Accounting for Retail Business

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ACCOUNTANTS FOR BUSINESS

Accountants for small business


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Accountants for Small Businessis a campaign aiming to raiseawareness of the value of

professional accountants in SMEs.

This report is the centrepiece ofthe campaign, which will buildpartnerships between ACCAand business associations,government agencies, and serviceproviders in order to providepractical resources and supportfor SMEs investing in internalfinance functions.

ABOUT ACCA

ACCA (the Association of Chartered CertifiedAccountants) is the global body for professionalaccountants. We aim to offer business-relevant, first-choice qualifications to people of application, ability andambition around the world who seek a rewarding careerin accountancy, finance and management.

Founded in 1904, ACCA has consistently held uniquecore values: opportunity, diversity, innovation, integrityand accountability. We believe that accountants bringvalue to economies in all stages of development. We aimto develop capacity in the profession and encourage theadoption of consistent global standards. Our values arealigned to the needs of employers in all sectors and weensure that, through our qualifications, we prepareaccountants for business. We work to open up theprofession to people of all backgrounds and removeartificial barriers to entry, ensuring that our qualificationsand their delivery meet the diverse needs of traineeprofessionals and their employers.

We support our 154,000 members and 432,000 studentsin 170 countries, helping them to develop successfulcareers in accounting and business, with the skills neededby employers. We work through a network of over 80offices and centres and more than 8,400 Approved

Employers worldwide, who provide high standards ofemployee learning and development.

ABOUT ACCOUNTANTS FOR BUSINESS

ACCAs global programme, Accountants for Business,champions the role of finance professionals in all sectorsas true value creators in organisations. Through people,process and professionalism, accountants are central togreat performance. They shape business strategythrough a deep understanding of financial drivers andseek opportunities for long-term success. By focusing onthe critical role professional accountants play in

economies at all stages of development around theworld, and in diverse organisations, ACCA seeks tohighlight and enhance the role the accountancyprofession plays in supporting a healthy global economy.

www.accaglobal.com/ri

The Association of Chartered Certified Accountants,March 2013
http://www.accaglobal.com/accountants_businesshttp://www.accaglobal.com/accountants_business


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Executive summary 4

1. Small business matters 5

2. Accountants for small business: the campaign 6

3. The value of information 7

4. Building SME capabilities around the world 11

5. From shoebox to cubicle 13

6. The many roles of finance professionals 17

7. SMEs demand for financial skills 20

8. Conclusions 24

References 25

Contents

ACCOUNTANTS FOR SMALL BUSINESS 3


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REPORTERS, PRESERVERS ANDCREATORS OF VALUE

Although it is sometimes assumed thatSMEs accounting needs are driven byregulation, they are in fact mostly drivenby genuine business and stakeholderneeds. SME stakeholders, frombusiness owners and management tofinance providers, government agenciesand employees, need the raw materialof the finance function information distilled into actionable insights.

Building the finance function beginsbefore start-up, at least when businessplanning is done properly. Once theybegin trading, micro-enterprises buildfinancial capabilities to ensure

compliance with the law and cementthe owner-managers control over agrowing business. As small businessesmature, their finance teams devote theirtime to the standardisation andmonitoring of business processes, oftenunder pressure from third parties suchas investors or customers; but once thisprocess is complete, the financefunction can reach its potential and helpthe business position itself for growth.

Young businesses rely to a great extenton external accountants and maintainrelationships with them even after theyhave built their own in-house financeteams. This bond, based oncompetence and trust, has earnedpractitioners their reputation as SMEsmost trusted advisers. Accountants inpractice and in-house finance staff arenot competitors, because SMEsdemand for financial skills is not azero-sum game. Rather, financial

ABOUT THE CAMPAIGN

The small and medium-sized enterprise(SME) sector is a major employer offinance professionals. Althoughrelatively few ACCA members careersstart in SMEs, 45% have at some pointin their lives worked for an SME.

ACCA has long recognised this and in2013 it is launching Accountants forSmall Business, a campaign aiming toraise awareness of the value ofprofessional accountants in SMEs, theprocess of building professional financeteams in young businesses, and theneed for Complete Finance Professionalswho can develop with the business.

This report is the centrepiece for thewider campaign, which will buildpartnerships between ACCA andbusiness associations, governmentagencies, and service providers inorder to provide practical resourcesand support for SMEs investing ininternal finance functions.

The Accountants for Small Businesscampaign also emphasises theimportance, in emerging and frontiermarkets, of business formalisation as adriver of economic development,through which governments canachieve predictable revenues and theability to implement policy moreeffectively. The accountancy professionis their natural ally in this process.

Executive summary

expertise and capabilities, correctlymatched to the businesss changingneeds, help SMEs grow and hencedevelop their demand for the morediverse, value-added advice thatproactive practitioners offer them.

This is possible because financialcapabilities in SMEs are not just aconsequence of success but, rather, oneof its causes. SMEs with well-developedfinancial capabilities are much morelikely than others to be growing rapidlyand sustainably. SMEs hire finance staffto help them build or preserve capital,both tangible and intangible, and tocreate product and service innovation.While the impetus for finance functiondevelopment often comes from

investors or supply chain partners, mostof the value stays with the businessitself. In other words, a well-resourcedfinance function is a source ofcompetitive advantage.

THE CASE FOR COMPLETE FINANCEPROFESSIONALS

It is hard to over-emphasise how variedthe role of the finance professional canbe in a small business, where distinctbusiness functions cannot beresourced and formalised. In fast-growing businesses, the role becomeseven wider: entrepreneurs need to hirecomplete finance professionals whocan suppor t an SME today but alsolead the large business it is likely tobecome. The unique breadth of theACCA Qualification ensures thatmembers are able to step into suchroles with confidence.

