Besides crunching the numbers, SMPs can play a ‘virtual’ role as directors, advisers and business facilitators to SMEs.
South African chartered accountants in small and medium practices (SMPs) who look beyond auditing alone have the opportunity to engage small and medium enterprises (SMEs) in mutually profitable relationships, say SME funders.
The change in South Africa’s financial reporting legislation, which allows SMEs to forgo an audit in favour of an independent review, has financial implications for CAs(SA) in SMPs. Nonetheless, evidence so far indicates that small businesses have not migrated in large numbers toward the independent review. By far the majority of small and medium businesses still opt for an audit. A recent study undertaken by SAICA sheds some light on why this is so, and also points to major opportunities for SMPs to broaden their scope of business with SMEs.
So often it takes a threat – real or imagined – to make industries and businesses face the fact that the world has changed. Those who recognise this and grasp the nettle, find new areas of business opportunity, while those who don’t see their businesses inevitably shrink as they become less meaningful.
Recognising that the change in the Companies Act held the potential for SMEs to reduce spending with SMPs, SAICA in a survey of five major banks and three specialist SME lenders, found that there are a number of areas in which lenders trust the input of CAs(SA) above other financial professionals. This level of trust holds potential for SMPs, both to hold onto audit business and to expand their businesses through providing new value to clients by identifying and expanding the services they can offer. Financials provided by CAs(SA) still make lenders more comfortable
The institutions surveyed agreed that they found financials prepared by CAs(SA) more trustworthy than those produced by the companies themselves, or by other independent accountants, when assessing creditworthiness. “The letters behind the name make a big difference to us,” says Scott Brown of Investec. “Rather than some other accounting qualification, the CA(SA) counts a lot more as far as we are concerned.” Oscar Siziba of ABSA concurs. “Figures signed off by a CA(SA) have more credibility.”
Specialist SME funders, in particular, prefer audits: “As it stands today, we prefer audited financials,” says Darryl Adriaanzen, Chief Commercial Officer of the Bank of Athens. “When the new criteria get embedded it will still undoubtedly make a difference whether the review is conducted by a CA(SA) or somebody else. The independence and the quality of that information, whether it is reviewed or audited, is a significant component of the credit decision in terms of the data that we look at.”
On average, when asked whether financials signed off by a CA(SA) are more trusted, the banks scored 7.4/10, where 10 represented complete agreement and 1 complete disagreement. Specialist SME lenders scored the statement 10/10. The research confirms that, in total, providers of gearing to SMEs trust financial information provided by SMPs over other service providers or businesses themselves, with a score of 8.4/10 on the agree/disagree scale.
Lenders also believe that as they are familiar with banks’ lending criteria, SMPs can also advise small businesses on ways to improve their financial fitness – by providing proof of ongoing turnover and realistic projections of future business and cash flow based on credible assumptions. They can also improve the bankability of SMEs by ensuring salaries are paid on the same date every month, keeping VAT and PAYE payments up to date, and ensuring the person behind the business maintains a clean credit record. The input of a CA(SA) can make a major difference on the bank scoring system, when credit is required.
This finding has been published widely in recent press releases by SAICA in an attempt to convince SMEs to stay with CA(SA) service providers to preserve and even enhance their own ability to access funding from the banking and specialist SME lending sector. SMPs business advice is also seen as valuable by lenders The research respondents also indicated that CA(SA) involvement in an advisory capacity can make SMEs more attractive as a credit risk.
They help business owners understand the difference between cash flow and turnover, for example, and their professional relationships with lenders make them invaluable when creating a business plan that will qualify for credit. “We pretty much look for a business that is well supported financially – and that starts by being mentored and taught on how to run a business, treat customers, manage creditors, and manage payments.” says Oscar Siziba.
“Everybody says funding is the biggest pain point for entrepreneurs,” adds Kandis Swanepoel of Nedbank. “I think it’s more the soft issues – the coaching, the mentoring, the consulting. ‘How do I register a company?’ ‘How do I create a business plan?’ I think those are bigger pain points.” SMPs should investigate all the services they can provide to SMEs, from cash flow management to risk assessment.
CAs(SA) can perform “non-executive director” roles, and act as funding facilitators
All of the funders who responded to the survey agreed that one of the greatest challenges facing small businesses is governance. An SME often has an owner, Chairman of the Board, CEO and shareholder all rolled into one. Without the oversight, checks and balances that are built into large corporations, an SME owner can lose perspective and succumb to poor decision making, or simply miss a glaring opportunity in the hurly-burly of business.
The business and finance expertise of a CA(SA) can be invaluable as an outside and independent eye – so lenders encourage SMPs to make themselves available as “non-executive directors”. This would not be a formal appointment, but would utilise the SMP in exactly the same oversight role. “There is a need for this,” says Kandis Swanepoel. “SMEs get into a windmill of doing stuff, and don’t see how they could grow. They’re chasing sale after sale, but they never sit back and say, ‘This is where I want to take the business in two years’ time.’”
When asked whether they thought this role would affect a business’ creditworthiness, lenders were again positive, although they believed that the value would be more directly felt by the business. They believed that as a result of SMPs playing this role, the SMEs would be in better shape to approach lenders because they would have taken better decisions over time. Big banks agreed with the statement at the 5.2/10 level while specialist SME funders agreed at the 6.7/10 level.
In addition, the respondents agreed that the professional networks built up by CAs(SA) could be a useful asset when SMEs plan expansion or acquisitions that require funding. Their specialised knowledge allows them to put SMEs in contact with the funder that best suits their needs; most of the lenders are also prepared to pay SMPs a commission on these referrals. “I think chartered accounting practices could be a significant source of business for us,” says Thakani Makhuva of the Small Enterprise Finance Agency. “No doubt that would apply the other way around, as well. Our funded SMMEs could do with their active help.”
When asked if they would welcome and pay for successful leads, all research respondents agreed that they paid for these quality introductions, but that the deal needed to be transparent to the client. This provides SMPs with a mechanism to reduce the cost of this type of consulting work for their clients. Funders went further to suggest that the SMPs could provide a useful role in pointing their SME clients to the right lending institutions in the first place.
Many SMEs are unaware of the fact that banks, of all the lenders, will take the least risk and that the specialist SME lenders may take more risk, but will insist on closer monitoring and even mentoring for the duration of the loan – at a higher price of course. Then for newer or start-up ventures the venture capitalists and angel investors exist.
The advice is invaluable in selecting the best lending partner at the beginning of the process. Banks agreed that SMPs could perform a valuable business sourcing role at the 6.3/10 level, while specialist SME lenders rated the usefulness of this role at 9.3/10.
Versatility and value -addition paramount
The challenge, for SMPs and SAICA, is to develop tools and programmes that would enable SMPs to offer this added value to small businesses. SAICA has committed to providing protocols that could give the SME market a common approach from SMPs for various services that funders agree would be valuable. The provision of risk assessment and mitigation, cash flow management, “non-executive director” input will provide SMEs with valuable services, and SMPs with valuable revenue streams.
The CA(SA) in private practice can, in effect, become the SME owner’s one-stop outlet for auditing and financial oversight; improving borrowing fitness, risk assessment and management, and long-term financial planning – a symbiotic relationship which will strengthen SMEs and SMPs alike.
At a recent meeting of the SMP sector in SAICA, a decision was made to investigate the feasibility of providing a set of agreed protocols for each of these services so that lenders could expect a common approach. Of course, many SMPs are qualified to begin providing these clearly needed services, in the meantime using their
Author: Bridgitte Kriel CA(SA) is Project Director: Small Practices, SAICA.