23 Aug The Importance of Management Accounting Education on SME Performance
Considering that SMEs (99% of all UK enterprises) employ about 60% of the country’s workforce, they are the backbone of the UK economy. However, what most entrepreneurs don’t realise is the importance of accounting management and how it can contribute to their business growth, helping them operate not only economically, but also ethically, effectively, and efficaciously.
Researchers have found that most SMEs fail to leverage the potential of management accounting for helping them reach their financial objectives (liquidity and profitability included). It seems that the main emphasis on management accounting is on control information, instead of decision-making, which means that most SME owners/managers tend to make decisions without a financial analysis or with inadequate financial information. Also, most entrepreneurs undertake the management accounting role. This results in considerable opportunity costs.
Management Accounting Tools most UK SMEs Use
According to a CIMA (Chartered Institute of Management Accountants) sponsored study, the majority of SME entrepreneurs use: (1) Service/product costs for profitability/pricing analysis (not for cost control), (2) Informal CVP (Cost-Volume- Profit) analysis, and (3) Working capital measures, where appropriate. It became apparent that they did not understand their costs or did not know of them, which lead them to get the wrong decisions related to their pricing. They also showed an inability to manage their working capital and cash flow adequately.
The type and amount of management accounting undertaken are dependent on several factors:
1. The size of an organisation (larger enterprises do more management accounting that small ones).
2. External stakeholder requirements (there may be a need for high financial gearing and detailed management accounting information and systems to support scenario planning and more).
3. Nature of the organisation’s operations (and the environment in which it operates).
4. Financial constraint when it comes to credit availability, cash flow, and profitability (less constrained businesses don’t do much of accounting management compared to very constrained ones).
5. Senior-managers’ background experience (those with non-financial backgrounds will probably not employ management accounting).
Given that most SMEs usually fail within their first 5 years of operation, it is paramount to use formal budgetary planning, formal CVP analysis (also taking into consideration many different “what if” scenarios), responsibility centres, and formal budgetary control systems to survive.
How Management Accounting Education can Help Enterprises Flourish
Usually, SMEs have no in-house accountant. Their sole contact with one is with the SAP (Small Accounting Practice), which provided the taxation services and statutory compliance only. Accountants in SAPs appear to be more proactive in marketing management accounting services, and SME owners could be more informed about the many benefits of using management accountants. That aside, in-house accountants can also receive proper training and education as to how to stop acting like bean counters and get more into a business partner role.
As for the cost of using management accounting tools (cost-benefit calculus), it varies, depending on the IS/IT systems used. Although Excel spreadsheets are widely used, an integrated software solution will definitely save entrepreneurs both time and money.
That said, SME executives can benefit from the existing management accounting tools that support decision-making, such as capital expenditure appraisal techniques, cost analysis, decision trees, and other tools that help deal with risk, including expected values and payoff matrices. There is also the need to educate new entrepreneurs on the fundamental need for product costing, working capital management, and break-even analysis, in order to give them a chance to survive.
Finally, management accounting education is paramount to SME executives, especially when they are running a business that is expanding, because failing to use specific tools, such as overhead allocation techniques and responsibility centres, might be acceptable for a small business, but it is totally wrong for a medium enterprise. This is because, at some point (when it is time for elevated scope in product range and decentralised decision-making), some techniques left aside will become highly relevant.