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Not everyone agrees on what small andmedium-sized enterprises (SMEs) are.Different stakeholders use fairly arbitrarythresholds typically based on headcount,turnover and assets. As a rule of thumb,businesses with fewer than 250employees tend to be considered SMEsin developed countries, while inemerging and frontier marketsbusinesses with 100 employees or moreare seen as large businesses. It makesmore sense to define SMEs on the basisof resources and governance. Smallbusinesses are generally independent,largely owner-managed, and havelimited functional specialisation.

While they may not agree on definitions,policymakers and business leaders

around the world do agree that smalland medium-sized enterprises (SMEs)collectively are big business. Half ofthe worlds private sector output, nearlytwo-thirds (63%) of jobs worldwide and

1. Small business matters

about one-third of all developed-country exports are generated bySMEs. As countries develop, the SMEshare of their economies increases aspreviously informal businesses comeout of the shadows typically with thehelp of an accountant.

The SME sector is a major employer offinance professionals in its own right.Although only about 13% of ACCAmembers careers start in SMEs, 45% ofmembers, including 54% of CFOs, haveat some point in their lives worked foran SME.1

Nor is ACCAs interest in SMEs purelycommercial. Entrepreneurs embodythree core ACCA values: opportunity,

innovationand diversity. For this reason,ACCA has prided itself for over 100years on being the professional bodymost closely aligned with enterpriseand small business.

1. This estimate is derived from the ACCA/IMAGlobal Economic Conditions survey for Q4 2012

and includes members who claimed to be working

in SME finance functions. A definition was not

provided for the sector, so the resulting figures

should be treated with some caution.

PDF AVAILABLE ONLINE


Find out more about SME definitions and

SMEs contribution to the global economy in

the ACCA report, Small business: A global

agenda(ACCA 2010)

For facts on the global economy and finance

labour market see the ACCA / IMA Global

Economic Conditions Survey(ACCA and IMA2013), the largest regular economic survey of

accountants in the world.



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acknowledge the sheer breadth ofthe finance professionals role in asmall business and the need forcomplete finance professionals tohelp run SMEs

focus stakeholders attention andACCAs efforts on the kinds of SMEbest placed to benefit frominvestment in the finance function.

A GLOBAL PERSPECTIVE

The Accountants for Small Businesscampaign is carried out under theauspices of the ACCA Global Forum forSMEs.

Launched in late 2011, the Forum is

convened on a quarterly basis andrepresents over 15 countries and a widerange of professional backgrounds from finance institutions, academicsand professional advisers toentrepreneurs themselves.

The Forum reflects the sectors needsat a global level and facilitates thesharing of best practice. It serves asboth a source of ideas and a soundingboard for ACCA, helping distil trulyglobal insights out of national andregional developments.

Accountants for Small Businessis thecentrepiece of a wider ACCA campaignby the same name. The campaignbuilds on ACCAs long history ofworking to support enterprise globally,but also the strategic direction ofACCAs key global partners, such as theInternational Federation of Accountants(IFAC 2011; IFAC 2012) and the UNConvention for Trade and Development(UNCTAD 2012).

The Accountants for Small Businesscampaign aims to:

raise awareness amongentrepreneurs, SME owner/managers and their advisers of thevalue of employing professional

accountants in-house and theprocess of building a professionalfinance function

cultivate partnerships around theworld between the accountancyprofession and the businessassociations, government agencies,and service providers best placedto promote capacity-buildingamong SMEs

provide practical resources forowner-managers consideringinvesting in the finance functions oftheir businesses and thosesupporting them in their efforts

2. Accountants for small business: the campaign

Find out more about the work of

ACCAs Global Forum for SMEs on the

ACCA website:

www.accaglobal.com/global-forums

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Table 3.1: Users of SMEs financial information and their needs

UsersAcknowledged inIFRS for SMEs?

Purpose

Business owners/investors

Non-managing

shareholders only

Evaluating performance

Deciding on the risk and return of continuedinvestment in the business

Deciding whether profits can be distributed

Management No


Managing cash flow, collecting money due, etc

Diagnosing possible financing needs

Input into planning, forecasts, etc

Supporting recommendations to owners on the

portion of profits to retain and distribute

Supporting recommendations to owners on a

proposed change in the range of products or

business activities

Governments and their

agencies Yes

Assessing tax liabilities

Informing enterprise statistics and national

accounts

Banks and other creditors

(plus suppliers as creditors) Yes

Assessing credit risk


Customers/suppliers Yes

Assessing the risk and returns for those entering a

business relationship with the enterprise

Monitoring the supply chain for efficiency/

sustainability

Employees No

Assessing the risk and returns of employment/

investment in the SME

Assessing the viability of wage demands

Framework adapted from EC (2008). Rankings of information needs taken from Deaconu et al. (2009)

The raw material of the finance functionin businesses both large and small isinformation and the businesssvarious stakeholders need thisinformation distilled into actionableinsight. To understand the role of thefinance function, it is thereforeimportant to understand whosedecisions it is supporting, and whatthese decisions are.

