Financial Management & Cost Management in SMEs - Trafford Park

Effective financial management performance is critical for business survival and growth. Without clear financial controls and targets linked to strategy a business can under-perform, not matter how entrepreneurial and enthusiastic its owners, investors and staff.

The Trafford Park Business Forum, in partnership with the Centre for Professional Accounting and the Centre for Enterprise at Manchester Metropolitan Business School, conducted a survey of small and medium sized firm accounting methods. The subsequent report addressed the following questions:

- how small and medium sized enterprises (SME’s) manage their finances and the contributions good financial management can make to performance;
- the links between financial management and business strategy;
and which ‘good practice’ lessons in financial management can be learnt to support better business performance.

Report Summary
The analysis showed that the businesses recognise the importance of having to keep financial records, but are not fully persuaded by any strong relation between keeping these records and driving performance improvement. Perhaps helping to better persuade businesses of this link, the survey shows that those choosing to use market based cost accounting enjoyed a higher than average growth rate. Proportionally, 46% of those using activity based costing, 40% of those using cost of quality and 50% of those using life cycle costing experienced an 11-25% growth rate or higher. Though the numbers are relatively small and not sufficient to make generalisations they do hint at a relationship that warrants further attention.

It was found there was a low take up of external advice (Business Links, Academic Institutions, Consultants). It appears businesses are happy to rely upon established modes of cost management using their accountants to assist them in regulatory audit compliance, and to rely upon their own networks and experience for business advice.

In conclusion, the survey shows the continuing reluctance of the regional small and medium sized business community to fully embrace the market based cost accounting techniques developed by larger businesses during the 1980 and 1990’s. Contacts with external ‘experts’ on the implementation of such practices are, likewise, muted. The reasons for this might include:

The tools are not wholly relevant for SME’s, requiring dedicated resources in staff and training for which smaller businesses are unable to justify investment.
The tools do not operate with sufficient clarity to aid strategic decision making in the fluid markets within which SME’s operate.
SME’s are not aware of the tools, nor do they have the time to make themselves aware.
Yet the surveys also indicate that, at least amongst fast growing new businesses, cost accounting is regarded as important and is used. Moreover, as the survey identified that where businesses had a preferred growth strategy, it was the identification of new markets. This would suggest that the adoption of SME-specific market-based cost accounting would seem to offer some benefits.