this quite expensive process.
A well managed business will have good quality, accurate and timely management information continuously. This is often monthly for management accounts, but should be daily or weekly for “commercial” statistics like order intake, order book, sales raised and perhaps other key performance indicators (“KPI’s”) relevant to the business. If this information is produced from a well run and managed system, and management use it, then this adds value to the business and builds a good foundation.
I say a well managed business, actually it probably goes further than that. If a business is to survive in the long term it simply must have these processes in place and the relevant and detailed management information to make decisions from. Otherwise you are simply working in a vacuum – and that leads to suffocation and certain death!
The alternative, of having a mediocre accounting system which is “checked” just once a year (and then some months after the date) by an external accountant who is not really overly familiar with the day to day running of the business is simply hopeless. However, this is where most businesses are, and arguably perhaps this recent move by the banks may force them further down this road.
When Insight Associates get involved with a business, the concept of a “year end” becomes much less significant. It is after all just another month. Yes, there may be a little more work to provide some additional analysis for the annual statutory accounts (which of course as a management tool are about as much help as a chocolate fire guard!), but other than that if the other 11 months of the year are done properly what is the big deal! The business needs good information, like I say, continuously, not just when the year end arrives, so every month must be “right”!
Having said all that there is great value in an external audit, and I feel from the businesses we get involved with that raising the threshold over recent years has actually done no one any favours. Most businesses do not have the benefit of “independent” eyes looking at their accounts on a regular basis (as they do of course when we are involved – but that is another story!!), and so things can “go wrong” without being noticed. There is much value in an external overview. However, the really important bit is to get it right all the time and have a good process in place that produces accurate results regularly.