Performance and Financial Management: Key Factors for Small- And Medium-Sized Entities’ Survival in a Volatile Environment

Robyn Erskine, Johnny Yong | January 6, 2020 |

According to the Small Business Administration, (SBA) 80% of small businesses established between 2005 and 2017 survived past their first anniversary. Unfortunately, only about half of these businesses see their fifth anniversary. And only one in three small businesses typically get to the 10-year mark. While data cited here is for the United States, other studies suggest a similar trend globally.

These statistics are a cause for concern. According to the World Trade Organization, SMEs represent over 90% of the business population, 60-70% of the employment base, and 55% of Gross Domestic Product (GDP) in developed economies. Additionally, a 2017 OECD Report claims SME’s can contribute as much as 45% of total employment and 33% of GDP in emerging economies.

While there are a variety of reasons why SMEs ultimately fail, financial management skills and performance are two of the most often-cited explanations. Small- and medium-sized practices (SMPs) can play a critical role in helping these SMEs to navigate an increasingly volatile operating environment.

The Importance of Performance and Financial Management

Studies suggest low financial literacy levels and a lack of financial discipline may be reasons for the poor track record of SME’s (OECD Report, 2016). Small businesses can make poor decisions due to their inability to identify key metrics for their business performance.

IFAC research highlights that accountants from SMP’s are the most frequently utilized source of business advice for SME’s. Furthermore, accountancy or business advice receives by SMEs from SMPs is associated with better performance for example, improved growth and profitability, better survival rates and decision making. 

In addition, the literature review The Role of SMPs in Providing Business Support to SMEs—New Evidence highlighted that:

  • Factors driving SMEs’ demand for business advice from SMPs, among others, include company-related factors (i.e., size, debt, age, growth, and available resources) and environment-related factors (i.e., economic conditions, including regulations, and competition).
  • Market segmentation (e.g. start-ups, growth ambitions etc.) will impact the demand and type of advice provided.
  • SMEs seeking business advice tend to be larger and younger and carry higher levels of debt or have greater aspirations to obtain new funding.


SMPs can serve as trusted advisers and are the ideal partner to help nurture, grow and develop SME clients. Helping clients build strong, successful businesses can also lead to new income streams for SMPs. 

For example, many organizations struggle to prepare accurate and meaningful financial accounts. SMP’s can play a critical role in helping prepare these accounts, while also providing the context found within the numbers. For many owners, simply having someone ‘demystify’ the financial information and provide meaning to the numbers allows them to make informed decisions regarding their future operations.

The examples and key SME concerns as elaborated below are a result of discussions at a recent IFAC SMP Committee meetings, which involve practitioners from around the world sharing their perspectives and insights.

Examples being shared of how SMPs help SMEs to ensure they’re running their business efficiently:

  • An SME is experiencing falling profits and increasing write offs due to bad debts.  An initial review determines poor credit control being exercised by the business as the culprit.  While sales are increasing, the customers are not credit worthy (hence the increased in bad debts, which in turn effected profits). The practitioner is able to understand this outcome and suggest actions to help correct the situation. 
  • An SME ‘s financial performance is deteriorating due to an increase in stock levels caused by a slowing sales environment. The SMP advises on the cashflow risks associated with too much of the company’s resources being tied up in stock, as well as the increased risk of stock obsolescence that can result in an inability to sell the stock. The practitioner is able to identify these issues quickly and suggest strategies to manage the stock holding before it reaches an unhealthy level.
  • An SME, which had been operating for several years, posts weaker than normal results and suggests that it is due to competition and price undercutting. The SMP helps the organization’s management to develop a series of short, medium- and long-term strategic plans. The plans are refreshed on a regular basis to ensure it is nimble and thoughtful in responding to competition and price undercutting. These strategies help to reverse the company’s sliding fortune over time.
  • An SME approaches an SMP on ways to enhance its business performance. The SMP establishes a proper financial accounting and reporting system (complete with profitability margins, expense ratios, cashflows, taxes and capital investments) which can be easily monitored. The owner finds a regular review of these indicators particularly insightful and, armed with accurate, insightful data, is now more confident in making decisions.
  • The management of an SME consults with an SMP because they have decided to exit the business. Often, in a situation that requires a quick disposal, businesses cannot be expected to realize a “good” value.  However, with guidance from the practitioner, the management can develop and initiate a viable planned exit strategy which leads to a better valuation for the business.     

