Seyi and Sewa are partners in the consulting business and have been doing business for more than ten (10) years but were recently confronted with a decision to submit their financials for three years to qualify for consideration for a government project.
They were alarmed to know that they had previously not kept proper records and were only running the business on cash basis (how much cash comes in and goes out). Now that they need a proper financial statement, they are unable to meet the very tight deadline to meet the application. One of their friends advised them to meet with a consultant to discuss a remedy and they were advised on their first strategy meeting to consider adopting an accounting system.
To prevent you from facing a situation similar to Seyi and Sewa’s in the future, this article emphasizes the importance of having well-documented policies for accounting, auditing, and other essential business functions.
These policies can assist small businesses to mitigate risks and enhance performance by providing access to relevant information necessary for making informed decisions. The article will also address how to get cost-effective policies, as well as the implementation and periodic review process to ensure they remain relevant and effective.
Importance of Policy Documentation
Small businesses usually question the relevance of some compliance practices such as tax, accounting, auditing, and strategy. They ask: why should we “waste” our lean resources (human and others) pursuing non-valuing adding practices?
A simple answer is that these mostly taken-for-granted practices can minimise the risk of emergencies, failure, and save the day. For example, I like to compare them to “back up” which can easily be used to “restore” your operations when things go south. Given that businesses face significant risks, there is the need to do all that is possible to mitigate those risks and drive productivity and sustainability.
Many small businesses are setup using the owner-manager model and do not vividly appreciate the need for these business practices and services that potentially enhance their ability to thrive.
Should a small business be considered too small to be bothered about policy? You can find information about what a small business is here. Policy, they say is for the big shot, not for small businesses. A very large fat fallacy. Why? If you agree that you need proper accounting records, then why do you disbelieve that you need documented policies to guide the operations of the system that should produce those accounting records?
Accounting records give insight on the performance of a business and allows comparison and informed decisions on special decisions. Without such information, it is quite difficult for businesses to stabilise and grow considerably.
One of the biggest importance of policy documentation is that it improves your business practices over time, since you can view the guidelines and review them as need be. It also help:
- Stabilise business processes
Your accounting and other policies help to stabilise your business processes by ensuring that divergence from the “norm” is quickly identified.
- Provide a basis for comparison
Given the advantage of policies, a business is able to within the scope of those operations compare their operating results or compare performance with a documented benchmark.
- Provide a basis for business process revisions
As with human and all living things, there is growth and this comes with diverse changes. Policies help businesses to be able to revise their operations and align their operations with current realities.
Having a policy is only one step I must add. Making it available and accessible is another step, while using it and reviewing as the business grows is another.
Drafting a policy requires specialist skills, and there are businesses that can help you develop your business’ policies. You can contact an Accountant, Business Advisor or SMP (small and medium practice) to help draft or review your accounting and audit policies.
Few of them are: