By Daniel Hunter

A report by SKS Business Services, Loughborough University and CIMA reveals today that many small and mid-sized companies are failing to use their finance function efficiently to make important management decisions.

While many larger companies have applied technological advances, shared services and out-sourcing best practice to their financial processes, SMEs are typically lagging behind, despite the cost savings and higher quality of information that taking these steps can deliver.

The finance function is often misconceived as a ‘bean-counting’ operation when forward-looking management accounting can support better management decisions, deliver growth and cut costs. John Cridland, Director General of the CBI claims that “boosting productivity in medium-sized firms could be worth an additional £20 billion to the UK economy by 2020.” Some 45 per cent of SMEs don’t use regular management accounts, according to SKS Business Services research.

The report by SKS Business Services, Loughborough University and CIMA, called Accounting for Growth, explains that many smaller companies have not explored appropriate ways to outsource business functions to reduce costs, while developing core expertise to direct the business.

Furthermore, many medium-sized companies aren’t using shared services business models, sharing general and administrative functions across their different business units which would thereby cut costs. Use of technology such as accounting information systems is also limited, as is use of low-cost online technology such as Skype, Dropbox and to assist their international operations.

Sanjay Swarup, Director, SKS Business Services, commented: “The root cause of smaller company underperformance is often inefficient use of their finance function. Finance and accounting is too often misunderstood as a ‘bean-counting’ operation, when financial analysis and forward-looking management accounts are meant to help you plant and reap more beans.

“In our experience, communication with prospective equity investors or loan providers becomes simpler if the company has regular and credible financial analysis of their business. This in turn ensures that businesses do not run out of cash or have insufficient resources when they need it.”

Primary report author, Ian Herbert, Deputy Director of the Centre for Global Sourcing and Services at Loughborough University, said: “In the past 20 years, big companies have been reconfiguring, re-engineering and relocating their business support functions. These world class companies have reduced back-office costs dramatically through the use of shared service centres and outsourcing.’’

"As the report and SKS research indicates, in smaller companies, G&A costs are rising as a result of greater regulatory and reporting obligations and these organisations do not have the scale to make better use of technology and the new working practices. G&A costs can easily spiral out of control as entrepreneurs concentrate on their core operations. But, new solutions are now becoming available for smaller companies to mimic the more flexible sourcing strategies of the large companies.”

Peter Simons ACMA, CGMA, Technical Specialist, CIMA, said: “The UK’s economic recovery is dependent on the SME sector, but many smaller companies could be performing below their potential because they are not making full use of their finance professionals. Previous CIMA research has identified that SMEs do not engage management accountants as their larger competitors do, and as such they are missing opportunities.

"This new report shows how globalisation and technology can enable smaller companies to transform their finance function, making it more efficient and able to provide better support to management , as many leading large organisations have already done.”

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