The past few years have been good for business. Profits high, revenues from new markets. It all spelt a brand new beginning. But as anyone in business understands, it is cyclical. What goes up ...
What seems to happen every boom part of the market cycle is companies seem to forget the basics of accounting and let their fixed and variable costs get out of control. They employ far too many people, spend like a madman, and fail in their initial pursuit of lean and mean. Costs eat you up, costs become the controlling factor.
Not surprisingly, it is not until the end of the financial year when an accurate and auditable set of financials are released for taxation purposes that many businesses find they are broke. Then they start to ask the shareholders for a loan. What happens is a quick and dirty balance sheet is done during the year. But the basics of accrual accounting are forgotten. And because they have not invested in the resources they actually need like Accounts Payable and Accounts Receiveable they really do not know their actual financial position.
So how did this happen?
It happened because the business did not show enough attention to detail and it did not acurately understand its committments. For example, they authorised a purchase order for a particular service or goods, and left it is a blanket order. That meant they kept on purchasing more and more of the same service and really did not have a budget for it. The supplier was tardy at getting their invoices in and perhaps they arrived 9 months after the original purchase was made.
The management accounts run the numbers and discover they have spent 1000 - 2000% more on the purchase than was originally planned.
Many businesses are about to pull their belt buckles in very tight.
They will go back to basics. But not before they over react and sack all the wrong people.