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As trusted advisers to SMEs, accountants need to discuss with their clients the impact non-financial metrics can have on their firm’s development.
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Accountants must question non-financials to improve risk management
20 July 2023
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13 minute read
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Accountants must have a conversation with their small business clients about non-financials to improve their risk management and growth, says the founder of advisory firm Succession Plus Craig West.
He said the volatile economic climate had pushed lenders to avoid risk, which means businesses need to re-evaluate their non-financial metrics.
“While the economy is booming, the share market is booming, and risk is not a big factor, that’s great, banks are happy to lend the money. What they’re now doing is saying wait a minute, there’s a bit of storm cloud on the horizon, let’s start to think about what might go wrong here,” said Mr West.
“Normally what might go wrong is not driven by finance, it’s driven by non-financial metrics. One example is, key person dependents with most small businesses in Australia really dependent on the owner, or the general manager or the brother and sister that run the business or whatever it might be.”
“But there’s also a lot of other risks now around the economy and the environment with ESG now a factor in valuations, which was never an issue five years ago, now it’s in every valuation we do.”
Mr West said non-financial factors such as ESG were crucial for SMEs to be across as banks, lenders, borrowers and buyers were now concerned by it and therefore how a firm addresses ESG could be a significant risk.
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He said SMEs need to face the non-financial factors and the risk they pose to their firms due to the nature of supply chains and being a part of it with banks as a borrower or, as a supplier to large corporations.
“Our business itself does work with Macquarie Bank, and as a big corporate they cannot afford to have a supplier like us breaching any of these environmental issues, social issues or governance issues,” said Mr West.
“So when we sign on as a supplier for a big bank, we have to subscribe to all these policies and it’s all about risk.”
“Whilst it’s been a big issue for the government and big corporations for quite a while, it’s now coming down to the smaller, medium businesses.”
Mr West said accountants are positioned the best to speak to small and medium-sized businesses about the risks non-financial factors could pose due to the trust already built with clients.
“It might just be a simple conversation where you sit down with a client and go through something like an ESG scorecard and say, have you thought about these 10 things? Have you thought about the fact that if you want to supply the government, then you need to be adhering to these policies,” he said.
“So just starting that conversation is enough for the business owner to start to think about it, because they’ve probably never thought about it.”
“I think it’s a big opportunity for accountants to do more work with their clients outside just doing their accounting work, but actually saying, you know what, we need to get some of these policies in place, we need to get your systems sorted out.”
He said the non-financial factor of employees holds a potential risk due to the reliance SMEs had on the owner or manager.
“The number one thing for small businesses is they’re really dependent on the owner, they can’t operate without them,” said Mr West.
“That’s the first question to ask, if you were to go on a holiday today for three weeks without your mobile phone or your laptop, would the business still be okay when you got back?”
“Most people would say no, not really, you’d have some problems, or something might go wrong or clients won’t get invoiced. That’s where the accountant should be saying, let’s fix that problem first, let’s work out what you need to do to solve that.”
Mr West said many businesses will require a reason to act on non-financial risk factors and that the cost of not doing anything should be sufficient.
“They’ve got to have a reason why they would do this otherwise it’s just another thing the owners have got to do and they have so many things to do already,” he said.
“But when you explain to them if you don’t do this your bank will charge you two per cent more for your loan than if you did do it, or the buyer will pay $200,000 less to buy the business than they would if you had them in place, then there’s a reason.”
“The ideal thing is to start a conversation about non-financial aspects of the business.”
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