Best Ways to implement Corporate Governance in Small Companies

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Corporate Governance is the system of rules, practices and processes to facilitate effective, entrepreneurial and prudent management to deliver the long-term success of a company. 

The Organization for Economic Co-operation and Development (OECD) defines corporate governance as: “Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring”.

Why Corporate Governance matters to Small Companies?

Good governance enhances confidence, value, and idea creation in the company. We need to create the belief that all private or public, big or small companies can compete in an environment where good governance is a business imperative and assist in achieving the organization goals and objective. We need to change the mindset that only public companies can obtain benefits from implementing corporate governance.

Listed companies are bound to follow the Corporate Governance Code, listing regulations, having strong oversight by external shareholders and independent Board of Directors. Management and Owners have their own set of duties and responsibilities. Management commits to ensure that the executives act in responsible and ethical manner to safeguard the interest of shareholders and other stake holders.

In comparison, Small companies are usually owned and controlled by single individuals or by a family. Where, management function is also performed by the owners. Good governance in this context is not a question of protecting the interests of stakeholders. However, it is concerned with establishing a framework of procedures and approach that will impact the performance and long-term viability of company.

Small companies may face challenges in implementing corporate governance as they have to develop their own strategy according to cost and benefits of adopting these policies.

Ways to implement Corporate Governance in Small Companies

In a corporate governance system, it is important to include all stakeholders. An effective governance framework ascertains the distribution of rights and responsibilities among different participants in the company (such as the board of directors, managers, and all and other stakeholders).

Here are the corporate governance best practices for small companies to implement – and it is beneficial for every company/ business.

  • Build strong Board of Directors:

Board of Directors should comprises of competent and qualified directors having strong ethics, integrity, and able to perform their duties effectively. A governance framework will define the board’s structure, size, composition, and the process to appoint the directors to the board.

An independent director on the board of a small company is to fill the existing board’s knowledge and experience gaps. Independent directors can be valuable to family-owned companies who can help to mediate conflict and introduce a measure of neutrality to a company’s decision-making.

  • Develop a business plan

Small companies need to develop a business plan in writing, with clear goal definition and strategies on fulfillment of those goals. As Niewulis said that “The focal point of corporate governance within small businesses is that all businesses need to set company strategic goals, provide the leadership to put them into effect, supervise the management of the business, and report on stewardship of stockholders and investors.”

  • Code of conduct:

Small companies should introduce code of conduct that defines the required behaviors, responsibilities, actions or attitudes for all employees. Management should ensure that all individuals have a clear understanding of the business’ mission statement and values. This provides guidance on how employees should act or react in various business situations. The clear guidelines related to whistle blowing policies should be mentioned and communicated to employees at the time of orientation training and at regular intervals.

  • Consistent financial reporting

Small companies should conduct audits to obtain accurate financial reports. A consistent financial reporting plan either by auditor or internal process of book keeping protects the financial investment of the organization. This process provides you details on when, where and how the money is used or allocated. It also serves to hold staff accountable and to promote transparency.

  • An advisory board

Small companies should establish an advisory board comprised of unbiased third-party professionals, to assure the integrity, accountability of management practices, resolutions for conflicts of interests, and the overall transparency.  A careful selection of this board with clear expectation, competitive payment, compensation and clear awareness of ethical implications should be enough to ensure the efficient monitoring and evaluation of activities.

To summarize, every company should implement corporate governance with a high level of integrity, discipline and consistency. Good corporate governance shows the credibility of the firm in the eyes of its various stakeholders (e.g. employees, creditors, suppliers, and customers) whereas implementation of bad corporate governance will destroy the company’s image in front of its stakeholders. Good governance requires more than the implementation of formal rules and processes and it is equally important to have the right governance attitude, which applies to key governance principles throughout the organization.

Written by,

Asma Ishaq, ACA

Associate, Usmani & Co. Chartered Accountants.

