Unprepared SMEs risk collapse

By Stewart Fleming

Date: 07/10/04

FRAUDULENT collusion between employees and suppliers, overdependence on a single customer and irresponsibility are among the major causes of business failures among small- and medium-sized businesses (SMEs), according to a new report from the European Federation of Accountants.

The report, Avoiding Business Failure - a Guide for SMEs, cites numerous case studies to illustrate the many and varied paths to perdition which SMEs have trodden.

Mueller KG, a German private company which produced specialized high-grade cutlery, failed as a result of a two-year delay in investing l10 million in new processes to meet rising quality requirements.

Two brothers and their wives held the company's equity. The cause of the delay, the report states, was that, under pressure from their wives who ran a commercially unsuccessful modern art gallery, the brothers withdrew the majority of the profits in order to purchase paintings.

As a result of the delay much of the customer base turned to other suppliers and the firm became insolvent. The paintings also fell in value and new funds could not be injected.

The report states that SMEs should seek advice from experts in good time in order to acquire the skills for detecting and reacting to threats to the survival of the firm.

It stresses that planning, budgeting and forecasting systems should be put in place and key performance indicators identified and analyzed on an on-going basis.

It also recommends that even firms which are not required to carry out a statutory audit under national law should commission a voluntary audit of financial statements, partly to enhance the credibility of the firms' reporting and results with banks.

It puts heavy emphasis too on the need to monitor cash flows carefully to ensure that the firm is always able to meet debt payments when they fall due.

Actual receipts and payments should be monitored and compared with budgeted figures and cash-flow statements should be compiled in order to get a good idea of a firm's actual ability to generate cash and to get a clearer picture of the timing and regularity of cash flows.

Fraudulent collusion between employees and suppliers, overdependence on a single customer and irresponsibility are among the major causes of business failures among small- and medium-sized businesses (SMEs), according to a report from the European Federation of Accountants.

European Federation of Accountants: Homepage http://www.fee.be/

---