Financial statements for an SME audit

Building Resilience and Prosperity: Key Considerations for Sustainable SME Growth in the Irish Economy

Aidan Ryan, Director, Audit
Financial statements for an SME audit

When auditing financial statements, statutory auditors can encounter issues that have wider implications for a business or organisation and its people than just the financial statements alone.

The sheer volume of businesses we work with and the breadth of sectors and industries we engage in means we have an in-depth first-hand insight into understanding what works, what doesn't, where the gaps are, what can be done better and where the key operational and commercial risks lie.

Small and medium-sized enterprises (SMEs) are a vital part of the Irish economy. According to the Central Statistics Office, in 2020 over two thirds of persons engaged within the business economy in Ireland are engaged by SMEs. 34.5% of business economy gross value added in Ireland is derived by the SME sector.

Simply put, without entrepreneurs and SMEs, Ireland's economy simply could not function. It important to note, however, that for anyone setting up in business, the reality is their chances of failure are greater than their chances of success. This is why it is fundamental that the Irish SME sector is supported and protected.

Although large companies tend to grab the business headlines, SMEs have their own issues. SME owners often operate within a very restricted business community and face daily financial and operational challenges.

There are several hurdles that SMEs will encounter depending on their size, and it is understandable that owners will not be completely knowledgeable about how best to deal with all of these issues. The most important challenge they face in their early years is to survive and as they grow in the medium term, to do so in a sustainable way while managing risk.

Below, we have looked at some of the issues and some considerations which can help make the building and maintaining of a sustainable business easier.

1. Planning

Entrepreneurs are optimistic and have a moderate to high risk appetite by nature. While passion and hard work are essential elements in building and expanding a successful business, it can be tempting to neglect proper planning as it can be viewed as a time-consuming process that keeps an SME owner away from their primary objective of generating sales. An effective business plan will seek to objectively look at the business offering, target market, main competitors, key people, operations and financial projections.

When sourcing new finance, a robust business plan document is often an essential part of the application. Providers of finance, such as banks, will often require a business plan supporting the application to satisfy themselves that an SME owner has demonstrated that they understand their business and have clear strategies for growth.

Equally, it is also vitally important that SME owners monitor their actual performance and financial position against that plan, adjust it where required and re-assess where its key risks are. This is always a useful exercise as it will help to identify where a business's weaknesses and threats may lie, as well as its strengths and potential future opportunities that may exist.

2. Value for money and effective IT systems

Effective use of IT systems within a business will not only lower costs from both an administrative and operational perspective but will also improve the quality and timeliness of information SME owners use to make decisions on an ongoing basis. Having reliable, complete and timely information can be the difference between success and failure. When researching and deciding what IT systems are a good fit, SME owners should always consider the following factors:

  • How will this system integrate with other IT systems?
  • How effectively can the data within the system be used to produce the information needed?
  • Will the system be fit for purpose as your business grows?
  • What level of investment is required and what is the exit route if the system does not operate as envisaged?
  • What level of data backup or cybersecurity measures are needed to protect the IT system?

All businesses are unique and the implementation of effective IT systems is not one size fits all. It requires careful consideration and assessment of the above factors. Speaking to and engaging with advisors who understand the intricacies of this level of change management is always a worthwhile step to take. At Crowe, we have extensive experience guiding businesses through this process.

3. Good cash flow management

Managing cash flow is one of the most critical components of success for SMEs. Despite the fact that cash flow is the lifeblood of SMEs, there can be a certain lack of appreciation for the importance of maintaining a constant cognisance and focus on this area.

Poor cash flow management often has a number of adverse knock-on effects, for example delayed payments to suppliers and other creditors which can negatively relationships and the ability to obtain future credit. It can result in an inability for businesses to make necessary investments when needed.

The cost of borrowing is generally much higher given the perceived greater risk to lenders. If often increases difficulty for owners to attract investment or future partners and it will almost certainly negatively impact the value of the business.

SMEs can take a number of practical steps to aid good cash flow management. These include:

  • Building personal relationships with customers and suppliers.
  • Formalising credit terms with customers and suppliers and setting expectations.
  • Putting the necessary information systems in place to monitor customer credit history.
  • Stressing your financial projections and understanding what level of customer receipt delays the business can absorb.

4. Adapt to the pressures of running your business

As noted above, SME owners are by definition risk-takers. They face daily challenges to ensure their businesses survive and grow. There is always a concern that a business can take on too much risk, or not spend enough time managing certain risks. Examples of this include putting unsustainable stress on the infrastructure or resources within the business to fulfil large contracts, or not devoting enough time and resources to maintaining the necessary regulatory compliance.

SMEs need to be able to withstand long periods of uncertainty while managing a range of business risks. These are vulnerabilities that come with the territory. By learning to live with vulnerabilities and being adaptable, businesses will be able to be resilient and increase their chances of survival and future prosperity. Through our experience as auditors and advisors of many different SMEs across a range of sectors, we see issues relating to decision-making, processes and operational matters which re-occur with a degree of frequency.

These reflect the particular pressures and constraints that SMEs find themselves under as a consequence of a potential lack of breadth in management resources and skills and the wide variety of tasks that fall to them. Some of the typical areas where these arise include contract commitment, investment evaluation and addressing regulatory risks.

It is important that SMEs engage the right people to support and assist them, provide an informed perspective based on first-hand experience and give peace of mind when the “Yes or No” decision needs to be made. This gives SME owners the confidence to make decisions and implement critical change quickly and adapt as needed to scenarios that arise.

How we can help

At Crowe Ireland, we have been working with and supporting the SME sector for over 80 years. On a daily basis, we work with our clients to overcome the challenges they face and help them to meet their objectives. We do this by building personal relationships with SME owners and their management teams, operating in that trusted advisor space and acting as a sounding board.

The nature, size and history of our firm gives us an in-depth and broad range of experience but it also means we have dynamic solution-driven specialists on hand to assist our clients as and when the need arises. For smart decisions that build lasting value, your next move is a call to Crowe.

Contact us:

Aidan Ryan audit director Crowe Ireland
Aidan Ryan
Director, Audit
Brian Geraghty, Partner, Audit - Crowe Ireland
Brian Geraghty
Partner, Audit