Sanjay Swarup, director of accountancy firm SKS Business Services, in partnership with Loughborough University and the Chartered Institute of Management Accountants finds that SMEs are failing to utilise modern accounting practices which can aid growth.
In our recent survey of more than 100 hundred finance directors of SME companies in the UK, showed that only 55% of businesses utilise their monthly management accounts effectively.
This implied that the other 45% of financial directors appear to be making crucial business decisions every month without access to real-time financial information; effectively driving in the dark with no headlights.
It has become regular practice for SME accountants to spend a large proportion of their time just on book-keeping and external reporting.
Whilst many large organisations have increased expectations of management accounting information, most SME owners have limited expectations from this regular analysis. Many assume that it mainly relates to ‘historical control data’ rather than future-oriented information that aids decision-making.
Management accounting for growth
Since securing bank finance and overdrafts is still expected to be tough this year, it is imperative to look at management accounts and forecasts as important management tools. Relying upon spreadsheets as management information systems implies that the company looks to the past instead to its future. Upgrading to integrated accounting systems reduces the time required on the accounts, creating greater opportunities to forecast growth and finance projections.
In our experience, communication with prospective equity investors or loan providers becomes simpler if the company has regular and credible financial analysis of their business. This in turn ensures that businesses do not run out of cash and have sufficient resources when they need it.
A report last year by the CFA Institute highlighted various reasons why SMEs struggled to attract investment. Lack of liquidity rose to the top of the poll, with 74%. But 38% attributed this difficulty to different accounting standards compared to larger companies. Other areas identified were: lack of understanding the business; and insufficient transparency of SME finance information.
Understanding ways of overcoming these barriers will truly benefit SMEs chances of securing the investment needed for growth this year. This reinforces the SMEs need to transform their current finance function through an alternative approach to finance, balancing the focus on not just conformance, but towards performance.
Better management information will inform stronger management decisions, ultimately improving the business financial health. Regular monthly management accounts will provide the SMEs with greater in-depth financial information, increasing transparency and disclosure to management and key lenders.
Stepping away from the normal bean-counting approach to the finance function will help SME accountants understand the relationship between costs, risk and the businesses’ value. This is a pre-requisite for the long-term growth.
There is a wide spread belief that SMEs are going to drive economic recovery in 2014 and beyond. Efficient management accounting will be key for SMEs to secure necessary investment so they can spearhead the economic growth.
* SKS Business Services focus on applying modern accounting methods, including the use of global skills sets (for example their shared services) and utilising low cost technologies such as Skype, Dropbox, Join.me, which allows SKS to offer SMEs regular management accounts at low rates.