Joshua Kamau has operated a mid-sized internet service providing business in Nairobi since 2007. “I had an accountant in charge of making collections from clients. The same worker also ensured clients had internet and was in charge of disconnections in case of payment default,” he says. Everything went on smoothly until the accountant tendered his resignation.
“He cleared following the right procedure but as soon as he was gone, we realized some clients enjoyed internet services but nowhere in the records were their payments indicated,” he recalls. “The clients themselves had paid cash amounts of over Ksh 700,000 to the accountant over a period spanning four months,” says the businessman who also runs a stockbrokerage firm.
And not one to engage in lawsuits, he resolved to become more vigilant regarding his business finances. Since then Mr. Kamau has minimized cash transactions and not only that: he now checks the accounts on daily basis. He however admits he wouldn’t have noticed had the accountant not left his firm. “I now have financial systems in place that man every department, and my cash exposure is almost at zero,” he says.
Time and again, many SMEs across the country grapple with similar accounting challenges and in some cases, owners have had to let go of their money as well. Though business owners like Kamau might initially be oblivious of the mess building up, lack of checks can have far-reaching consequences on the business—unless caught in good time. How often then should businesses monitor their accounts?
Andrew Makhulo, Accountant at MGK Consulting, says it depends on who’s doing the checking. “Members of the management team should closely monitor metrics that impact on performance in their area. The sales manager, for example, would be expected to have his eye on daily sales while the accountant would focus on cash flow; payments in and out on a daily, weekly basis. ” he says.
“A director though,” he adds “can review business performance on a monthly basis though some types of businesses might require him to oversee the accounts more or less frequently. In most cases, an investor’s checks can best be conducted on a quarterly, half-yearly or annual basis depending on how often accounts are published.”
According to Mr. Daniel Muhia, Partner at MGK Consulting, the size of the business also dictates how frequently accounting records should be verified. “For example the bigger the business, the higher the number of transactions, and the more checks it requires. Look at the volume of business Safaricom conducts for instance and the sheer number of daily summaries arising out of those transactions will need constant checks,” he says.
In Mr. Muhia’s opinion, the frequency of checking the numbers at a minimum should be one month. “Sometimes sales-driven businesses demand far more frequent supervision,” he observes. “In this type of business venture, you would want to know what you did last week and what you are doing this week, unlike a consulting firm which on the other hand would need less of those checks.”
Even with close monitoring, points out Mr. Makhulo, certain changes in transactions might turn out small enough to evade daily surveillance but will take a period of about month to ascertain their magnitude.
In Mr. Muhia’s experience, another key parameter that will still determine how regularly you observe business accounts is the growth rate of a business. “It is not enough to just read the financial statement,” he says. “Small businesses grow and non-financial reports such as number of customers may be required. For bank balances, the owners should review bank reconciliations—do the bank statements and cash book balances add up? Be analytical; do the figures reflect your understanding of the business transactions? Pay attention to the numbers,” he advises.