Top Tips - What Are SMEs’ Main Concerns?

Below are some common questions asked by SME clients and what SMPs can do to help:  

Profitability vs Cashflows

My business is profitable; so why do I not have more cash in my bank account?

One of the big puzzles for many SMEs is the difference between profitability and cashflow. While an SME may see an increase in sales and in turn, profit, much of the actual cash could be tied up in receivables or inventories. This is usually true for many growing businesses. Cash flow forecasts and projections are therefore important for business decision making. Educating the SME on the difference between profit and cash can provide great insights and make a huge impact on the  business operation. It will make the organization more diligent in its inventory and debtors management routine at the very least.

Business Competition

Why is my competitor more profitable than me?

Another common misconception is the tendency to compare businesses without understanding the underlying financial ratios such as gross margin, net margin, variable and fixed costs and thus, the impact on the business profitability.  SMPs can show the client the importance of benchmarks (for comparison), the impact of margin on sales, the efficient and effective use of capital, whether fixed and/ or recurring and the leverage on the cost of financing, where applicable. Many clients also appreciate a break-even analysis for their operations and how changes of product mix, for example will produce a different set of results.

Access to Finance

How can I finance my operations more efficiently (or I don’t have capital for further expansion)?

Access to finance can be a challenge for SMEs.  This can be due to their limited capital base and lack of a track record or due to the current economic climate of that region. The preparation of cashflow forecasts and projections with various scenarios, leveraging on the use of financing are important for many SMEs. With a credible forecast and projection coupled with good documentation and a compelling business plan, SMEs can have an easier access to finance from the credit provider.

Taxation Exposure

How can I minimize my taxes or what is the impact of the recent tax legislation on my business? 

Death and taxes are the two constants in life. It is therefore not surprising for SMEs to be asking this question. In other instances, the corporate vehicle or tax structure may need to evolve as the business grows. SMPs can discuss this with their clients – at a certain point of the SME’s evolution. Preparation (for the entrepreneur) is important to ensure long term success of the business.

The Use of Technology

The 2018 IFAC Global SMP Survey found that 86% of SMPs provided some form of advisory/ consulting service with 50% providing management accounting (e.g., planning, performance, risk management and internal control, budgeting). Many of these SMPs have started to use technology tools and data analytics when providing advice to their SME clients.  With better tools and data, more predictive analytics can be made available at a faster rate.

Conclusion

Running an SME can be very challenging and the early failures rates are daunting. But SME’s are absolutely critical to each nation’s economic prosperity. Therefore, they need all the help they can get to make sure they are successful. The research confirms the odds of survival are significantly increased if the SME had received professional expert advice from its trusted SMP, the earlier the better.

 

Robyn Erskine

Robyn is a partner in Brooke Bird, a specialist restructuring insolvency and turnaround firm located in Melbourne Australia and has been actively involved in the public practice sector for over 30 years.In January 2015, Robyn was appointed to the International Federation of Accountants (IFAC) Small and Medium Practices Committee on the nomination of CPA Australia and Chartered Accountants Australia and New Zealand. She is currently the Deputy Chair of the SMPC and the Chair of its Ethics Task Force.Robyn is a director of CPA Australia having been appointed to the board in 2017.  She has served on CPA Australia’s Victorian Division and Victorian Public Practice Committee and in 2014 Robyn was awarded the Henry Fox Award for outstanding service to Public Practice in Victoria.In 2011 Robyn became the first female to be appointed as the National President of the Insolvency Practitioners Association of Australia, now known as the Australian Restructuring Insolvency and Turnaround Association (ARITA) and served as a director of ARITA until May 2019. In 2017 Robyn was awarded Life Membership to ARITA for long, dedicated and distinguished service to ARITA and the Profession.Robyn is a current councilor of the Australian Institute of Credit Management’s Victorian Tasmanian Division. See more by Robyn Erskine

Johnny Yong

Technical Manager, Global Accountancy Profession Support, IFAC

Johnny Yong is a technical manager with IFAC’s Global Accountancy Profession Support (GAPS). He was previously a partner of a Training Provider in Malaysia, specializing in provision of training to accounting firms and for accountants in general. He qualified as an accountant following his articleship with BDO Malaysia and was also heading the Malaysian Institute of Accountants (MIA) Public Practice Department for a while before leaving to pursue his other interest in the accounting fields. See more by Johnny Yong

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