Understand the main current technical language and practices of management accounting, thus demonstrating the application of communication skills.
Demonstrate analytical thinking and synthesis skills by manipulating financial and other data to undertake numerical analysis, thus demonstrating problem-solving skills.
Analyse business operations through the use of relevant decision analysis and performance measurement, thus demonstrating the application of organisation & planning skills.
Critical Review of the Findings given in the article 'Management Accounting Practices of (UK) Small-Medium-Sized Enterprises (SMEs)'
The present essay is undertaken to examine the usefulness of gaining significant knowledge by the small and medium-sized companies of the UK in relation to the management accounting. The small and medium-sized companies (SME’s) constitutes largely to the economic growth and development of the UK. In this context, it is very essential for SME’s to develop an adequate understanding of the different management accounting tools and techniques for better cost management and improvising their profitability position. As such, the essay presents a critical view of literature in relation to the growing debate among the management accounting experts regarding the best practice to be adopted for managing the working capital. The essay particularly discusses the usefulness of management accounting education for SME’s growth with regard to application of cost-volume-profit analysis. The overall review of literature has been carried out in the context of the discussion held within the journal article ‘Management Accounting Practices of (UK) Small –Medium Sized Enterprises (S.M.E.s)’. The review of literature will particularly aim at supporting or refuting the views that have been developed in this context.
Critical Review of findings given in the article “Management Accounting Practices of (UK) Small-Medium-Sized Enterprises (SMEs)”
Zabri (2016) stated that the small and medium-sized enterprises constitute a major part of the developed as well as developing economies. In this context, it is becoming highly essential for them to implement effective business systems and processes that aid them in promoting their sustainable growth and development. Therefore, it is highly recommended that SME’s need to adopt the use of contemporary management accounting techniques to assists the business managers in taking better decisions for planning and control. It has been researched in this regarded that small businesses are adopting the use of simple techniques for determination of the product costs. The use of contemporary management accounting systems such as ABC, sensitivity analysis and other advanced methods is lacking in SME’s (Zabri, 2016).
In this context, the give article developed by Lucas, Prowle and Lowth (2013) has also discussed the need for SME’s within the UK to implement and adopt the use of management accounting techniques. SME’s are regarded as a significant part of the UK economy as it is estimated that about 99% of the firms within the UK are small and medium-sized. It is highly important for SME’s to adopt the use of effective accounting systems that helps them to maximize their financial performance. The use of management accounting systems will provide significant help to SME’s in better planning, controlling and decision-making. In this regard, it has also been depicted that only minority of the small firms are integrating the use of accounting systems. Thus, it is very essential that such firms gain knowledge regarding the impact of the management accounting systems on the operations and performance of the businesses. The techniques of management accounting has greater potential for achieving the financial objectives of SME’s by enabling them to maximize their productivity, efficiency and lastly the profitability (Lucas, Prowle and Lowth, 2013).
The Importance of Management Accounting Education for SMEs
In the article by CIMA it has been articulated that owners of SME’s does not believe to hire the management accountant to perform the job of management accounting as they want to have full control and exclusive right to sensitive information. It is the belief of owners in SMEs that making the managerial judgments by themselves will provide them with greater insights of what is going on and it short it increases the control of the managerial affairs with the company. In this relation the concept of business partnering with managerial accountant has changed perception of the owner’s at SMEs and also helped a lot with ease of management accounting decisions. It has been supported by Regondola (2016), through conducting the research on strategic management accounting and control process while making the managerial decisions. The findings shows that owner’s find it difficult to disclose the sensitive information to the managerial accountant as looses the control over the entity and also make less aware about the managerial activities going in the entity. Owners of SMEs believes that if they have control in the managerial activities and also have decision making power with them allows better control and also increases the profits (Regondola, 2017).
