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How Can SMEs Implement Integrated Reporting? A Starter Kit
by Paul Thompson, Director, European Federation of Accountants and Auditors for SMEs | December 14, 2017 |
As a follow up to my article on why small- and medium-sized entities (SMEs) should consider integrated thinking and reporting, this article helps SMEs get started in practical terms, including how to start the journey and useful resources.
For good reason, SMEs often complain that they are too busy to even consider taking on integrated reporting. But insufficient thought today about tomorrow’s strategy means SMEs may end up simply here today, gone tomorrow. Integrated reporting can help ensure SMEs grow and prosper in a way that can have a positive impact in all senses of the word: economically, socially, and environmentally. And the integrated reporting journey, with the right road map, need not be a difficult one.
While integrated reporting may differ in an SME context as compared with a large listed entity, especially as to sophistication and extent, the goal of thinking in an integrated manner will be advantageous if not already embedded. The principle of connectivity should inherently be easier for SMEs. SMEs can use the concepts embodied within integrated reporting as a business improvement tool. It does not mean more reporting, rather better reporting: concise, relevant, and accessible. It does not mean more mandatory reporting but rather voluntary reporting that is responsive to the information needs of users. It does not mean yet another report, rather a basis for the rationalization and harmonization of existing reports and communications.
Ultimately, integrated reporting may be better suited to larger SMEs, which have a number of external stakeholders seeking a better understanding of the business and its value story through better communication. In this way, SMEs can lead integrated thinking and reporting’s development rather than having to adopt as a result of supply-chain pressure. Let’s start by burying a few misconceptions.
Removing Barriers to Integrated Reporting
Integrated reporting is not about more reporting or endless detail. While it’s important for an integrated report to include sufficient context for a reader to understand your SME’s strategy, governance, performance and prospects, it should not be burdened with less relevant information. Where appropriate, an integrated report can link to information elsewhere, like more detailed information (e.g., full statutory financials), relatively static information (e.g., a list of production sites), or external sources (e.g., economic forecasts on a government website).
Integrated reporting is not “just adding another report.” The flexibility of integrated reporting means it can be used as a springboard to rationalize and harmonize other reports and communications. Depending on jurisdiction, in time an integrated report may replace some obligatory, but otherwise redundant, reporting requirements. For example, it may enable rationalization of reporting through merging financial, sustainability, and governance reports, and with savings in report production and distribution costs. It may also become part of the supply chain reporting suite demanded of SMEs by larger customers.
An evolutionary step-by-step approach might be the best approach to integrated reporting implementation, according to Stratton Craig. SMEs can transition from conventional annual reporting to integrated reporting over a few reporting cycles. This will enable SMEs to leverage and incrementally adapt existing reporting structures and processes and put new systems in place to engage with staff, stakeholders, and potential investors gradually.
Specific Applications of Integrated Reporting to SMEs
SME Seeks Buyer
A prospective buyer will be paying for future profitability and cash generation. As such, they are interested in knowing the value creation story: about the capital base available for trading and growth (financial capital); the tangible assets available for production (manufactured capital); the processes and intellectual property that can be used (intellectual capital); the expertise and know-how of employees and management that can be leveraged (human capital); the key connections it has with its customers and suppliers (social and relationship capital); and the proximity and access to resources like water, power, and infrastructure (natural capital). A buyer needs to understand the business beyond what can be gleaned from historic financials.
SME Seeks Finance
SMEs may seek funds to acquire a competitor, adopt new technologies, spend on research and development, replace outdated equipment, expand into new markets, etc. It may seek these funds via equity or debt, family, friends, venture capitalists, crowdfunding, banks, the markets, or other sources. Whatever the reason, type and source, the SME will need to convince finance providers of its ability to create sufficient value to pay dividends or interest and repay capital. They’ll also want to see evidence of how the business identifies and manages key risks. These financiers, like prospective buyers, need to understand the business beyond what can be understood from historic financials. For service providers with little in the way of tangible assets and for start-ups with little or no financial history, integrated reporting is potentially even more persuasive as it stresses capitals other than financial. According to the B20’s Task Force on SMEs and Entrepreneurship, integrated reporting is expected to facilitate the ability of SMEs to raise finance.
SME Seeks Contract
Increasingly, government agencies and not-for-profit organizations seek commercial partners that can supply the goods and services needed and do so in a manner that's both reliable, ensuring continuity of supply in the long-term, and responsible, ensuring reputational risk is mitigated. Tendering processes often seek to understand the characteristics of the businesses that tender that may extend beyond its ability to reliably and cost effectively deliver to include its ethical stance, corporate social responsibility, and community ties. Integrated reporting can provide this.
Embracing integrated thinking is the overarching theme: integrated reporting is dependent on, and helps achieve, integrated thinking. Connectivity is critical for the benefits of integrated reporting to be realized.
Let’s now examine the initial steps SMEs can take as part of their integrated reporting journey.
Step 1: Issue a statement of intent. Advise stakeholders of your intentions: briefly explain the aims, ambitions, and rationale and consider reaffirming a commitment to good governance, transparency, long-term strategic thinking, and sustainability. It should also outline the implementation journey, including timeframe and key milestones.
Step 2: Conduct a stakeholder mapping exercise. Identify principal stakeholders, such as primary customers, staff, local community, and bank. SMEs need to understand who its stakeholders are and their expectations of the business today and tomorrow.
Step 3: Think about value creation. In what ways does the business create value? Does it manufacture goods or provide services? Does it invest in the local community? How does it look after its employees?
Step 4: Consider the business model. Are your stakeholders highlighting any risks or opportunities to managed or leverage? How well does your business model and strategy support value creation? Does your business model reflect your stakeholders’ expectations? Do you need to adjust your business model and strategy?
Step 5: Determine what resources are needed. Now is the time to consider required resources to implement any changes to your business model and strategy. These include attracting and retaining new staff, enhancing product design and innovation, etc.
Step 6: Improve cross-organization communication. Are the right people talking to each other internally? Is enough being done to break down silos and encourage cross-organizational communication and engagement with business strategy?
Many businesses, especially SMEs, will reap most of the benefits of integrated reporting from the integrated thinking it demands. For some, if not most, SMEs the final report, if there is one, will be the icing on the cake. The final report will need to pass a litmus test for clarity and conciseness to ensure its benefits far exceed its costs. Yen-pei Chen outlines some key approaches to passing this test. These include focusing on material items both in terms of length and topics and using various presentation techniques to enhance navigability and readability, such as cross referencing and links to additional materials online. For the report to yield the greatest benefit, it will need to reflect the challenges and opportunities unique to the SME.
- Creating Value for SMEs through Integrated Thinking: The Benefits of Integrated Reporting
- Integrated Reporting: Focus on Integrated Thinking—a handbook on the change journey with step-by-step stages for companies to follow
- Preparing an Integrated Report: A Starter's Guide—practical suggestions
- Integrated Reporting for SMEs. Helping Businesses Grow: Case Studies—examples of how SMEs are using integrated reporting to grow their business
- Integrated Reporting Examples Database
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