‘Governance’ and ‘financial compliance’ are not words that spark excitement in many, and for business owners and managers they may spark fear instead. However, financial compliance is a legal requirement for businesses of all shapes, sizes and types, and its importance spans across all industries.

When embarking on the journey of a new start-up, survival is the key priority; a lot of the admin and ‘detail’ comes later. However, many businesses go on to operate for years without creating and implementing their financial compliance procedures, and so go on to grow and develop further than their current contingent can carry them. Financial compliance is not an exciting part of business, but it is a critical one – and something that can’t be avoided. Indeed, there are even benefits to an efficient internal compliance program; and we explain what those are below.

Why Compliance Often Isn’t A Priority

Business owners are expected not just to be ‘jack of all trades’ across business management, but the expert in all too. Realistically, of course, there are only 24 hours in the day and competing priorities means that financial compliance – which is, in itself, a professional speciality – often doesn’t make the completed portion of the to-do list.

Financial compliance operations are extremely time-consuming, and even more so to the untrained practitioner. The AAT (Association of Accounting Technicians) found that SMEs spend an average of two hours a week on complex tax issues alone, which quickly adds up to a costly sum when small headcounts and battling priorities are taken into consideration.

What’s more, financial compliance is an expensive task to both set up and manage on an ongoing basis. The AAT believes that SMEs in the UK spend £9.9 billion on tax compliance, incurring almost £4,500 each in tax compliance costs. The Forum of Private Business found the average cost of regulation to SMEs is £713 per annum, costing businesses a total of over £19 billion every year. These costs make the financial impact of compliance and tax management considerably higher (proportionately) than that of large businesses – up to 7x higher per head compared to companies with 50 employees or more! Tax compliance and financial regulation operations are the single biggest outlay for small and medium enterprises, followed by employment law requirements and health and safety compliance.

To add to the burden businesses’ face with tackling financial compliance, it is ever-changing. Regulations, paperwork requirements and tax categories change and update constantly. For this reason, big businesses hire a full Compliance or Governance Department; but with smaller enterprises, this usually is not an option.

The Risks of Non-Compliance

The costs of non-compliance are not just financial. Steinberg Governance Advisors warn that a major compliance failure can cost billions of pounds in direct costs alongside ‘stealing the time and energy of top management’, risks ‘detracting from the day-to-day running of the company and initiatives to grow the business’ and could result in ‘damage to a company’s reputation; affecting relationships with customers, suppliers, alliance partners, bankers and investors’.

Whilst big businesses may be well positioned to deal with both the financial and reputational hit that a compliance failure can bring, most SMEs are not. In many cases, the financial ramifications alone would lead to the destruction of the enterprise, and in others, would severely limit the success of the brand. Richard Steinberg, the CEO of the aforementioned Steinberg Governance Advisors admits ‘a major compliance failure can not only cost billions of pounds in direct costs, but also bring a company to its knees’.

The Benefits of Financial Compliance

Financial compliance is one of those things businesses simply have to adhere to – but there are also benefits to having a robust compliance framework in place, no matter what size the company is.

Aside from the obvious avoidance of fines and financial implications, reputational damage, lawsuits and investigation proceedings, there are tangible advantages to the proper and thorough management of financial compliance and governance.

Financial compliance forces businesses to make improvements to their accounting and keep the quality of their internal systems and processes around finances high. Processes are always kept as efficient as possible and best practice guidance – paired with an expert managerial eye – allows for redundant, inefficient or irrelevant steps within processes to be eliminated entirely. This new-found efficiency and relaxation of unnecessary ‘red tape’ can allow those working within the business to focus clearly on its goals, mission and values.

Furthermore, in working toward the company’s values, the consistency and ethical standing that a robust financial compliance framework brings demonstrates the dedication to a high moral standing as a business as well as enhancing strategic business relationships with stakeholders, regulators and banking and investment partners.

Regulators often find that smaller businesses are unable to properly manage their financial compliance matters, so working with an SME that does this well shows them commitment and supplies a good case study to be used for others who are in similar situations.

A well-communicated financial compliance plan can cement brand loyalty and trust within customers, internal and external stakeholders and staff. Stakeholders are much more likely to want to continue involvement with an ethical and ‘by the book’ company, and job seekers and top talent will want to work with and for a brand with a strong reputation within their field – increasing the ability to attract and retain the best possible workforce. In turn, this lowers the significant financial and resource costs of employee turnover and recruitment.

A well-governed company is a well-planned company, and internal managers and decision-makers will be able to make business plans confidently and securely, safe in the knowledge that the information available to them is concise and reliable, accurate forecasts can be made and activities and operations focused on them can flourish. The better the financial compliance systems, the better the data available – and any data analyst or scientist will tell you that the benefits of having reliable, timely data and making data-driven business decisions to grow and develop far outweigh the initial cost of obtaining it. It is simply a further efficiency tool in-house.

Despite all of the above, which is easy to appreciate when properly understood, financial compliance is often viewed as more a ‘necessary evil’ than it is a true business benefit. Richard Steinberg agrees, saying ‘Certainly, the thought goes, it’s a drain on resources that could otherwise be used to grow the business and enhance profitability. [This thought] ignores the many benefits that compliance can provide’.

How to Create A Comprehensive Compliance and Governance Mechanism in Business

In order to create a comprehensive financial compliance plan, business managers must first understand the importance of adhering to compliance regulations and guidelines – and in some cases, must be able to make a persuasive business case to demonstrate such. The current costs of working with compliance matters should be weighed up alongside the risks, and compared with the cost, and benefits, of establishing and working with an efficient and robust financial compliance system. There must be a good understanding of the business’ current financial compliance position as well as what the desired outcome is to be.

Ideally, a compliance and governance programme will be entirely embedded into the business’ everyday operations – integrating seamlessly within business and management processes, responsibility structures, accountability programmes and communication protocols. The operation, communication, reporting and ongoing monitoring of financial compliance matters should become ‘business as usual’, to best allow for it not to be viewed as an additional burden or awkward and unwieldy technical job.

Everyone within the business should be trained regularly on financial compliance and understand both how to report their concerns and seek help, as well as how such regulations affect their own day-to-day business responsibilities. Employees are best engaged into compliance matters when they are clear on not just the ‘how’ but also the ‘why’, and are given a good overview of the benefits of good financial compliance to the organisation (and, in turn, them as a staff member).

Hiring Compliance Managers

Ideally, a business would have a whole department of specialists working on financial compliance and accounting governance matters but, realistically for most, this isn’t an option. Instead, businesses are turning to an innovative solution for their financial compliance management – hiring a part-time Financial Director (FD).

A part-time FD brings to the role a wealth of experience and specialist knowledge, without the high associated price tag. Bringing an expert oversight to the business’ financial operations and governance, the FD is able to both design and implement a financial compliance programme bespoke to the company’s needs, as well as ensuring that they reap the full benefits of properly integrated measures. This frees up the business owners and other managers to work on their dedicated area of focus, allowing for better and more rapid success, growth and profitability.