You have quit your job to start an entrepreneurial journey
with trusted friend (s). You each contribute some funds as capital. Depending
on your strengths, you share out various roles within the start up. Some take
up marketing roles, others finance and accounts, others communication etc. The business
picks up and within no time the office is buzzing with new clients, meetings
and a few hi five moments as you bag clients and deliver to clients
Things seem to be working great – regular salary, bills
being paid, a growing portfolio of clients etc. Come the end of the year and
you are eager to see how much profit you have made and decide whether to take a
bonus or reinvent the profits. To your surprise, the partner in charge of
finance tells you that in fact the company has made minimal profit or a loss.
In addition, you are operating on a bank overdraft and the company car may be
repossessed because of the overdraft areas. You sit back and ask yourself,
how?? In your mind, the organization must be making profit even with basic understanding
of the transactions. You know the estimate of your costs and you know how much
is coming in…..so why you in loss territory and a negative cash are flow
position?
Then you remember a few things – you have always been
signing cheques without asking too many questions, you have never seen your
period accounts or a bank statement, only the partner who is an expert in
finance has full information on the company finances etc.
Does this sound familiar? It may or not, but this is not a theoretical
case. This is actually something that has happened to a number of business
where partners trust each other and focus has been on growing the business and
less effort on financial management and controls. The right conditions for
fraud.
For people in such businesses here are a few things that you
should do or never do in relation to cash flow:
- Cash flow is king in small businesses – never let your sight off on the cash flow position of the business. At end of every week, review the cash flow position and understand how every penny has been spent.
- Never sign blank cheques – never ever. Where possible use online banking.
- Let all payments require at least two signatories.
- Reduce cash payments to the bear minimum – ensure that you can tract all payments to an account or person. Cash has no audit trail. So if your partner sys he paid X you can never prove it.
- Insist on original documents - e.g. include your email in the banking transactions so that you receive bank statements form the bank. I have seen people editing soft copy bank statements in PDF to hide their fraud.
- Have a third party audit your accounts every year – select such an auditor competitively.
- Have proper business registration and have transactions and assets in the name of the company and not individual partners.
- Hire a staff unrelated to any of the shareholders as the accountant – trust is not an internal control. Many capable accountants out there will not cost much.
- Deal with any case of theft ruthlessly.