The article has provided that owner’s or accountant has used individual management accounting tools that helps to make useful managerial decisions but has not provided relevant information needed to make decisions such as pricing decisions, budget control and other decisions that requires analytical tools. Some of the basic management accounting tools used by accountants at SMEs, are working capital measures, product or service cost measures and informal cost volume profit analysis. All these management tools do not provide information to make the decisions regarding pricing, and product mix decisions. Due to this reasons SMEs fails to manage their working capital and cash flows falls short at some point of time. Azudin and Mansor (2017), has stated that lack of proper understanding of managerial tools such as variance analysis, cost volume analysis and product pricing by the accountants of SMEs has led to failure of SMEs. The use of tools such as informal CVP analysis, working capital measures and profitability analysis does not help the SMEs in pricing their products and services and also does not allow managing the working capital in right way. The difference in size of small and medium size firms has also led to make use different management accounting tools. For example, only some small size firms make use of formal budgets and CVP analysis while medium size firms uses CVP analysis in areas where they find it appropriate. Both small and medium size firms uses product costing, breakeven analysis and working capital measures to solve for the problem related to pricing and working capital requirements (Azudin and Mansor, 2017).
Factors Impacting the Implementation of Management Accounting System in SMEs
All these findings indicate that small firms does not need all the management accounting tools while medium and large enterprises have to be dependent upon the managerial tools to drive their growth. Same can understood through an example of use of formal budgetary planning and control system. The use formal budgetary planning in small size firms does not provide all benefits of budgeting such as resource allocation and forecasting. But small size firms cannot make use benefits like coordination, control, motivation and communication as in such firms decisions is centralized and is being taken mostly by one person (Lin, 2017). In the same way, small enterprise with centralized decision making power does not need responsibility centres and also they do not make use of responsibility accounting.
The most important finding in the article by CIMA is that both small and medium size firms do not make proper use of cost volume profit management accounting tool and this has also been reported by many researchers. According to research made by Abdullahi, Sulaimon, Mukhtar and Musa, it has been found that there is no relationship between cost volume profit analysis and management tool used by the SMEs for decision making purpose. Only managers at SMEs make use of formal CVP analysis for allocating the resources. It means SMEs does not make proper use of CVP analysis while making management accounting decisions or they use CVP analysis when SMEs faces serious financial constraints and a resource planning is most important criteria for SMEs (Abdullahi et. al, 2017). The most important objective of SMEs is to earn the maximum profits and factor that is responsible for profit level in SMEs is level of production. It means to get the success in long run and to earn the maximum profits there is requirement to cost volume profit analysis. CVP analysis is the most important management tool that examines the relationship between cost and profit to the volume of production within the business.
This analytical management tool aims to maximize the profits in long run. There are many cases where management has to change the level of production to meet the change in demand. Some of the few cases are introduction of new product, increase in demand of particular product, resources are in short supply, competition level, inflation, change in cost and selling price of product, and many other factors (Shim, 2013). In all such cases management at SMEs need to look at change in profits due to change in production level. To measure the change in profit the best management tool that can be used by the management at SMEs is cost volume profit analysis. Cost volume analysis helps to find out the crisis point or breakeven point for all products at once or for individual products. Breakeven point refers to point where total cost is equal to total sales. It means CVP analysis helps management at SMEs to locate the breakeven point and managers need to look after this point in to order to earn some profits and survive for long run (Prowle and Lucas, 2016).
According to the view of Husin and Ibrahim (2014) there is limited knowledge in relation to the contribution of management accounting for SME’s to improvise over their financial performance. As such, it is highly important that SME’s should develop an adequate understanding of the impact of management accounting system on their short as well as long-term performance. They can be regarded as a critical source of gathering relevant financial information that can helps the financial managers to take accurate decision regarding the business growth. The major factors that are regarded as responsible for the small and medium-sized companies within the UK regarding the adoption of management accounting techniques are attributed to be ownership, size of firm and requirement of higher costs (Husin and Ibrahim, 2014).
The given article of CIMA Journal has also regarded the nature of operations and the environment in which the firm is operating to be major factor impacting the implementation of management accounting system. It has been identified in this regard that SME’s adopts the use of simple accounting systems as per the complexity of their operations based on their limited size. However, it has been found out that it is highly important for SME’s to adopt the use of contemporary method of accounting systems for proper financial planning and control. Similarly, Kofi (2014) also stated that the SME’s are placing less emphasis on the implementation of management accounting systems due to the type of their business operations. It has been identified in this context that it is not feasible for the recording the actual time of labor on specific jobs within SME’s. Therefore, the lack of accurate measuring of revenue and costs make it significantly impossible for SME’s to undertake the use of management accounting system of Cost-volume-profit method. As such, it is required that executives of smaller size companies within the UK need to gain relevant knowledge about the application of management accounting decision-support tools such as cost analysis for avoiding the occurrence of risk and uncertain conditions (Kofi, 2014).
