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Is your business suffering from financial disconnect?

Have you ever wondered why it takes so long to have your tax return completed each year? Do you confidently know how your business is performing and what its financial position is? Do you suffer from not having accurate and financial information on hand to make important business decisions?

If you answered yes to any of these questions then your business may be suffering from a financial disconnect.

The traditional accounting model still existing in a large percentage of small and medium sized businesses is one of the toughest obstacles to tackle but one of the biggest opportunities to really improve their business. The traditional model involves having an internal person running and managing the day-to-day accounting, an external firm managing compliance and tax issues and perhaps a strategic advisor elsewhere providing advice when needed.

What I’ve learnt from working with and advising SMEs is often this model doesn’t work well enough to benefit the business and as a result, managing finances and accounting becomes purely a cost driven activity and seen as an administrative burden.

Here are four reasons why this traditional model doesn’t work well for SMEs and how you can fix it:

1.     A duplication of work – In some cases it can take an external accountant up to four months to complete an income tax return. Duplication exists when the updated and adjusted accounting file is returned to the business and the internal finance person must re-enter all the information and figures from the start of the financial year to this updated file. This duplication can be avoided by using accounting programs hosted in the cloud, where both accountant and internal finance staff can work on the one file of accounts simultaneously or perhaps consider engaging an external tax accountant that can deliver a faster turnaround, thereby reducing the necessary duplication of work.

2.     Lacking financial expertise – Most SMEs make do with having an office manager, bookkeeper or even the business owners managing the day-to-day accounting. Unfortunately the lack of experience to efficiently and effectively manage the company’s accounts causes significant issues in maintaining up-to-date and accurate financials on a regular basis. The business then runs the risk of not having sufficient information to make sound business decisions. In most instances it would be worthwhile to hire a qualified accountant to manage the business’ finances to ensure the financial information you receive is on time and more importantly accurate in order to drive the business forward.

3.     Inefficient reconciliation process –Tax compliance can be extensive and for an under-resourced SME it can be extremely difficult to ensure financial records are up to date. However, it is critical that all ATO returns (income tax return, payroll payment summaries and fringe benefits tax return) not only reconcile to financials but also to each other. This is often overlooked, and before long you may be targeted by the ATO and face a tax audit. If you are unsure as to how accurately your deadlines have been managed, firstly have an experienced advisor review your company accounts to ensure they are accurate and up-to-date, then consider engaging the advisor to provide support on a quarterly basis to ensure that the task is being managed and reviewed properly before lodgement.

4.     Inefficient monthly reporting – Monthly reports, like balance sheets, are vital in understanding a business’ performance and its financial position. Many SMEs don’t have the financial expertise required to produce sophisticated monthly reporting and waiting for the results for a tax advisor to find out how they are doing isn’t practical. In order to get more out of your business’ finances and gear it for growth, I would recommend you engage a commercially-minded finance expert, like a financial controller or chief financial officer, to provide advice on improving the business’ financial function and implement strategies that will help the business to be successful.

When your finances are managed effectively and you have good reporting in place, it allows you to focus on running the business rather than playing catch up with your financial obligations, it improves business performance and gives you the information you need to grow the business.

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Michael Derin

Michael Derin

Michael Derin is the founder and managing director of accountancy firm <a href="http://www.azuregroup.com.au">Azure Group</a>. Derin is passionate about helping small and medium-sized businesses reach their financial and business objectives and achieve success. He has developed sophisticated ways in which SMEs can compete effectively with larger organisations that have more resources. Each fortnight he can be seen on Sky Business News’ Trading Day program.

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