WHY INTERNAL AUDIT? IS IT WORTH AN ADDITIONAL COST TO YOUR COMPANY?

In order to understand the term ‘Internal Audit’, lets first understand what an “Internal control system” is. Internal control system means the policies and procedures adopted by the management of an entity to assist in achieving management’s objective of ensuring orderly and efficient conduct of its business. It includes reliability of management policies, safeguarding of assets, the prevention and detection of fraud and error, the accuracy and completeness of the accounting records and the timely preparation of reliable financial information.

Internal Audit is a function that constitutes a component of internal control with the objective of determining whether the internal controls are designed, managed and operated in the best possible manner.

Assessing and managing enterprise risks have become a primary concern for CFOs, Directors and audit committees. Stakeholders are increasingly demanding a higher degree of transparency and ethical behavior. In today’s global economy, organisations must be able to demonstrate that they have adequate controls and safeguards in place.

Consequently, organisations are introducing risk-based internal audit plans, which are designed to focus on critical areas. Managing loss potential, while consciously taking acceptable risks directly enables the management to provide fair returns on investment.

As Chartered Accountants, we are no longer expected and are limited for hazard avoidance or compliance of Companies’ policies. There is a need to demonstrate knowledge of risk management, business process improvement, which is a characteristic of a consultant rather than a classical internal auditor. We need to provide value-added support to management across all areas of operation, such as the Purchase-to-Pay process, possibilities, and limitations of the IT system being used, regulatory compliance, etc. 

Potential benefits of Internal Audit include:

  • Gaining access and knowledge of highly skilled and experienced professionals within the relevant field
  • Timely and effective management of risk and hazards  
  • Managing risk with a fresh perspective 
  • Added level of scrutiny and caution in the organisation
  • Cost-benefit approach by reducing cost/overheads and managing the key ratios effectively
  • Reducing procedural complexity and participation in developing strategies and governance process

Internal Audit is no longer considered an additional cost to organisations. In fact, due to ease of business operations in UAE, it is crucial for the management to understand the risks and possible hazards, which are looking for an opportunity to pierce the shield of internal controls and paralyze the growth of any organisation. Stakeholders prefer to have a transparent approach by reviewing the internal audit reports submitted by experienced professionals.

Written by Nihar Kothari, Partner, Affiniax Partners

E-mail: nihar@affiniax.com

PRINCIPLES OF TRANSFORMATIONAL LEADERSHIP

When we talk about ‘Leadership’, what is the first thing that comes to your mind?

An Executive, busy developing a Company’s strategy to compete in the market; or a Political leader pursuing his passion; or maybe an Explorer, cutting a path through a dense jungle for the rest of his group to follow. One thing remains common in all cases – Leaders set directions, build an inspiring vision and create something new for others to follow.

In this article, we are focusing on the process of leadership – particularly the “Transformational Leadership Model in the workplace”. This model was first proposed by James MacGregor Burns and then developed by Bernard Bass. This model highlights visionary thinking and bringing about change, instead of management processes that are designed to maintain and steadily improve current performance.

According to the idea of Transformational Leadership, an effective leader is a person who does the following:

1. Creates an inspiring vision of the future.

Vision for a business is basically where you want to be in the future. It provides directions, sets priorities, timelines and finally, a model to analyse if you have achieved your milestone. Leaders should focus on an organisation’s current skills, analyse situations and then proceed with innovation by shaping the business and strategy in such a way that it creates something meaningful to the people being led in the organisation. A very important aspect of this theory is that a leader should be “Proactive” and should not be satisfied with things as they are.

2. Motivates and inspires people to engage with that vision.

The ability to motivate your employees inspires them and helps to deliver the vision. Effective leaders link motivation under two segments:

  1. The expectation that hard work will lead to good results.
  2. The expectation that good results will lead to attractive incentives and rewards – intrinsic or extrinsic.

People believe in and admire leaders who have an expertise in that area. A leader must have a proven record to support that he can lead people, which means he should have earned such power and not by mere position in the organisation.

3. Managing delivery of Vision.

A leader must make sure that his vision is followed and managed effectively – either by himself or by dedicated managers under him to whom responsibilities and roles are clarified. They should set KPI (Key Performance Indicators) for each employee to make sure they are on the right track and working collectively towards achieving their goal. This stage may also include certain changes and a leader should ensure that changes go smoothly and with the support of all employees in the organisation.

4. Coaching and building a team to achieve Vision.

A leader must understand the team dynamics in order to strategise his vision. He needs to make sure that the required abilities and skills are set to move forward. This is an ongoing process under which the team is mentored, various training and coaching is provided along with appropriate feedback and analysis by way of KPIs.

Leadership includes searching for and grooming leadership skills in others. Once the skills are developed in the team, success continues for the long term- and that’s the true measure of Great Leadership.

Leaders become great, not because of their power but because of the ability to empower others – John C Maxwell

Written by

Nihar Kothari

Nihar@affiniax.com

WHY BUDGETING IS CONSIDERED KEY TO BUSINESS FINANCIAL SUCCESS?

One of the most important tools an entrepreneur can develop for the financial success of a business  is a budget. Budgets allow a business owner to not only plan for expenses, but also analyze expenditures and make changes according to the needs of the enterprise.

A business that doesn’t budget sets itself up for a host of financial problems down the road. This is true for businesses of all ages and sizes. Conversely, a business that develops short- and long-term business objectives by creating a detailed business plan can create a road map for financial success and opportunities to expand.

Just like a household, a business has certain debt obligations and expenditures it is responsible for. Imagine the potential implications if a business is unable to meet even one financial obligation, because of poor budgeting. Being unable to meet payroll means employees will leave the company; not carrying insurance leaves the company open to liability; failure to pay rent means eviction; and not paying statutory taxes on time leads to fines.