Best way to implement Corporate Governance at a Small Business

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Good governance is important for long-term stability, sustainable growth and efficiency of operations of the organization. In the absence of, or with poor governance, an organization is destined to experience frauds, unexpected highs and lows in business volume and profitability and eventually business failure. This primary objective of sustainable growth cannot be achieved unless the accountability and performance measurement tools are not maintained. Corporate governance is one of such tool which provides guideline to organizations. Corporate governance increases the confidence of shareholder and has positive impact on value of organization. Good corporate governance secures the corporate image and helps in achieving the competitive edge in market. It improves management of capital, risk and long term objectives.

In context of small businesses, which usually do not have extended level of strategic apex; corporate governance provides a guide and acts as a safeguard against existential threats to the entity. This is achieved by managing risk by balancing power through division of responsibilities, maintaining internal and external processes of control and maintaining corporate relations with financial institutions. Small business need to address these questions as soon as possible but it does not happen as an event; it is always a process. It starts by addressing the most material risks first. For example, a system of internal control implemented by professionals after thorough study of the operations serve as a safeguard against risk of fraud and errors in financial information. Similarly, a rigorous set of reporting structure designed by professionals after collecting the information needs of all the stakeholders serves as efficient business planning and monitoring tool.

Board of directors are accountable towards ordinary shareholders of the company. However in case of small business, where shareholder or their nominee assumes the role of a director, usually do not feel accountable towards other stakeholders. Their powers are not restricted towards inspection of books of accounts only. They influence the daily running of operations of company and managing the staff to whom this responsibility is delegated. Financial information presented by management to directors is used by them for analyzing the current financial performance of company and future prospects are based on that presented information. When managing director is also the shareholder of company, as in case of small businesses; the potential conflict of interest may arise between the management staff and the shareholder. Therefore, it is necessary that small business shareholders shall not control the way operations are carried out in organization in order to ensure transparency and accuracy of information presented to them for decision making.

Beside this, management staff in small businesses is the only source which can ensure compliance with laws and regulations required for achieving purpose of corporate governance. Their role shall not be hindered by owners of business which may display potential threat towards corporate governance. In order to achieve goal congruence, the owner’s objective shall not have conflict with objectives of management staff which have responsibility of foreseeing cash position and maintaining books of accounts. For example, payments against sales and purchase cannot be sanctioned without considering the cash position of organization. During periods of financial crises, considering the position of cash, the management may suggest the owners to obtain short term or long term loans from banks for purpose of meeting financial obligations and for securing interest and corporate image of organization. Or contrary to this, the management may suggest the owners to revise its credit policies instead in order to prevent to company from becoming highly geared in future. These both decisions are highly dependent on information that is produced by management. Thus, management staff integrity is also another important factor for achieving corporate governance objective. All the accuracy and completeness of financial data are based on calculations performed by management. Financial information presented in form of valuation of assets, liabilities and estimates are also based on judgment of management. Management integrity will ensure that information presented is true and not based on false assumptions or data.

Another important factor for achieving corporate governance objectives in small businesses depends on performance of system of internal controls that are embedded in financial function of organization. The accuracy of data is dependent on efficiency of system of internal controls and their design effectiveness. In case of small business; the internal control system needs not to be very complex but rather it needs to meet the objectives of business as well as all the compliance requirements with laws and regulations that governs the business. Code of corporate governance is mandatory in case of listed companies. However, small businesses can also benefit from it by following the guidelines that are for best interest of company.

Budgeting: What is it and Why is it Important

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As per Wikipedia, budget (derived from the French word bougette, meaning purse) is a quantified financial plan for a forthcoming accounting period. The process of arriving at this plan is called Budgeting. Simply put, budgeting is making estimates of one’s future inflows and outflows for a specific period of time and ensuring the availability of sufficient funds to perform desired activities. The revenues and expenditures can be estimated on a periodic basis, say monthly, quarterly or yearly and summarized in a spending plan based on previous trends.

