Considering the fact that SMEs occupy a fair share of a county’s workforce and the important role they play in the economy, most entrepreneurs fail to realize the importance of accounting management and how it can help them in their growth and to operate economically, ethically and efficiently.
For most SMEs, it seems the main focus of management accounting is on control information instead of decision making. This means that the majority of SME owners and managers are likely to make decisions without a financial analysis or with insufficient financial information. There’s also the case where most entrepreneurs opt to undertake the management accounting role.
Management Accounting Tools most SMEs make use of
According to a study, most SME entrepreneurs utilize:
- Informal CVP or Cost-Volume-Profit analysis
- Service/product costs for profitability and pricing analysis
- Working capital measures
In light of this, it become apparent that they did not understand their costs which lead them to make the wrong decisions related to their pricing. Most entrepreneurs also showed a failure to manage their working capital and cash flow effectively.
The type and amount of management accounting taken on are dependent on quite a few factors:
- The quality of the organization’s operations and the setting it operates in.
- The size of the organization
- External stakeholder requirements
- Senior managers’ background experience
- Financial restrictions with regards to cash flow, profitability and credit availability.
Given the fact that most SMEs typically fail within the first five years of their business, it is of paramount importance to use formal budgetary planning, formal budgetary control systems, formal CVP analysis and responsibility centers to continue their operation.
How Management Accounting education can help enterprises prosper
In regards to the cost of using management accountancy tools, it can vary. While Excel spreadsheets are commonly used, an integrated software solution will certainly save entrepreneurs precious time and money.
That being said, SME executives can greatly benefit from the existing management accounting tools that support decision-making like capital expenditure appraisal methods, cost analysis, etc. Other tools will help in dealing with risk including payoff matrices and expected values. It’s important to educate new entrepreneurs on the essential need for working capital management, product costing, etc, so that they can operate successfully.
Lastly, management accounting education is vital to SME executives, particularly when they are operating a business that is growing. Failing to utilize specific tools like responsibility centers might be suitable for a small business, but it is erroneous for a medium enterprise. This is because, at some point when it’s time to elevate the product range, for example, some methods that were disregarded will become highly relevant.