Dubai Business Austerity

28 Oct 2012
Posted by The Free Zone

Dubai faces it’s first economic downturn in it’s history. After years of explosive growth in a tax free system, most business in the UAE have to cut back to cope with diminishing returns. But a Tax Free business environment can have serious side effects – effective austerity measures require accurate balance sheets. Who cares about good book keeping when there’s no State Tax Department demanding accurate financial figures? Wait till business starts to decline. Have a look.

Tax free book keeping

The UAE has seen very good times and still is – the 2012 business climate is not bad when compared to other regions. The tax free system in the UAE is attractive to work in – but can have a side-effect which can cause UAE companies to go bankrupt more rapidly when business starts to decline.

Good book keeping results in accurate balance sheets
Accurate book keeping results in trustworthy balance sheets - State Tax department requires accurate book keeping

A tax system requires companies to have minimum level of maturity in their company accounts. The state wants it’s taxes paid on time and sanctions those companies who don’t. The balance sheet must add up when the tax inspector goes through the company accounts. 

Dutch tax system in the Netherlands Tax department in Germany
The best TAX systems in the world come from Northern Europe - left The Netherlands, Right Germany

The result of a national tax system is an effective financial department. Without an accurate balance sheet the state tax department won’t hesitate to and haunt company owners or even bankrupt a company. When there’s no tax system, it’s up to the UAE company CEO, CFO or Financial manager to run an effective financial department.

If business is booming – sloppy book keeping can go on for years. The UAE company can stay afloat nonetheless, everybody is happy even when money leaks away. However when business goes sour, a sound financial system is essential for the survival of the company.

Dubai Business Austerity

Rolling out austerity measures in your UAE company is hard enough already. Cutting costs, being forced to fire people for companies that only have seen good times is a daunting experience. Even more for those UAE companies where accurate booking keeping has always been a low priority.

Cutting costs requires an accurate balance sheet
Cutting costs requires an accurate balance sheet

It’s close to impossible to effectively cut costs if company accounts are inaccurate. It makes the UAE company half blind missing the tools to navigate through bad economic times. And the situation is even worse.

Trying to establish accurate company accounts ‘on the fly’ when it’s never been the companies best quality, requires tough measures and determination. It’s like creating a new financial department in record time – demanding new investments with not much room for mistakes.

Besides thus - it’s beyond naive to believe that new book keeping software will do all that – which is a stubborn misconception often advertised by software vendors.

Cutting costs requires an accurate balance sheet
A stubborn misconception - new book keeping software won't save the company

The company might need financial experts to sort out it’s past. Company clerks and accountants who’ve produced poor financial records most likely don’t have the education and experience to lead the company through a financial shake-up.

Hiring an ad-interim financial manager is threatening – things will surface that should have stayed buried since a poor quality balance sheet provides excellent opportunities for exploits and fraud.

In any case in countries without a tax system, time is on short supply. The longer the CEO waits, doubts or ignores reality the more likely bankruptcy will be the outcome.

Financial experts to avoid bankruptcy

Countries with a well enforced tax system breed effective financial managers and CFO’s.  Northern European countries like the Netherlands, Germany and Scandinavia have tax systems with a long standing track record.

Northern European countries have tax system with a longstanding track record
Northern European countries have tax system with a longstanding track record

CFO’s, Financial managers and Ad-interim managers from this region have experience how to create and use an accurate balance sheet to financially manage a company and pay a minimal amount of tax. This goes far beyond having good book keeping software and some-one to punch in the numbers. 

Ad-interim financial manager to save your UAE company
Ad-Interim financial manager requires a extensive mandate for a financial restructuring

The mandate for an ad-interim financial manager to rescue your UAE company from going bankrupt is extensive. The CEO has to step aside for some time to allow a financial manager to re-shape the financial department. First priority is create an accurate balance sheet and forecast, next is to steer the company away from going bankrupt.

In most cases it’s a race to the clock – if its not too late already. It all depends on an early sense of urgency in the board room and the willingness to improve the financial structure of the company for the better.