The importance of budgeting cannot be over-emphasized, be it at a personal, corporate or government level. Individual, corporations and governments are faced with similar challenges in the form of scarcity of resources and highly unpredictable futures. Thus it becomes imperative not only to think and plan ahead but also to prioritize. Thus the significance of budgeting as a planning and controlling tool is crucial. Budgeting requires a clear bifurcation between needs and wants. It is a tool for ensuring that the needs are firstly met without jeopardizing the individual’s or company’s sustainability.

Personal Budget

On personal level, when incomes are limited and usually restricted to one earning member of a family, budgeting ensures that the basic needs and expenses like housing, education, utilities and grocery are given priority and catered to. In today’s world, where competitions are tough and layoffs are highly anticipated across all levels and industries, budgeting can help meet not only the current needs but ensure that savings are kept aside for any unforeseen calamity. Devising a spending plan can ensure that the household does not run into a debt or can actually help in strategizing a way out of an existing debt. More often than not, the tasks falls on the wives/ mothers who master the art of budgeting while running their households.

Budgeting does not necessarily mean missing out on your wants and curbing your wish lists. On the contrary, it helps in devising a sound and strategic plan to go about the finances in an optimal fashion; ensuring spending within available limits, with a penchant for saving as well.

Graphically a personal budget can be represented as follows:

09-2

Corporate / Government Budgets

Similar is the case with corporations and governments when tasked with budgeting but on a macro level.

There are multiple facets to budgeting in an organization where respective divisions and departments including human resources, IT, operations, marketing, sales etc are tasked with making their respective departmental budgets. The main aspects of these budgets based on past figures are:

  • Estimating future revenues and sales;
  • Estimating future expenses and disbursements
  • Prioritizing activities

The past trends assist the departments in making fair judgments of when to anticipate high or low sales volumes including which periods would require extravagant outflows of cash. The departmental budgets are then rolled out into a master corporate budget.

Corporations usually make two types of budgets: static and flexible one. In the static budget, the figures for sales and revenues, cost and expenditures, assets and liabilities remain constant. Such a budget helps the organization to compare the actual performance of sales and expenses against the estimated projections and measure variance. The flexible

budget gives room for updating the projected estimates as events unfold and corporations are able to make more reliable and realistic assumptions.

In the absence of a budget, companies are usually clueless and shooting in the dark. A budget helps in monitoring the company’s performance. If the actual sales generated and costs incurred are in line with the budgeted estimates, it portrays that the management knows its game and can accurately predict external variables affecting its work environment. However, if the budget estimates vary greatly from the actual figures, the management needs to stringently revisit the assumptions used to generate the budget as well as re-evaluate the surrounding environment for factors having positive as well as negative impact on its operations.

Budgets are inevitable in helping corporations operate effectively and efficiently. A surplus budget indicates that a company anticipates profits at year/ period end. This allows room for investments or capital expenditures and builds up on the earning per share and projects a company’s positive image. A balanced budget indicates that the company anticipates breaking even. Whereas deficit budget estimates the expenses to exceed the revenues. Such a budget allows the companies to look for avenues to secure debt in case it foresees a deficit for meeting operational requirements or capital expenditures.

Categorically, the most important budgets prepared by corporations are:

Sales budget: estimates of the forecasted sales usually in terms of number of units as well as value.

Capital Budget: estimates of the company’s investments in fixed assets, machinery, research projects etc.

Cash Budget: estimates of company’s cash receipts and expenses usually assisting in meeting the working capital requirements.

Similarly, governments task the finance ministers to make budgets based on estimated tax revenues, export incomes and probable outflows for development expenditures and import payments broadly speaking.

Thus budgeting plays a pivotal role in ensuring that cash management for any individual, corporation, government is streamlined and any anticipated challenges are timely addressed.

By: Amina Tariq, ACA

Amina Tariq, a qualified chartered accountant who is open to accepting new challenges.

Her experience ranges from aviation industry to audits across multiple sectors.

Importance of creating a business plan

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A business plan is a sneak peak of the future of your business. It is a kind of written statement of the future of your business. It is a document which describes the plan and the necessary resources to carry out that plan. As Benjamin Franklin puts it “If you fail to plan, you are planning to fail!”