3. The value of information



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Table 3.2: Perceived usefulness of general sources of management information

Information Mean score (15)

Monthly/quarterly management accounts 4.24

Cash flow information 4.06

Bank statements 3.97

Budgets 3.53

State of order book 3.49

Additional accounts for management 3.38

VAT records 2.91

Statutory accounts for shareholders 2.61

Statutory accounts for the Registrar 2.61

Credit rating agency data 2.32

Published industry data 2.20

Source: Collis and Jarvis (2000)

Table 3.3: Frequency of use of specific sources of management information (%)

Source Monthly Quarterly Annually Total

Bank reconciliation statement 63.9 5.5 3.6 73

Profit and loss account 48.1 18.7 20 86.8

Cash flow statement 39.5 14 5.2 58.7

Balance sheet 38.2 14.3 25.7 78.2

Budget variance analysis 36.1 13.2 2.1 51.4

Cash flow forecast 34.3 13.5 8.3 56.1

Budgeted profit and loss account 32.2 16.1 9.4 57.7

Budget plans 21 13.5 8.3 42.8

Costing reports 18.7 5.2 3.1 27

Break-even analysis 9.6 5.7 6 21.3

Standard costing and variance analysis 9.1 2.3 2.3 13.7

Ratio analysis 8.6 7 10.6 26.2

Industry trends 6 7 9.4 22.4

Inter-firm comparison 2.9 4.2 8.8 15.9

Source: Collis and Jarvis (2000)

OWNERS AND MANAGEMENT

The heaviest users of information aboutSMEs tend to be business owners andmanagers themselves, seekinginformation for management, rather thancompliance, purposes. Indeed, goodaccess to information has been shown tohelp make the most of entrepreneursknowledge and experience (ACCA2012a), and in emerging marketsmanagement education is a very strongpredictor of SME reporting activity(Ernst & Young 2011).

Survival and stability are at least asimportant as growth to owner-managers (Jarvis et al. 1996), who placeparticular emphasis on information

relevant to safeguarding liquidity andmanaging cash (Deaconu et al. 2009).Tables 3.2 and 3.3 demonstrate in detailthe information that SME owner-managers use on a regular basis.

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Figure 3.2: Factors affecting the decisions of lenders to SMEs, before andduring the 20089 financial crisis

Figure 3.1: Access to finance for SMEs by country and strength of cash positionCREDIT PROVIDERS

All financial intermediation relies onfour raw materials: information,collateral, control, and risk appetite.Many small businesses, however,struggle to provide collateral orpersonal guarantees and most SMEowners are unwilling to give up controlof the business to outsiders (in the formof either equity shares or covenants).This means that, in comparison withlarge businesses, SMEs access tofinance tends to be determined moreby the quality of financial informationthey can produce and the degree towhich individuals, institutions andgovernment are willing to take the riskof financing them.

In countries with a stronger supply offinancial information and strongerprovisions for creditor protection, SMEsare more likely than in countries withweaker disclosure environments to beable to source all the finance they need,and the financial system is better atdistinguishing between better andworse risks. Figure 3.1 demonstratesthis relationship using data from ForbesInsights (2011). Even within individualcountries, however, businesses withregular management reporting andfinancially trained staff find it easier tosecure loans and overdrafts (BDRC 2012).

Like owners and managers, creditors(including banks and other financeproviders but also suppliers) focus onassessing cashflow and liquidity,although under crisis conditions theywill tend to emphasise security andguarantees at the expense of financialinformation (IFAC and The Banker 2009,see figure 3.2).

%o

fSMEsapplyingforfinancein2

00910

thatobtainedallthefinanceneeded

70%

60%

50%

40%

30%

20%

10%

0%

0 20 40 60 80 100

UK

S. Africa

Canada

Country's World Bank / IFC Getting Credit Rank in 2010 (out of 183)

ChinaItaly

Strong

Medium

Weak

Industry trends

Collateral

Forecast information

Personal guarantees

Key risk indicators

Transaction history

Financial statements + compilation report

Directors/management profiles

Tax return

Cash flow information

Business plans

Credit ratings and references

Financial statements + non assurance report

Financial statements alone

Financial statements + audit report

1 2 3 4 5

Before Added importance during crisis



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Figure 3.3: Estimated shares of total (formal and informal) output in OECDand non-OECD countries in 2009

Source: ACCA (2010)

GOVERNMENTS

Governments are heavy users ofinformation about SMEs and becomemore so as their economies develop.As already discussed in Chapter 1,developed countries do not have muchbigger SME sectors than developingones. More often, they have justmanaged to move more of the healthierparts of their informal economies intothe formal sector (see Figure 3.3)through better infrastructure and publicinstitutions, as well as moreproportionate taxation and regulation(Schneider 2009).

Given a choice, few entrepreneursoperate informally, because doing so

means poor access to finance and publicservices, unenforceable contracts, andthe risk of legal sanctions (Battini et al.2010). Governments, of course, also

EQUITY INVESTORS

Equity investors, such as venture capitalfunds or business angels and, morerarely, investors in listed SMEs, need amuch wider range of information thancreditors because they have to assessboth the upside and the downside oftheir investments.

Although this means they rely less onfinancials than creditors, venturecapitalists pay a great deal of attentionto financial forecasts and profit margins(Ludwigsen 2009), and unrealisticprojections of turnover and profit areone of the most commonly cited dealkillers (Mason and Harrison 1996).Moreover, although they focus on

forward-looking information at theinvestment stage, investors emphasisthen shifts to other types of information,especially information on the businesssability to meet agreed milestones(Wiltbank et al. 2009). The businesssability to provide actionable informationtied to the business planning process isa significant element of what venturecapitalists refer to as investmentreadiness or investability.

EMPLOYEES

Employees are an often-overlookedgroup of SME information users, partlybecause organised labour is rare amongsmaller businesses. Typically, informationon an employers earnings and cashreserves can influence bargaining forwages and benefits. Even so, present andprospective employees may well want toassess the viability of the business, whilethose on contingent remuneration will beinterested in assessing their incentivepay. Moreover, key staff in young,promising businesses will sometimes

take an interest in the business aspotential investors or creditors.

have a great deal to gain from businessformalisation, as this allows them tomonitor and anticipate tax revenues aswell as to improve their control over thesocial impact of enterprises.