Developing an accurate budget is a critical component of financial success; that being said, a budget is a living tool that should change according to the needs of your business. When developing an initial budget, try best to accurately estimate income and expenses, but know that the figures will change as expenditures rise and fall. For example, if you overspend on office supplies but overestimate the cost of your utilities, feel free to adjust the numbers in the budget accordingly for that month – you didn’t do anything wrong! Budgeting is a trial-and-error process, and the accuracy of your estimations will improve as you continue to follow the budgeting model.

After the budget has been developed, it’s important to analyze actual results at the end of each month. Compare expenditures and income to the budget planned, and try to develop a sense of how you performed in relation to your budget goals.

Benefits of Budgeting:
A carefully constructed budget allows a business to continually track where they are financially. This allows for strategic, long-term planning for everything from current operating costs to potential expansion. Other benefits include:
  • The ability to set sales goals
  • The chance to open lines of credit
  • The ability to make decisions about salaries, bonuses, benefits and overhead operating expenses
  • Easier tax preparation (VAT)
  • Plan and predict cash flows

To ensure budgeting is done accurately, it may be worthwhile to hire an outside accountant, or a business manager who has expertise in business finance. We can help you establish an accounting system, track expenditures and produce reports that will help you make calculated and informed decisions about business operations. Please click here to get details as to what we have to offer.

To sum up, it is very well said by Joe Biden that “Don’t tell me what you value, show me your budget, and I’ll tell you what you value.”

OUTSOURCED CFO SERVICES

Case Study

We were recently approached by a mid-sized Events Management Company having a successful track record across several GCC countries. The Company performed much better than the young entrepreneurs had expected in a short span of time. Due to the inherent nature of their business, most of the revenue was collected in advance, thus making it a cash-rich Company. The entrepreneurs were happy to see their bank account flowing with cash and resultantly began to indulge in fancy business meetings, business class travel and investing in Associate Companies that were not doing so well.

Suddenly, they got the shock of their life when one of their suppliers refused to provide any further event management related services to the Company – followed by a few more suppliers. As expected, the event was the biggest failure in the history of the Company. The event sponsors blamed the Company’s management for making false promises and underperforming. Aggravated with the sudden change in attitude of suppliers, the Management decided not to renew their contracts and appointed an alternate chain of suppliers. Surprisingly, the same issues started trending for other events which affected the reputation and goodwill of the Company even more.

The Board of Directors identified key problem areas in the business cycle:
  • Continuous decline in revenue. Due to them having a lesser number of projects in hand, the sustainability of the Company was being questioned.
  • Bank account balance was used by Management. Looking at the declining trend of business, bankers reduced their facility limits and charged a higher rate of interest to safeguard their interest.
  • Low-quality services were provided by suppliers
  • Employee turnover started rising in the Company
Since most of the issues were finance related, they hired Affiniax to provide Outsourced CFO Services. The intention was to identify the root cause and provide solutions. After two months of interaction with their team and suppliers, we came up with the following observations:
  • The Company hired the best category of suppliers in the first place. Their services were at par with their big brand competitors. However, they were not paid in a timely manner. This exposed the Company to various legal cases. Even though the Company was cash-rich, the process of approval and payment took a long time. As a result, these suppliers stopped engaging themselves with the Company for any future projects. 
  • The news was widespread in the market for non-payment of dues which ultimately affected sales and impacted negatively on the goodwill of the Company.
  • The Company was making reasonable profits from all their projects individually. However, the Company was not prepared to incur the additional expenses of the young entrepreneurs. The money they spent on their lifestyle was supposed to be paid to their suppliers in the first place. It is a common practice and a big mistake for entrepreneurs to consider bank balance as their profits. 
  • Employees started leaving the Company as they felt stuck in the same position in the Company for years. Regular appraisal/performance-based bonus was never made a part of the Company’s policy. As a result, they lost their best talent to their competitors.
  • The Company maintained a very high level of inventory. This not only exposed the Company to obsolete items but also increased the cost of storage.
  • We helped the Company to re-negotiate terms and conditions with their bankers.
  • We gave them an insight into market conditions and recommended they amend their contracts to ensure compliance with local authorities.
  • Potential business opportunities were discussed with the management.

Concept

Outsourced CFO is a financial management solution that renders a combination of visionary and technical service to accomplish the ambitions of SMEs.

How it works

An outsourced CFO model involves a part-time, temporary or project-based CFO. This gives small business owners the strategic financial expertise they need while saving them money in terms of salary, benefits and additional overhead that is typically associated with hiring a full-time CFO with a hefty salary.The responsibilities of an outsourced CFO may include overseeing financial and accounting functions, training staff on accounting best practices, developing cash flow improvement programs and evaluating internal controls.

Services Provided under Outsourced CFO

  • Management of the finance infrastructure (accounting, treasury, finance)
  • Financial, business, and strategic planning and implementation
  • Hands-on guidance during transitions
  • Cash flow management and projections
  • Budgeting and forecasting
  • Assisting with private equity and debt financing
  • Bank financing and investor meeting preparation
  • Key metrics benchmarking and trend analysis
  • Accounting software selection and implementation
  • Financial and operational improvement plans
  • Mergers and acquisition support
  • Risk management
  • Contract review

How Affiniax Partners can help?

We have a talented and purpose-driven team of Chartered Accountants and finance professionals that help entrepreneurs to identify their key areas, focus on providing customised business solutions, report on cost-benefit analysis, provide market updates, automate systems and scale up their competence in pursuit of business eminence. Article written by Nihar Kothari, Partner, Affiniax PartnersThe author can be contacted at nihar@affiniax.com