In the modern era of technological advances it has become important to have a business plan. It is necessary to have a written, clear strategy in order to clearly communicate the vision of the business to the investors who are interested in investing. The key is to keep it simple yet having all the necessary and adequate information in order to be convincing and promising. This can help to communicate with other stakeholders of the business as well.

For new businesses, a business plan is the best way to ensure that whether the business idea is feasible or will do well in the long-term. It also helps in understanding and studying the market. Not only this, but a business plan also aids to form a strategy for the new start-ups in the form of viability and future stability.  It is kind of a safety net for the new business and will determine the future prospects of the new business.

Another aspect in which a business plan can help the business is when it is deciding to expand or looking for other avenues in order to diversify the business. It will also help the entrepreneurs who are looking forward to explore other markets for their business,                        by providing a clear roadmap towards success. In other words, it helps to formulate the strategy of the business. Since it focuses on both financial and operational objectives of the business it can provide a guideline to the business about crucial areas such as budgeting and market planning.

When a business requires capital for operational and expansion activities and approaches any financial institution it cannot attain a loan without a formal business plan. It is a mandatory requirement for any business seeking to obtain loan to have a business plan so that the financial institution can assess the repayment ability of the business. Having a business plan can increase the chances of getting financial loans from these institutions and which in turn help the business to expand.

Moreover, a business plan can help the business to secure any other professional support required such as lawyers, consultants, leasing arrangements or accounting services. A business plan also helps to provide a guideline to the key personnel of the business such as executives, managers, and other employees who possess strategic responsibilities of the business. As it clarifies the objectives of the business so that everyone in the business works on the same pattern in order to achieve success.

The increasing competitive environment in which the businesses are operating makes it necessary to have a business plan, so that the strategy of the competitors can be easily analysed and timely response can be formulated. This in turn will help the business to position itself in the market and identify those areas which are not yet explored.

What constituents make the business plan outstanding?

The approach you follow to write your business plan makes it distinguished and understandable for your possible readers.

The first aspect to include in the business plan is the Executive Summary. It is a summary of the key elements which are included in the business plan. Since it is the first thing which the readers will set their eyes on, so it is very important that this section contains all the headings which are included in the business plan.

An industry overview is an integral section of the business plan. It contains the market trends, major industry players, and an estimate of the industry sales. This section also includes a summary of the company’s position in the industry.

Market Analysis is the study of the market in which the company wants to launch its product or service. This is a detailed study containing the geographic location of the company, demographics as well as the steps required in order to be recognized in the target market along with the resources required for it. The tone of this section must be convincing enough in order to give an idea to the potential readers that, the company is well-aware of its customers, target market and is able to make a sales prediction as to how well the company will do in terms of revenue.

The interesting section of your business plan is going to be the competitive analysis in which the analysis is being done of the competitors directly or indirectly. It is an assessment of their competitive advantage along with the strategies to be used in order to overcome the entry barriers of the target market. It is preferable that this section must persuade your readers that the company is offering some really distinguished products or service as compared to its competitors. This will build the investor confidence and will give an assurance that the business will do well in the long-term.

Marketing plan is yet another crucial aspect of the business plan. It is a detailed study of the sales strategy, advertising campaigns, promotional activities and the long-term benefits of the company’s products and services. The unique selling points of the business must be included in this section which must contain points about how the company is willing to introduce its products or services in the market, distribution channels, the way it will be marketed to the potential customers.

Along with these sections it is important to include the financial plan which will brief the readers about how the business is willing to meet its financial needs. It must contain the income statement, balance sheet and the cash flow statement along with the necessary notes to the financial statements.

Other than that factors which will make the business plan attractive is its appearance, tone, and the placement of the sections. All in all this document must be such that it does wonders on its own and the readers are impressed after going through it. As it is rightly said “looking successful is half the battle to being successful”.

By Madiha Kauser-

ACCA is currently working as a freelancer. She is a blogger, article writer, and editor. Her interests include reading and research.