Business formalisation is almostsynonymous with the building of thefinance function. Businesses becomeformal when they begin to give anaccount of themselves to the state orbefore the law signing contracts;acquiring licences and permits;demonstrating compliance withemployment or other regulations;paying taxes and social insurancecontributions; tendering for governmentcontracts. Almost all elements offormalisation involve record keeping

and reporting, first by the owner-managers themselves, and ultimatelyby employees hired for this purpose.

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Big business

Formal SMEs

Shadow economy

OECD Non-OECD

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private non-financial serviceproviders with significant SMEofferings: telecoms, logistics,payments, accounting, customerrelationship management (CRM) andenterprise resource planning (ERP)system providers.

The last category of stakeholders arethe silent majority of service providers;although they are less engaged inenterprise policy in most of ACCAsmarkets, they provide the infrastructureon which SMEs rely for growth and arecentral to the working lives ofaccountants in business.

ACCAs engagement in building SMEscapacity focuses on:

supporting training provision forbasic bookkeeping and taxadministration

developing and spreading standardsfor management and governance

Recognising the importance of businessformalisation to multiple stakeholdergroups, as well as the commercial casefor the profession and other serviceproviders, ACCA is working to supportcapacity building and professionalisationin small business in all its markets.ACCAs most important partners in thisprocess include:

business development agencies,both national and international

tax authorities

business associations andrepresentative bodies, includingtheir international umbrella bodies

financial services firms, investor andventure capital associations,exchange operators and capitalmarket authorities

academic enterprise researchersand/or enterprise educators

4. Building SME capabilities around the world

supporting entrepreneurs inbuilding professional networks

attracting and developingenterprise mentors

improving SMEs understanding ofexternal finance providers andsignposting to professional fundingadvisers

demonstrating the value of financialmanagement and helping SMEsbuild relevant skills

guiding SMEs in processmodernisation and the adoption ofinternational standards.

Figure 4.1 describes ACCAs recentcapacity-building partnerships aroundthe world.



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December 2009: ACCA

and the Trinidad & Tobago

Business Development

Company (BDC) sign anMOU to assist the

development of local

businesses through skills

and training provision

October 2009: ACCA

and BSBA (Barbados

Small Business

Association) signMOU to bring greater

professionalism and

accounting rigour to

the SME sector

October 2009: ACCA

and JBDC (Jamaica

Business Development

Corporation) sign

MOU to assist SMEs in

formalising and

modernising their

operations

October 2012: ACCA

and the SME

Development

Agency of Nigeria

(SMEDAN) partner to

improve SMEs ability

to access finance

October 2008: ACCA

and the Zambia

Chamber of Small and

Medium Business

Associations

(ZCSMBA) sign anMOU to improve

financial management

among SMEs

March 2010: ACCA and the

Chartered Management

Institute sign an MOU to

promote professionalism

and ethics in finance and

management

October 2010: ACCA

signs MOU with

Enterprise Uganda to

foster marketing

leadership, human

resource and finance

management skills

among SMEs

January 2011: ACCA

and the Zambia

Institute of Directors

(IoD) sign an MOU to

improve corporategovernance among

businesses in the

country

January 2006:

ACCA and the SME

Development

Association

(SMEDA) of

Pakistan sign an

MOU to promote

SME capacity in

book keeping and

taxation

October 2006: ACCA

and the Vietnam

Chambers of

Commerce andIndustry (VCCI) sign an

agreement to support

SME development in

Vietnam and the Pac ific

February 2010: ACCA

and Singapores ASME

(Small and Medium Size

Enterprise As sociation)

sign an MOU to

develop a framework of

cooperation on training

and development and

joint networking

opportunities

Figure 4.1: Building SME capabilities around the world

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STAGE 2: COMPLIANCE ANDCONTROL

As businesses begin to trade in earnest,management reporting, formal businessplans and financially trained staff areengaged in order to allow theentrepreneurs to focus on thecommercial direction of their business.Rapid growth tends to accelerate thisprocess of formalisation and businessestypically leave this stage once theybreak even or once they have more thana handful of employees.

At this stage, the finance function ismostly concerned with aligning staffincentives with business objectives,putting internal controls into place and,

in the case of newly incorporatedbusinesses, helping the company liveup to its statutory obligations. Aprofessional financial manager is hiredfor the first time along with the adoptionof management accounting practicesand software as a bundled pair.

Good access to information makes iteasier for founders to put their humancapital to good use and this helpsstart-ups to reach break-even sooner.This is often the case for repeatentrepreneurs, whose presence inmanagement teams is known to beassociated with rapid growth.

ACCA research has demonstrated thatthe SME finance function developsthrough four relatively distinct phases.Understanding the businesss needs ateach of these stages allows businessowners and managers to plan for thekinds of skill and resource they willneed; and a solid business plan for thefinance function makes it easier todemonstrate how it adds value.

STAGE 1: PRE-START-UP PLANNING

Entrepreneurs typically draw upbusiness plans for finance providerseither before start-up or at least beforerevenues are earned. Such businessplans are often perfunctory and manyare never used again after the initial

round of funding. Nonetheless,business planning that sets specificobjectives and is intended to berevisited in order to assess performanceis an early finance function. This istypically carried out with the assistanceof a professional accountant, typicallyan external practitioner. Small andmedium-sized practices (SMPs) are keyproviders of support at this stage,combining technical competence andcommercial awareness with a first-handunderstanding of the challenges ofrunning a small business and the abilityto provide one-to-one support(Blackburn and Jarvis 2010).

