The Bigger Picture: Little Research Has Been Done into Management Accounting Techniques in Small Firms-Until Now. Gavin Reid's and Julia Smith's Study of SMEs Found That Efficient Information-Processing Plays a Vital Role in Successful Firms. (Feature Information Management Systems)

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The rise of small entrepreneurial firms as an economic force is well known, but what about their role as processors of information? How do small firms' management accounting systems (MAS) handle information? How does the structure of this information change over time, and can modern economic theory help to explain the nature and development of the MAS in small firms?

Small firms are innovative and flexible and, therefore, vital to the UK economy. They make a major contribution to business activity. The bulk (99 per cent) of UK businesses are classified as "small", and they employ 58 per cent of the workforce. MAS is the key information system in small firms and use of MAS is crucial to enhancing performance, surviving in the market and coping with change.

Fast-growing small firms are in the minority, but they make a significant contribution to new job creation--for example, the effects of recession can be reduced by small firm activity. UK small and medium-sized companies (SMEs) are likely to be more innovative in their internal processes and outputs than their larger counterparts. Typically, they do this without dedicated research and development facilities. They are relatively flexible about internal changes, such as adapting information systems. Taken together, changes at this level can contribute to sectoral growth.

The organisational structure of a small firm is relatively lean. SMEs find it easy to monitor information system development, and their responses to key contingencies such as industry innovation or new competitors are fairly transparent. These responses usually lead to changes in the internal accounting systems.

Previous research shows that the quality of management accounting information available in small firms directly affects performance. A refinement of this link is the view that the positive effect of sophisticated management accounting information on performance will be higher when there is greater perceived environmental uncertainty. This means that the inception, growth and development of a small firm provides a laboratory for examining dynamics.

Our study was based on three theories: MAS helps a small firm to adapt to new contingencies; MAS helps a small firm to achieve the entrepreneur's goals; and MAS helps a small firm to function as an organisation.

There were four main areas to investigate:

1 Accounting information:

* who prepares it?

* what is its scope?

* how detailed is it?

2 How is accounting information managed for:

* making investment decisions?

* controlling costs?

* sending information round the firm?

* using software to handle information?

* performance measurement?

* setting budgets?

* facilitating evolution?

3 How is the complexity of information handled for:

* planning?

* directing?

* problem-solving?

* decision-making?

4 What problems does the small firm face in terms of:

* information reliability?

* using information?

In 60 per cent of cases the boss (entrepreneur) prepares all the accounting information in the small firm (see figure 1). If the boss does not prepare it, then it is either delegated (30 per cent) or farmed out to an accountant (10 per cent). From this, we can conclude that most bosses like to stay in control. The downside of this, of course, is that such bosses may lack objectivity and could fail to tap into accounting expertise.

[FIGURE 1 OMITTED]

A minority of small firms, typically around a third, set budgets. This varies slightly by budget type, with the bank balance (42 per cent) being the most common and the balance sheet the least common (see figure 2). Bosses who don't have budgets or targets lack a potentially useful controlling tool.

[FIGURE 2 OMITTED]

Actual values for key economic variables are frequently recorded in practice--for example, profit and loss (61 per cent), balance sheet (55 per cent), cash flow (78 per cent) and bank balance (94 per cent). …