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Sound financial management is crucial to the success of any business.  Unfortunately this is often an area neglected by many business owners and managers.  The importance of gaining a better understanding of financial management techniques and tools can never be over emphasised.

Image courtesy of: Jorge Franganillo

In the current economic times, business owners are faced with a demanding set of market forces.  Interest rate volatility, reduced availability of credit, fluctuating rates of inflation, employee costs, the commercial forces of price pressure, extended credit terms and increasing competition.  Your success in today’s economic environment is directly related to your ability to use and understand financial management tools.

To get a better grasp of how critical sound financial management is to the success of a business, we should consider two of the three main reasons that cause a business to fail.

LACK OF PROFIT

• Insufficient sales
• Over trading
• Burdensome operating expenses

LACK OF CAPITAL

• Collection problems
• Insufficient credit terms with suppliers / Reduced lines of credit
• High levels of fixed assets
• Inventory issues

The effective use of sound financial management techniques is vital in averting all of these factors.

Businesses must have financial control systems that are not complex, that provide early indications of potential problems, and that result in clear, timely and appropriate decisions being made.   In fact, it can also help alleviate the third reason for business failure – LACK OF TIME – which invariably manifests itself in the form of management neglect.

Doran Business Advisors have tools and underlying analysis techniques to help provide businesses with a sound system of financial management and control. Our methodology ensures the process meets the needs of your firm, and is relatively easy to understand and use.  Doran Business Advisors Financial Management techniques enable you to clearly establish goals and objectives for your firm and deliver a sound framework for effective and efficient decision-making.

Give your business the chance of success it deserves.  Implement a sound financial management system and make sure you have plenty of profit, capital and time to drive your business forward.

Contact Us:

Should you wish to find out more about our services and approach please feel free to contact us.  Click here for our contact details.

In reality, a lack of time results in the “gut” feeling approach.  This approach can work in the short term and the entrepreneur may be able to spot an irregularity with a quick scan of the numbers, be it approving payroll or signing off on the payments file for creditors.

Image Courtesy of Robbie1

However, as your business grows so does the workload.  The volumes of transactions increase. Customers and employees demand more of your time.  Managing product and service development requires your constant attention.  Sales and marketing activities need to be maintained.  Any chance you had of stepping out of the daily grind of the business fades away fast.  Your time no longer seems to be your own.  It is not long before your numbers become a blur and the “gut” feeling approach is quickly replaced with a sense of being overwhelmed.  The danger is that proper scrutiny of your numbers is all too easily overlooked.

As you become successful and your business starts to scale upwards it becomes more and more difficult to rely solely on your “gut” feel and a quick scan of the numbers is no longer feasible.   The irony is that at this point it becomes ever more critical to keep an eye on your numbers.

At Doran Business Advisors we are often told by business executives “My business has become too big to manage singlehandedly but is not on a scale large enough to justify its own internal audit department.   Waiting for the annual audit is not an option”. This all too common statement is usually followed by questions such as:

• “Can a business owner effectively and efficiently review in detail all key areas of exposure?”
• “Can a business manager get a handle on areas of concern quickly and cost effectively?”

Our answer is a resounding “Yes!”.

One of the many tools and processes we use is based on a little known mathematical theorem called Benford’s Law!

In 1938, Dr Frank Benford a physicist with General Electric stumbled upon a law that has since become known as Benford’s Law or the First Digit Phenomenon.  Benford’s Law states that in lists of numbers from many (but not all) real-life sources of data, the recurrence of the first digit in a number occurs in a specific, non-uniform way.

Most people would predict the chances of a random number starting with a 1 would have as equal a chance of occurring as a number starting with a 2, 3, 4, 5, 6, 7, 8 or 9.  In other words there is a 1 in 9 or approximately 11.1% chance the number would start with a 1,2,3,4,5,6,7,8, or 9.  However this is not mathematically correct.

According to Benford’s Law, a number will start with a 1 almost 30.1% of the time, and will start with a 2,3,4,5,6,7, or 8 with lower and lower frequency, to the point where a number starting with a 9 occurs only 4.6% of the time.

Benford’s counter-intuitive result has been found to apply to a wide variety of data sets, including electricity bills, street addresses, stock prices, population numbers, death rates, lengths of rivers, etc. and is the foundation stone of forensic software used by tax authorities, large companies and accounting firms around the world.

What has Benford’s Law got to do with my business?

The reality is that this astounding mathematical theorem called Benford’s Law is a powerful and comparatively simple tool for directing suspicion at fraud, embezzlement, tax evasion, slipshod accountants and even computer glitches.

The truth is most people do not know the real odds of a number occurring, so they are unable to falsify data convincingly.  Benford’s Law can often be harnessed to review business data to quickly identify where there may be a likelihood of mistakes or fraud occurring and pin point where further investigation may be required.

Understanding how numbers work can really be of benefit to the managing of businesses. Doran Business Advisors have experience in taking that knowledge and embedding it in the practical implementation of efficient processes.  Such processes will not only save you time but give you a higher degree of comfort as well.   We have successfully used our knowledge in this field to:

• Identify customer orders that had been split in order to circumvent their internal approval process.  These enabled our client to, sensitively yet proactively, address these issues at a senior level within the customer organisation.  This resulted in an improved level of trust between the two companies
• Detect fraudulent issuing of credit notes.  Our methodology enabled the client to quickly quantify the extent of the issue and identify the exact credit notes involved. This enabled the recovery proceedings to be initiated in a timely manner.
• Provide assurance to client on the adherence of their procurement department to internal approval processes
• Uncover fraudulent expense claims
• Assess the accuracy of payroll data
• Review the integrity and use of accounting journals and estimates

The setting up of processes for analysing and understanding your numbers may take time and effort to implement, but the efficiency and effectiveness of having such a process in place brings will definitely be worth it in the long run.

Contact Us:

Should you wish to find out more about our services and approach please feel free to contact us.  Click here for our contact details.

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