5. From shoebox to cubicle


For more information about ACCAs research

into the four stages of finance development,

see Driving SME Growth Through an Evolving

Finance Function(ACCA 2012A)


A rigorous study of why and how SMEs use

advice can be found in the ACCA research

report SMEs and their Advisers: MeasuringTrust and Confidence(Schizas et al. 2012)



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STAGE 4: ACCOUNTING FORGROWTH

At this stage, businesses have distinct,specialised and professionally managedfunctions in place and are trying tobalance the need for standardisationwith that for responsiveness to marketconditions and customer needs.

Management reporting, businessplanning and the use of trained financestaff are now tied to supporting growth.The finance functions role expandssubstantially in more commercial andstrategic directions. The focus tends tobe on enabling businesses to accessfinance, make and assess the case fornew products and services, monitor the

businesss supply chains and manage itsheadcount.

ACCAs research (ACCA 2012a) alsoshows that financial capabilities in SMEsare not just a consequence of growth,but one of its causes. Even afteraccounting for turnover, headcount, ageand sector, SMEs with well-developedfinancial capabilities are much morelikely than others to be growing rapidly(at over 30% a year over three years ormore) and still retain a low or minimalrisk rating (see Figure 5.1).

STAGE 3: STANDARDISATIONAND MONITORING

At this stage, the business has startedto develop some diversified internalresources and to use financialinformation to optimise its internalprocesses. Moreover, it has becomebetter at producing standardisedinformation and feeding this into formalbusiness plans and managementdecisions. Financially trained staff arehired to monitor cash flow and managecredit as well as to report on theprogress and resource implications ofimproving business processes.

Many businesses at this stage alsoexperience higher needs for financial

skills if they are engaged in qualitymanagement or doing business online.More generally, external pressures fromventure capitalists and/or supply-chainpartners mean additional demand formanagement information. Businessestypically remain at this stage until theyhave roughly 20 to 30 members of staff,although in more labour-intensivesectors this threshold can be higher.


Learn more about how businesses achieve

and manage rapid growth in the ACCA-

commissioned report High Growth SMEs:

Understanding the Leaders of the Recovery

(Delta Economics 2012)

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Figure 5.1: The case for financial capability in UK SMEs

100

90

80

70

60

50

40

30

20

10

0

2006

2007

2008

2009

2010

%o

fUKbusinessessurviving

Years from establishment

0 1 2 3 4 5

Business born in:

100

90

80

70

60

50

40

30

20

10

0

Formal business plan

Regular management accounts

Financially trained staff

%o

fUKbusinesseswithplanning,

reportingorstaffcapabilities

Turnover

30% per year

Risk rating minimal

2.9%

7.5%

4.4%

10.5%10.0%

17.4%

Source: BDRC SME Finance Monitor

Source: BDRC SME Finance Monitor



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BUSINESS ADVICE: CONTEST ORRELAY RACE?

As discussed earlier, SMEs do not startout with in-house finance staff and willtend to rely on external practitioners for agreat deal of strategic and day-to-dayadvice in their early days. It is this recordof service to growing businesses that hasearned practitioners, especially SMPs, thetitle of most trusted advisers to businessin many parts of the world (Blackburn andJarvis 2010). This will gradually change asSMEs build in-house capabilities and, inthe short term, accountants in businessmay appear to be gaining at the expenseof their colleagues in practice. This is avery limited view of the sector and,indeed, the profession.

ACCA does not see accountants inpractice as being in competition within-house finance staff, because SMEsdemand for financial skills is not fixed.Rather, financial expertise andcapabilities, correctly matched to thebusinesss changing needs, help SMEsgrow and develop demand for morediverse, value-added advice.

This is demonstrated by ACCA-commissioned research (Schizas et al.2012) among SMEs in a diverse group of

six countries (Canada, China, Italy, SouthAfrica, Singapore and the UK) As Figure5.2 shows, SMEs with more than 50employees progressively cease to rely onthe expertise of external advisers as theybuild appropriate resources in-house.This process is more gradual than theheadline figures make it appear SMEsare likely to be swapping externalresources for internal ones as they grow.

External accountants do not generallylose clients during this process, but

rather progressively move towards highervalue-added, non-compliance serviceson the basis of the trust and goodwillbuilt up with clients over the years (seeFigure 5.3). As Blackburn et al. (2010) and

60

50

40

30

20

10

00 1 to 9

%o

fSMEsdemonstratingexpert-

and/ortrust-orientate

dbehaviour

10 to 49 50 to 99 100 to 249

Headcount

Need trusted advisers

Need expert advisers

Source: Schizas et al. (2012)

80

70

60

50

40

30

20

10

0

Advice on core areas of accountants expertise (financing, fin. management and tax)

Advice on non-core areas in which accountants are not automatically assumed to be experts

0 1 to 9

%o

fSMEsusingadvice

10 to 49 50 to 99 100 to 249

Headcount

Source: Schizas et al. (2012)

Jarvis and Ribgy (2011) explain, the mostproactive practitioners organise thisactivity as a distinct service offering andeither invest in additional human capitalor use their professional networks toestablish themselves as trusted brokersof professional services. Less proactivepractitioners can still offer value-addednon-compliance services in a profitableway for a while through a minimalist

offering that bolsters their core services.

More often than not, larger SMEs useboth external accountants and in-housefinance staff, whose services are

Figure 5.2: SMEs needs for trusted vs. expert advisers, by headcount

complementary. For instance,roundtables on SME access to financeheld by the Federation of EuropeanAccountants (FEE) have found that, innegotiating short-term credit lines withlenders, practitioners have often reliedon the support of in-house staff (FEE2012). Similarly, ACCA and CBI (2010)have found an interesting distribution oflabour in SMEs efforts to manage their

cash flow, with external accountantsalmost always being involved in planningand managing cashflow but lessfrequently in setting up or monitoringthe credit and collection processes.