Mkasiwa (2014) has also discussed in this regard that nature of ownership also impacts the adoption of management accounting systems within the small sized enterprises of the UK. The ownership structure of the SME’s is based on an individual or their family members without placing emphasis on their personal competencies and knowledge. This is largely causing the lack of effective and systematic accounting practices with the SME’s of the UK. The European Federation of Accountants has stated in this regard that owners of SME’s possess little knowledge in relation to accounting or financial judgment. Thus, the pertinent investment decisions are taken without carrying out significant accounting or financial analysis. The business managers take the decision regarding the business growth without analyzing the financial status of their business. As such, it results in making the inaccurate decisions that does not promote the financial growth of the business. Therefore, it is highly important that business executives and managers need to be provided with relevant training to increase the knowledge base regarding the management accounting (Mkasiwa, 2014).
The given article in this regard has also regarded the educational background and professional experience of the manager as a major factor limiting the adoption of the cost-volume-profit analysis within the small and medium-sized organizations (Lucas, Powle and Lowth, 2013). It has been identified by Padachi (2012) in this regard that lack of adequate management of capital is one of the major influencing factor that is negatively impacting the growth and expansion of SME’s. The poor accounting practices of accounting are responsible towards their sustainable growth and development. They are not able to gain finance from the larger financial institutions such as banks due to their poor accounting records. It is recommended to the SME’s of the UK that they should improve their accounting environment by enhancing the knowledge base of different types of accounting systems among the business executives or managers. This will ultimately lead in improving the accounting record keeping practices and promoting the sustainable growth and development of the small sized businesses (Padachi, 2012).
Mkasiwa (2014) has also argued in this context that the lack of adequate financial resources also acts as a major factor influencing the adoption of management accounting systems within the SME’s. It has also been stated in the given article that financial constraint is the dominant variable that is responsible for restricting the adoption of the cost-volume-profit analysis technique within the SME’s of the UK. The higher cost involved in the implementation of management accounting techniques is responsible for their restricted adoption. The business executives of the SME’s believe that the higher cost involved does not outweigh the benefits that SME’s will realize with the adoption of management accounting techniques (Mkasiwa, 2014).
However, it is important to take into account that SME’s are acting as a major contributor of economic growth not only within the UK but also on a global level as stated by Zhang and Wang (2013). The lack of quality financial information is leading to inaccurate decisions taken by the business executives of the SME’s for their financial growth. In this context, it would prove to be beneficial for the business executives of the SME’s to adopt the use of appropriate type of management accounting techniques to gather accurate information about the cost of their operational process. This would result them in taking right type of strategic and operational decisions leading to financial growth and development of the business (Zhang and Wang, 2013).
The requirements of the external stakeholders also influences the integration of management accounting systems within the SME’s of the UK as stated in the given article. The different stakeholders of the SME’s do possess varying requirements and this is causing the difference in the nature of accounting systems sued by these firms. For example, an SME would tend to adopt the use of budgetary planning and control technique to meet the requirements of the stakeholders of gaining knowledge about the monthly management account. However, the sue of management accounting techniques’ such as CVP analysis can help the SME’s to adequately met the varying needs of its stakeholders by improving the reliability and accuracy of the decisions taken thus promoting the business growth which eventually will met the varying expectations of different stakeholders (Lucas, Powle and Lowth, 2013).
It can be stated from the critical reviewing the literature in regard to the adoption of management accounting techniques’ within the small and medium-sized enterprises that it would prove to be beneficial for these firms to sustain the financial growth. There is larger need for SME’s to develop knowledge about the management accounting field for effective strategic and operational decisions-making required for fostering its long-term performance.
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Azudin, A. and Mansor, N. 2017. Management accounting practices of SMEs: The impact of organizational DNA, business potential and operational technology. Asia Paci?c Management Review, 1, pp. 1-5.
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