Accounting for Small and Medium Enterprises

Accounting for Small and Medium Enterprises

Accounting measures are extremely important for the businesses to make important decisions and take the appropriate actions regarding the continuity of the firm (Maskell et al., 2016, p 22). Some of the accounting measures are suitable for small and medium sized ventures while others are meant for large organizations. This paper aims to look at the accounting measures which fit all business types and the ones that do not.

In the 1900s, small ventures relied on third party accountants for book keeping simply because the firms had no power to employ accountants who would do the job internally. However, things have changed nowadays. Online accounting software have made the work too simple for these small entities because the businesses can now control their financial data effectively. The government of the United Kingdom is highly concerned with the availability of financial information to both small a, medium as well as big sized firms. In the year 2005, the government ordered all the firms to transfer to international accounting rules. However, it is still concerned about how over 80, 000 firms small and medium sized firms could have the same (Vasarhelyi et al., 2015, p. 385). Nonetheless, these firms are privately owned and so the government has less control over them. Despite this, the government wants to have all firms regardless of their size, being offered the chance to use a simplified version of IFRS. This simplified version is meant to make the IFRS tailored for the needs of the small businesses. Some of the topics are omitted and the complex options are excluded. Such topics include government grants, and intangible assets. Also, the disclosure requirements are reduced such as the need to present a second comparative.

Someone may wonder which businesses are classified as small. In the United Kingdom, these entities are around 5.25 million of them whereby, most of them (5 million) are micro-businesses (Warren, and Jones, 2018, p 45). These businesses are similar in some various ways. Well, an example of a medium motor engineering firm, a garage, shop, and a developer of phone applications.

Therefore, the smaller entities are required to only come up with a financial position and income statement together with some few disclosures according to the provisions of the law. More so, for the purposes of privacy, filing with the companies House can be done for the abbreviated accounts.

The accounting that these small businesses do helps them in decision making such that the economic information which is basic and necessary is made available (Schaltegger, and Burritt, 2017, p. 38). Through this, the managers are able to do comparisons as well as modelling which are quite important. More so, numerical representation is made possible whereby inbuilt assumptions are made, giving the firms an opportunity to make decisions which are better and more informed.

Although the small firms have less intensive accounting measures while the large sized organizations adopt an extensive reporting, there are those the tools that apply to all sizes of entities. The large entities call for the employment of the extensive financial management because of accountability and the delicate nature of the decisions that have to be made. The tools that were considered by all include the product or service costs that is made for the sake of pricing. Also, it is known as the profitability analysis although it does not aim to control the costs by the use of the analysis of the standard cost variance. The second measure is working capital which include the creditor and debtor days as well as the stock turn. More so, the daily cash balances also come under the working capital measure. This measure is especially appropriate for service based firms and some charity organizations that do not have stock because they depend on donations.

The third measure is the CVP analysis. Medium and large sized companies do refer to it as the formal CVP (Bennett, and James, 2017, p 25). The small firms are the ones that use the informal CVP analysis while the other organizations deal with the formal approach of the analysis. The informal CVP is what is today known as the break-even analysis. Managers only have a rough idea of the sales, revenues and fixed costs. More so, the managers are tasked with the responsibility of ascertaining how much sales they must make within a month for them to cover the costs. On the other hand, the formal CVP analysis has managers who adopt the role of planning as well as budgeting. They further find the break-even point and using all the scenarios available. They then get the margin of safety and use it to get the target profit.

There are reasons as to why firms may use one type of accounting measure and not the other. The possible factors which explain this phenomenon are taken depending on the influence that the management has received from various quarters. First, the extent of the constrains in terms of finances dictates which accounting measure to use (Liket, and Maas, 2016, p. 889). This phenomenon is indicated by low profitability and the lack of credit or cash for financing of business activities. The bigger the financial constraints, the greater the extend of the management accounting adopted. In particular, when finances are less constrained, the budgeting approach as well as the CVP analysis are both formally done. The top management for such firms in this situation have a priority for financial analysis so that they could use it in planning as well as a control tool. When the finances are a less constraint, such extensive analysis is seen as a less priority.

The educational background of the proprietors or the owners of the business also determines which measure to take when it comes to accounting (Grant, 2016, p. 57). Well, some of the firms have the ability to hire professional accountants while others do not have such a chance. This is because large firms require so much work and there is a lot of documents needed. Therefore, the book keeping task is great.

The nature of the operations of a firm also determine which measures it would use in accounting. The use of some of the many counting tools such as the CVP analysis as well as the budgeting does not need any mistake. They thus need a high degree of accuracy in the prediction of revenues. This is much needed in a business that produces a standard product in an environment that is stable. In some other firms whereby the revenues cannot be predicted, the CVP analysis is not feasible (Appelbaum et al., 2017, p. 30). For such firms, the monitoring of the achievement of the break-even point is crucial and is therefore done on an on-going basis. These firms are mainly concentrated in a market which is growing really fast and they make fast sales. As a result, they do not see the need of monitoring their usage of cash through budgets but rather they just have expenses which never outdo their revenues. They may be small players in an industry which is fast rising and therefore do not have the time to put their numbers under close scrutiny.

A firm may continue practising the measures of a small business because it has opted to stay small. The choice is because of the diversity of the events that a small business can conduct, fetching more revenue than thought. More so, the nature of operations that a firm conducts determines that measure of the management accounting adopted, both in the small and large sized organizations. In other perspectives, the manufacturing organizations act differently because they have tangible assets and are intensive in this side. They do not dwell so much on the human capital since they do not specialize so much in this area. The organizations that have intensive application of human capital are the ones that deal with business to customer services such as counselling organizations. Lastly, the requirement of the external stakeholders may push a firm into adopting a certain measure. Sometimes, the financiers who are the sponsors may demand that formal budgetary approach be adopted for control purposes because they have to see where their funds are invested. They insist that they have to see the monthly accounts of management because they cannot just trust the management in a blind manner. In conclusion, the management measure is determined by the requirements of the firm.



Reference List

Appelbaum, D., Kogan, A., Vasarhelyi, M. and Yan, Z., 2017. Impact of business analytics and enterprise systems on managerial accounting. International Journal of Accounting Information Systems25, pp.29-44.

Bennett, M. and James, P., 2017. The Green bottom line: environmental accounting for management: current practice and future trends. Routledge.

Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.

Liket, K. and Maas, K., 2016. Strategic philanthropy: corporate measurement of philanthropic impacts as a requirement for a “happy marriage” of business and society. Business & Society55(6), pp.889-921.

Maskell, B.H., Baggaley, B. and Grasso, L., 2016. Practical lean accounting: a proven system for measuring and managing the lean enterprise. Productivity Press.

Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts and practice. Routledge.

Vasarhelyi, M.A., Kogan, A. and Tuttle, B.M., 2015. Big Data in accounting: An overview. Accounting Horizons29(2), pp.381-396.

Warren, C. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.