Figure 5.3: SMEs use of accountants advice on core versus non-core areas,by headcount

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producing templates for this.Moreover, by virtue of theirpositions, they have superior accessto information about the business.

The jargon-busters: because theyare accustomed to technical andfinancial concepts and language,accountants make excellent liaisonofficers with third parties, such asfunding providers and consultants,whose working language is differentfrom that of entrepreneurs.

The true networked workers:through their professional bodies,qualified accountants have access toa network of professionals that ismuch wider in both geographical

and thematic scope than that of thebusiness owner-manager. This iseven more true of accountantsholding a globally recognisedqualification such as ACCA.

By combining ACCAs four-stage model(see Chapter 5) and IFACs classificationof finance functions (IFAC 2011), it ispossible to map the many roles thataccountants are required to fulfil in smallbusinesses. Table 6.1 demonstrates theresults of this exercise.

It is hard to over-emphasise how variedthe role of the finance professional canbe in a small business, where distinctbusiness functions cannot be resourcedand formalised. In fact, properlyresourced and formalised businessfunctions occur quite late in a businessslife hence businesses innovationpotential peaks at medium size (ForbesInsights 2011).

As a rule, four characteristics of financeprofessionals drive this diversity of roles.

The regulated people:professional accountants in SMEsare often the only professionallyqualified members of staff. Initially,this prompts employers to use

them in a range of compliancetasks, as they are at ease withregulated environments that canfrustrate entrepreneurs and purelycommercial staff. In reality, though,a lot of truly commercial activityworks in a similar way: applying forfunding, tendering for contracts orfor quality managementcertification are common examples.

The numbers people: accountantsin SMEs are accustomed to dealingwith standardised information and

6. The many roles of nance professionals


To find out more about how different

business and individual characteristics

support innovation, see the ACCA-sponsored

research report Nurturing Europes Spirit of

Enterprise(Forbes Insights 2011)



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Table 6.1: Roles of finance professionals (internal and external) working for SMEs by level of finance function development

Broad roles IFAC (2011) Pre-start-up Compliance and controlStandardisation andmonitoring

Accounting for growth

Personal advice

to entrepreneurValue enabler

Enterprise mentor

Financial adviser

Enterprise mentor

Financial adviser Financial adviser Enterprise mentor

Financing

Creditworthiness,

Investment-readiness coach

Finance provider liaison

Creditworthiness,

investment-readiness coach


Creditworthiness,



Creditworthiness,



Compliance

and governanceValue preserver

Corporate secretary

Tax & payroll administration

Corporate secretary

CSR adviser

Shareholder liaison


Internal auditor

Risk manager

Corporate secretary

CSR adviser

Shareholder liaison


Internal auditor

Risk manager

Operational HR manager

HR manager

Quality manager

Cashflow and credit manager

HR adviser

Quality manager

Cashflow and credit manager

Head of procurement

Reporting

Value reporter

Book keeper

Compiler of statutory

reports

Compiler of management

reports

Book keeper


reports


reports

Auditor liaison

Book keeper


reports


reports

Auditor liaison

Commercial

Value creator

Business development &

tendering manager


tendering manager


tendering manager

Strategic

Business analyst/planner

Intangible assets consultant


Intangible assets consultant


Change manager

IT/ERP/CRM systems lead

e-commerce consultant


Product / service innovation

champion

Supply chain manager, client

liaison

18


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THE COMPLETE FINANCEPROFESSIONAL

Within SMEs, a very small number ofprofessionals (usually one) need toperform multiple roles, and the fasterthe business grows, the more rapidlythe content of the finance professionalsrole will change.

Not all SMEs are set up for massivegrowth but among those that are thepace is blistering: high-growth firms aremost likely to reach their maximumgrowth rate just three years afterregistration (Delta Economics 2012).This means that entrepreneurs withsubstantial growth aspirations need tohire into their fledgling businesses

finance professionals who can lead alarge business in just a few years time.

The ACCA Qualification has beenuniquely designed to develop the fullrange of competences financeprofessionals in business need to havetoday; this ensures that members willbe able to respond to the needs ofgrowing SMEs from day one (Table 6.2).

Table 6.2: A summary of the competences developed through theACCA Qualification

Corporate reportingPreparing high-quality business reports to support stakeholder

understanding and decision making.

Leadership and managementManaging resources and leading organisations effectively and

ethically, understanding s takeholder needs and priorities.

Strategy and innovation

Assessing and evaluating strategic position and identifying

imaginative options to improve performance and position;

implementing strategies to ensure cost effective and innovative

business process improvement and change management.

Financial management

Implementing effective investment and financing decisions within

the business environment in areas such as investment appraisal,

business reorganisations, tax and risk management, treasury and

working capital management, to ensure value creation.

Sustainable managementaccounting

Assessing, evaluating and implementing management accounting

and performance management systems for planning, measuring,

controlling and monitoring business performance to ensure

sustainable value creation.

Law and taxation

Understanding laws and regulation relating to business;understanding taxation, regulation and systems, to establish tax

liabilities for individuals and companies, and minimising these

liabilities by using tax planning.

Audit and assurance

Providing high-quality external audits; evaluating information

systems and internal controls; and gathering evidence and

performing procedures to meet the objectives of audit and

assurance engagements.

Governance, risk and control

Ensuring effective and appropriate governance; evaluating,

monitoring and implementing appropriate risk-identification

procedures; designing and implementing appropriate and

effective internal audit and control s ystems.

