Capital and revenue are the lifeblood of any modern small business, to ensure day to day continuity and in supporting growth and expansion plans. It’s for this reason that financial statement audits are crucial. Operating a small business in London is a continually challenging task with great responsibility, so there is a pressing need for effective management of resources and oversight. Financial audits not only act as a vital asset for highlighting problems and evaluating performance, but also for ensuring that every business transaction is correctly recorded.
Why publish financial audits?
Audits were traditionally the domain of only the largest corporations, but a growing need for compliance and the potential for unearthing new opportunities and driving better decision making across the enterprise means the practice is now considered essential for SMEs. Stockholders and financial institutions will also demand audited financials as it provides a level of assurance, issued by an independent third party, of the accuracy your accounts. Transparency and accountability are two areas your enterprise needs to pursue in today’s increasingly competitive business landscape.
Smaller enterprises often rely on funding from angel investors, venture capital firms and other external sources to be able to compete in both and regional and global markets. Audits are usually central to these investments as they form the backbone of proposals during the tendering process. It is preferable to be on board with audits immediately rather than adopt a wait and see approach, even if you are a recent start-up. According to Aegis & Co Partner, Vijay Parabdeen, “it’s better to have audited financial statements and not need them than need audited financial statements and not have them.”
What is an audit?
An audit is an independent review of your financial reports, presented by you with assurances that the information present is both true and fair. An independent third party completes official audits – usually London based practising accountants with expertise in financial reporting. The primary purpose is to increase both the credibility and value of your business through the independent examination of your financial statements. As touched on earlier, this brings many benefits, including increased user confidence, while mitigating the risks involved for investors. A financial audit will verify that you are using the correct accounting system, are managing finances correctly, can prepare accurate and detailed statements, and are paying your taxes on time. You will have to provide a wealth of information to the auditor including a general ledger, loan statements, payroll reports and bank accounts.
Preparing for external audit
Performing a financial internal audit can help your business prepare for external audits. There are numerous areas of finance that you should consider beyond basic bookkeeping, including internal controls policies and cash holdings. Begin by reviewing the system you have in place for funnelling any financial information to your accounting department. It is important that accounting receives timely and reliable information as any discrepancies can skew your company’s financial records in the wrong direction, which has potentially disastrous consequences. Make sure all receipts, statements and invoices are forwarded immediately and optimise the system, so it remains robust and effective.
Now you have a steady flow of information, you can move on to record-keeping policies. Every small business should store digital files or photocopies of financial documentation, from cancelled cheques to invoices for the latest accounting period, which is a twelve-month time frame. Archives of data from previous periods should also be readily accessible so you can address any problems or issues, but remember that customer data must only be kept when deemed necessary, as stated in the Data Protection Act.
Fraud and tax obligations
Modern enterprises face ongoing security challenges so you must have policies in place to protect against financial risks such as theft and fraud. Internal control policies can provide the oversight required so that important financial duties are properly segregated between employees. These policies must cover aspects such as customer confidentiality. Tax records must also be kept on file in the UK for five years. It is crucial that you consistently analyse this information so you can be sure that reports tally with internal records.
Financial audits can also inform key decisions about expenditure and investments. Reducing expenses is in the best interests of any small business, and the optimisation and streamlining of various financial processes can support your broader strategic objectives. These redesigned processes and structures can also identify other areas of business where you might be losing money. One such area may be investments or loans. If you were mis-sold PPI with a business loan because your bank did not make it clear that it was optional, it was added without your knowledge or the costs involved were not fully explained, then you should pursue the avenues open to you on how to claim PPI.
A complete set of financial statements should be produced at the year end and cover your financial position, comprehensive income, cash flows and changes in equity. All the work you can do behind the scenes to improve your financial processes is geared towards these statements, which should be prepared regularly and used to budget, forecast and make decisions. The external review of these statements will allow an auditor to highlight your strengths and weaknesses. That much-needed perspective provides for your business to be compared to others in your industry, which can then act as a springboard for further advice and recommendations.
Your business, regardless of size, should aim to hold itself to the very best standards and even go above and beyond those you intend to compete with. Audits not only serve as a seal of approval of your ability to manage finances correctly but can have a positive impact on every facet of your business. With this knowledge, you can use audits as a foundation for a better future as you drive cost-effectiveness and productivity to allow you to grow your enterprise.