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The role of strategic planning, accounting information and advisors in the growth of SMEs

Slides for paper delivered at the Asia Pacific Management Accounting Association Conference, Bali Indonesia 2015.
The paper explores the relationship between Strategic planning, accounting information and the role of advisors in the growth of small to medium enterprises SMEs

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The role of strategic planning, accounting information and advisors in the growth of SMEs

  1. 1. Asia Pacific Management Accounting Association Conference Denpasar Bali, Indonesia October 26th – 29th, 2015
  2. 2. Abstract This paper explores the association between, small to medium enterprise strategic planning, the use of accounting information systems and the role of accounting advisors in the growth of small to medium enterprises (SMEs).
  3. 3. The Importance of SMEs  SME’s employ approximately 60-70% of the workforce in developed Western nations  Direct positive relationship exists between business density, high income countries and standards of living (World Bank)  Strength of SME sector is a key factor in avoiding and recovering from market failure  In depth studies of SME’s growth factors is limited, contributing factors include the time and resource constraints of SME owners
  4. 4. Propositions Proposition 1 Key points i) The organisation of transferable tacit knowledge is central to growth and viability. ii) Ad-hoc management accounting systems complement business tacit knowledge in SME decision making. iii) Financial Accounting information plays a secondary role in SME decision making. Proposition 2 1) The role of SME advisors is to complement knowledge gaps of an entrepreneur with specialised competencies.
  5. 5. The Literature Proposition 1  Gibrat’s Law proportionate relationship between growth rates and firm size  Penrose theory of knowledge accumulation, collective knowledge in the context of a purposeful firm  Ghoshal, theorised the value of a firm increases with the with the level of experience of deployment  Greiner’s 5 stage model later refined by Welsh & White and Elster & Phipps 3 key enabler’s  Osterwalder’s business model canvas
  6. 6. The Literature Proposition 2  The ability to influence via informational and expert power in via contextual compatibility (Mole)  Financial advice in planning is sort for start up financing then the use of the plan itself is negligible (ACCA)  Adoption of operational budgets and cash flow forecasts in first instance but dependent on the philosophy of the CEO  Positive relationship between adoption of operating budgets and the growth of companies. (Davila)  Success of advisor was dependent on the ability to gain tacit knowledge and complement with technical knowledge (Barbera & Hasso)  Culture, communications and experimental learning (Dyer & Ross)
  7. 7. Research Method This research paper presents quantitative and qualitative data gathered via a multiple method, multi-case field research design Data presented in this research paper includes structured questionnaires, semi structured interviews and information gathered from structured consulting projects and programmes Consultation series began with a pre-programme questionaries and meeting. Standard interview questions were asked during the one-on-one consulting session. The consulting sessions were semi structured in nature due to the different requirements of participants
  8. 8. Research Method The research method for 43 of the 54 SME’s (79.6%) involved a structured consulting programme. Key modules in the program included;  Defining business purpose and measures of success  Maximizing staff performance through organisational culture and structure  Understanding financial information and cash flow forecasting 20.4% or 11 of the SME data reviewed was derived from consulting projects that consisted of company wide strategic reviews
  9. 9. The Sample Industry (Standard and Poors GICS classifications) # % Consumer Discretionary 30 56% Consumer Discretionary - Automobiles - Components 1 2% Consumer Discretionary - Consumer Services 3 6% Consumer Discretionary - Consumer Services - Specialized 8 15% Consumer Discretionary - Consumer Services - Education 2 4% Consumer Discretionary - Consumer Services - Hotels & Restaurants and Leisure 4 7% Consumer Discretionary - Media 5 9% Consumer Discretionary - Retailing 7 13% Consumer Staples - Food, Beverage and Tabacco 3 6% Financials - Realestate Management 2 4% Health Care - Providers Services 1 2% Industrial - Capital Goods - Machinery 5 9% Industrial - Commercial and Professional Services 9 17% Information Technology - Software Services 4 7% Total 54 100% Turnover Years in Business # Staff Business Owner Education Attainment <$250K 15 28% 1<3 20 37% 1<3 16 30% High School 5 9% $250k<>$1m 13 24% 4<>10 20 37% 4<>10 22 41% Diploma/Trade Certificate 20 37% $1m<>$3m 16 30% 10<>20 6 11% 10<>20 10 19% University Degree 26 48% $3m<>$10m 6 11% 20> 8 15% 20> 6 11% Masters & Doctorate 3 6% $10m> 4 7% Total 54 100% Total 54 100% Total 54 100%
  10. 10. Years in Business & Annual Turnover  37% (20) of SMEs had been in business between 4 to 10 years, and 45% of those businesses generated between $1m to $3m AUD per annum in revenue  100% (14) of the businesses that had over $3m AUD turnover in the sample had been in business for 10 years or longer  All Businesses surveyed had been in business for over 12 months and were financially viable
  11. 11. Annual Planning, Admin staff and Annual Turnover  72% of SMEs surveyed did not have an annual planning process.  Of the 28% that did have an annual planning process, 93% employed of full time administrative staff  50% of businesses with over $3m AUD annual revenues did not have an annual planning process
  12. 12. Maintenance of Financial Statements  The practice of timely preparation of financial statements improved with the increase in annual revenues of the business.  The key driver of the improvement was the requirement to meet tax and external compliance reporting obligations
  13. 13. Understanding of Gross Margins & Break Even Positions  65% of SMEs surveyed did not have gross margin (GM) or break-even (BE) information  89% of SMEs with GM and BE had an administrative function in place.  GM and BE information was available to 83% of SMEs between $3-$10m AUD  In this sample only 25% of the SMEs over $10m AUD revenue had GM and BE information
  14. 14. Use of Accounting Systems  66% of businesses that did not use accounting software were micro businesses that had an annual turnover of $250k or less
  15. 15. Use of ERP  17% of SMEs surveyed employed an ERP system.  Implementation of ERP systems were more likely as the business grew. 75% of SMEs surveyed with >$10m annual turnover deployed an ERP
  16. 16. Key Role of Management Accounting Advisors Proposition 1 The rate of growth of an SME is influenced by the entrepreneurs ability to transfer tacit knowledge from individual motor cognition to organisational motor cognition. A critical role of management accounting information is in the facilitation, measurement and advancement of organisational motor cognition.  65% of SMEs surveyed did not have fundamental management accounting information such as gross margin and break-even information. While all SMEs prepared Financial statements at least once per year.  72% of SMEs surveyed, while financially viable do not prepare an annual plan Decision making was based on ad-hoc reporting and interpreted in the light of proprietary understanding of the industry the entrepreneurs operated. The size of the of a firm was dependent on the success of transferring tacit business knowledge to employees.
  17. 17. Key Role of Management Accounting Advisors Proposition 2 The role of an SME advisor is to complement knowledge gaps with specialised competencies. The opportunity for Management Accounting advisors is to provide the tools and mechanisms to plan the use of resources, measure the progress and success of business activity and enable an accelerated dissemination of tacit knowledge. The specialised competency a management accounting professional provides an entrepreneur is the capability to transpose operational statistics into key performance indicators that align staff accountabilities which facilitates the efficient execution of strategic activity. A skilled management accountant has the potential to influence decision making on the allocation of scarce resources from sales and marketing through to after sales service
  18. 18. The full paper can be accessed at: bail-indonesia/