Stakeholder relationship

management

Managing stakeholder expectations and needs; aligning the

organisation to their requirements; engaging stakeholders

effectively and communicating relevant information.

Professionalism and ethics

Understanding and behaving in accordance with fundamental

principles of ethical behaviour and personal ethics; ensuring

implementation of appropriate corporate ethical frameworks.



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1. SMEs hire accountants to help thembuild or preserve capital, bothtangible and intangible.Financerecruitment, capital spending, qualitymanagement and product/serviceinnovation go hand in hand. SMEs letgo of accountants less readily thanlarger organisations, usually whencash flow is tight and they are forcedto lose productive capacity in otherways. When business confidence isdangerously low, some SMEs will tryto reallocate excess finance staffrather than lose them.

2. Finance professionals in SMEs arecrucial liaison staff for majorcustomers and suppliers.Because ofthis, SMEs find it hardest to lose

experienced finance staff when theyare embedded in major supplychains that impose quality standardsor when they are seeking to invest inquality management. In fact, in suchcases, SMEs often find they have astrong incentive to invest in financeskills and the personal developmentof finance staff.

Another way of testing whether and, ifso, how finance professionals add valueto SMEs is to monitor when and whySMEs invest in finance skills whetherthrough recruitment or training andwhy some choose to let finance staffgo or stop investing in finance skills.The following analysis is based on asample of 2,300 ACCA membersresponding to ACCAs GlobalEconomic Conditions Survey overtwo years (ACCA and IMA 2013).2

2. This analysis is based on data from Q1 2009 to

Q1 2011 in order to ensure direct comparability.

7. SMEs demand for nancial skills

3. In SMEs, temporary recruitment israre, but whereas large businessesmay use temporary staff as asubstitute for permanent staff, SMEsuse temporary finance staff tactically,when testing the water in newmarkets or adapting to changes incustomer preferences.Suchappointments are often at a seniorlevel the use of an interim financedirector, for instance, allows thebusiness to tap into the expertise itneeds without overextending itself.

4. Finance employment in SMEs cansuffer under cost-cutting drives,but finance professionals are alsofrequently essential in achievingsavings.This often means that

finance functions are boosted byeconomic uncertainty as well asgrowth but an actual recession willtend to reduce their headcount.

5. Finance is a source of competitiveadvantage, particularly for SMEsembedded in broader supply chains.Because of this, outsourcing of corefinance functions is rare amongSMEs, and many often end upbringing them back in-house afteroutsourcing, under pressure fromcustomers and the process ofquality management.

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Figure 7.1: Perceptions of the finance function among executives in European SMEsLINKS TO INNOVATION

The link between the finance functionand innovation is corroborated byForbes Insights (2011), a pan-Europeanstudy of entrepreneurial attitudes andinnovation sponsored by ACCA. Thisstudy shows that SMEs are more likelyto succeed in producing innovations iftheir finance functions are seen ashaving a good understanding of theneeds of entrepreneurial firms. Thestudy also shows that, all other thingsbeing equal, SMEs finance functionsare seen as more adequately resourcedby business executives engaged inproduct or service innovations as wellas operational improvements than byexecutives who are not engaged in

these. While most business executivesin European SMEs claim to haveadequately resourced finance functionswith a good understanding of thebusiness, about one in three does not(Figure 7.1).

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Strongly agree

Agree

Dont know/ NA

DisagreeStrongly disagree

Has the right

resources to help

Understands the

needs of the business

Comfortable

taking risks

Large SME Large SME Large SME

14%

48%

6%

25%

7%

12%

44%

11%

24%

9%

10%

47%

7%

28%

8%

12%

45%

12%

24%

7%

5%

34%

8%

38%

16%

5%

31%

11%

37%

16%

Source: Forbes Insights (2011)



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1. Reduce distractions on the owner-manager at the earliest opportunity.Few business owner-managers arefinancially trained, and even thosethat are can rarely justify theopportunity cost of micro-managingeven a very modest finance function.A common example of poorpractice is credit management, forwhich even fairly mature businessescan over-rely on the business owner(Paul and Boden 2012).

2. Ensure the business can grow intoits financial systems.Businessesrarely grow smoothly, but in fits andstarts as their plans and resourcesmeet the right external conditions(Blackburn et al. 2008). Businesses

need to allow for sharp increases inthe information needs ofmanagement or important thirdparties and develop the systemsthey need ahead of time. Thoseembedded in major supply chainsoften invest in financial capabilitiesfollowing pressure from buyers(ACCA and IMA 2013). Likewise,venture capitalists often requirebusinesses in which they invest tooverhaul their in-house financialcapabilities (ACCA 2012a).

INVESTING IN FINANCIALCAPABILITY

Small but growing businesses have tomanage scarce resources and jugglecompeting objectives. As a result theyare faced with two dilemmas whenconsidering investments in financialcapability. First, why use these resourceson finance when they could be spent onmarketing, capital expenditures, or topay the owners? Second, why buildresources in-house when an externalpractitioner can provide good services?The following rules of thumb, based onACCAs research, can help navigatethese dilemmas.

3. Avoid outsourcing functions thatunderpin competitive advantage.Many of the earliest accountingneeds of enterprises, especiallythose related to regulatoryobligations, can best be served byexternal accountants. Similarly,purely administrative tasks can be,and often are, outsourced to athird-party specialist. Theproduction of managementinformation underpinningcommercial decisions, on the otherhand, needs to be kept in-house inmore mature businesses. The morethe business relies on uniqueresources, the more finance tends tobe part of its competitiveadvantage. In a rare test of this view,

Kamyabi and Devi (2011) confirmthat SMEs with more unusual assetstend to avoid outsourcing theirfinance functions.

