Academic journal article Management Accounting Quarterly

Management Accounting Systems Support Start-Up Business Growth

Academic journal article Management Accounting Quarterly

Management Accounting Systems Support Start-Up Business Growth

Article excerpt

WHEN A START-UP COMPANY ENTERED AN ENTREPRENEURIAL CRISIS, IT TURNED TO FORWARD-LOOKING MANAGEMENT ACCOUNTING TOOLS TO MEET THE CHALLENGES OF ITS CHANGING MARKETPLACE STRATEGY AND INCREASINGLY DEPARTMENTALIZED ORGANIZATIONAL STRUCTURE. THESE STRATEGIC TOOLS--VARIANCE ANALYSIS, PROFIT PLANNING, AND A PERFORMANCE MEASUREMENT SYSTEM--ALLOWED THE COMPANY TO SUSTAIN ITS ENTREPRENEURIAL SPIRIT AND GROWTH. HERE IS THE STORY OF HOW IT ALL CAME TOGETHER.

Entrepreneurial businesses emerge from the execution of unique and commercially viable ideas, but the success rate of these businesses is relatively low, according to recent research done by the University of Tennessee. A quarter of such businesses fail in the first year, while more than half cease to exist after five years. (1) The main reasons for the failures include a lack of planning, no knowledge of financing, no experience with record keeping, and a lack of managerial experience. Recent research in management accounting, however, offers good news and shows that formally adopting management control systems provides entrepreneurial businesses with greater success at surviving and transitioning into larger, more influential companies. (2)

Management control systems, which comprise a broad set of organizational controls, include management accounting systems. (3) The research literature defines a management control system as the formal, information-based routines and procedures managers use to maintain or alter patterns in organizational activities. (4) Elements of the control system include:

* Strategic plans, operating budgets, statistical reports, performance appraisals, and policies and procedures; (5)

* Personnel controls that select and recruit employees with similar objectives to those of the organization;

* Action or behavioral controls that influence employees by prescribing actions to be taken; and

* Results or outcome controls that influence employees by measuring the results of their actions. (6)

Other views of management control address informal control processes such as belief systems, group norms, socialization, and culture. (7)

As a subset of management control systems, management accounting systems specifically include a package of cultural controls, planning systems, cybernetic controls, administrative controls, and rewards and compensation. (8) Such a system should incorporate vision and mission; key success factors; strategy and plans; organizational structure; key performance measures; performance targets; performance evaluation at individual, group, and organizational levels; financial and nonfinancial rewards; and penalties for missed performance targets. (9)

Empirical evidence supports the association between sustainable growth in entrepreneurial businesses and the presence of management control systems. (10) The evidence shows that these businesses become gradually more complicated in structure and sophisticated in decision making, reaching a situation known as an "entrepreneurial crisis." In order to continue his or her company's growth, the entrepreneur must transition into becoming a manager who can display company stewardship to both investors and employees. (11) The manager has little choice but to collect more data and pay increasing attention to selecting and presenting information in order to make control and operational decisions for the organization. (12) Strategically focused management accounting tools can use this information to evaluate business performance, determine profit plans, and measure performance. (13) Because most entrepreneurial businesses are not likely to have such strategic tools, adding these tools will sustain the entrepreneurial spirit and growth.

Our case study describes an entrepreneurial business, Globe, from the starting phase to its current entrepreneurial crisis. Up until this point, the business had developed an informal management control system that featured elements of strategy and structure that would support the needs of a small business. …

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