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To find out more about the career aspirations

and prospects of ACCA students, see ACCA

Students and Affiliates Salary and Career

Survey(ACCA 2012b), the largest survey of

student accountants in the world

6. Weigh the value of more timely and/or detailed information against thecost of producing it.Information iscostly to produce, so SMEs oftenhave to sacrifice timeliness (ACCAand CBI 2010). Using an externalaccountant may therefore not becost-effective when information isneeded on a very frequent and adhoc basis. Investment inmanagement information systemsand/or e-commerce capabilities,however, can reduce theincremental cost of producinginformation in-house, thusincreasing SMEs demand forfinancially trained staff.

7. Avoid fire fighting through good

day-to-day financial management.Despite the well-documentedbenefits of external advice, businessowners considering applying forexternal finance or seeking toimprove cash flow often find thattheir chances of success are lockedin by the time they become awarethat they need finance, owing to theway the business has been managed(BDRC 2012; Paul and Boden 2012).Solid business planning could helpidentify the timing of such needsand potential problems so thatfinancial capabilities can bedeveloped beforehand.

4. Think beyond full-time andpermanent staff.Growing businessesmay not always be able to afford tofill key financial roles on a permanent,full-time basis, but may find that theydo not need to if all they need arethe skills to see a particular growth-phase project through to completion.Recent years have seen a growingtrend towards the employment ofinterim finance directors by SMEs;others might engage staff on apart-time basis or even hire anindependent practitioner for a whileas a virtual employee.

5. Train to retain.SMEs can rarely offerfinance professionals the financialrewards larger companies will. The

most secure way to retain staff in theSME finance function is to supportthem in becoming qualified and toprovide continuous training and aclear career path aligned to theneeds of the business.

DID YOU KNOW?

Of all ACCA students and affiliates:

81% plan to lead a finance teamat some point in their careers.

66% plan to start their ownbusiness at some point intheir careers

Source: ACCA (2012b)



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Policy-makers need to bear this in mindwhen targeting SMEs financialdisclosures for deregulation. Regularfinancial reporting is just one of theoutputs of day-to-day managementreporting, which is not a burden, but avalue-added service to the business.

To unlock the full potential of SMEsfinance functions, the accountancyprofession needs to build strongerpartnerships with the wide range ofservice providers that shape theirdaily work.

The profession also needs to developcloser ties with governments around theworld with the explicit purpose ofaccelerating capacity building and

developing professionalism amongsmall businesses. Increased businessformalisation is a win-win propositionthat can deliver faster and more resilienteconomic growth, more and betterquality jobs and more sustainablepublic finances.

The development of a professionalfinance function transforms smallbusinesses and helps release theirpotential. Simply put, SMEs with well-developed finance teams achieve faster,more sustainable growth for longer.

To achieve this, finance professionalsin SMEs need a broad skillset andgrowing businesses need to buildfinancial capabilities that they cangrow-into. This includes hiring ordeveloping finance professionals whocan run the large businesses that theymay soon become.

This proactive approach is critical to thedevelopment of young businesses.From accessing finance and managing

cashflow to managing employmentrelations and protecting intangibleassets, early planning and capacitybuilding in-house can achieve at amodest cost what no amount of last-minute advice can deliver later.

8. Conclusions

Finally, both governments and theaccountancy profession need toencourage and contribute to furtherresearch and policy efforts aimed atraising awareness among businessowners of the importance of developinginternal finance functions and thebusiness value they create.

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BDRC (2012), SME Finance Monitor Q22012: The Mid-Year Review, September, accessed 28 January 2013.

Blackburn, R. and Jarvis, R. (2010), TheRole of Small and Medium Practices inProviding Support to Small and MediumSized Enterprises, IFAC SMP CommitteeInformation Paper, April ,accessed 11 February 2013.

Blackburn, R., Carey, P. and Tanewski,G. (2010), Business Advice to SMEs:Professional Competence, Trust and

Ethics, ACCA Research Report no. 119, accessed 11February 2013.

Blackburn, R., Kitching, J., Hart, M.,Brush, C. and Ceru, D. (2008), GrowthChallenges for Small and Medium-SizedEnterprises: A UKUS ComparativeStudy, accessed 3February 2013.

Collis, J. and Jarvis, R. (2000), HowOwner-managers Use Accounts , accessed3 February 2013.

ACCA (2010), Small Business: A GlobalAgenda, accessed 14 January 2013.

ACCA (2012a), Driving SME GrowthThrough an Evolving Finance Function accessed 25January 2013.

ACCA (2012b), ACCA Students andAffiliates Salary and Career Survey 2012, accessed 3 February 2013.

ACCA and CBI (2010), Small BusinessFinance and the Recovery, accessed 02 February2013.

ACCA and IMA (2013), Global EconomicConditions Survey Q4 2012,accessed 2 February 2013.

Battini N., Kim, Y.B., Levine, P. andLotti, E. (2010), Informal Labour andCredit Markets: A Survey, IMF StaffWorking Paper WP/10/42 February, accessed 3February 2013.

References

Deaconu, A., Nistor, C. and Popa, I.(2009), Analysis of the StakeholdersNeeds and Their Inference UponFinancial Reports of SMEs, Journal ofInternational Business and Economics, 8(1): 3952.

Delta Economics (2012), High GrowthSMEs: Understanding the Leaders ofthe Recovery, accessed 28 January 2013.

EC (European Commission 2008),Accounting Systems for SmallBusinesses Recommendations andGood Practice Final Report of theExpert Group, November. , accessed 3February 2013.

Ernst & Young (2011), 2010BaselineSurvey of Small and Medium Enterprisesin Uganda, accessed 3February 2013.

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