Analysis of Business Performance and Financial Health
Analysis of Business Performance and Financial Health
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Benefits of proper accounting information for SMEs
According to the study ofHin& Ibrahim, (2014) accounting information is of great significance not only for the large scale organizations but also important for SMEs. Corporations face number of challenges due to lack of proper accounting and book-keeping procedure along with inaccurate managerial decisions and ineffective policies. Although SMEs are not legally obliged to prepare their final accounts, but still, in order to overcome all stated issues, they need to construct their financial statement through keeping proper accounting records. The effectiveness of accounting system can be judgenot only through assessing and evaluating the way in whichrecords havebeen kept in a well manner but also, it depends on the manner in whichthey meet information requirement of various internal as well as external userseffectively.
Likewise, in the literature ofZsidisin, (2016)it has been found that SMEs must prepare their final accounts to measure their operational results & financial health. In order to determine the net profitability and monetary health, they should prepareprofitability statement and balance sheet as well It gives huge assistance to the SMEs to examine and evaluate the results of regular course of action .and functions; no matter whether they are performingwell or not. Moreover, balance sheet also gives information to the policy makers to determine their owed liabilities and corporate assets.As a result, they can analyze their solvency, liquidity and efficiency and make appropriate decisions for the success.
However, it has been criticized byGarcía-Teruel, Martínez-Solano & Sánchez-Ballesta, (2014)that SME’s record-keeping accounting practices are affected by variety of factors such as size of business, industry in which it operates, age and others. The findings of literature presented that for reliable and accurate accounting information reporting, SMEs will need to hire talented and qualified accountants whowill bring high cost to the firms.As a result, their net profit will be decreased.
On the critical note, Van der Stede, (2016) stated that accounting information assists managers to determine the areas where they have not performed in an excellentway.Thus, suitable financial policies can be framed to reach at the final goals. Moreover, it also makes the managers aware about potential difficulties and helps to collate required information to statutory authorities, Atralian Taxation Office (ATO).
Relationship between accounting information and performance
According to the viewpoints of Zhang & Ni, (2016)maintaining properly and adequately the results of monetary transactions will give great assistance to the executives and policy makers to determine their total revenues and incurred payments. With the help of this, they will be able to determine the net profitability to examine results of routine functions. Thus, if financial statement reports inadequate return or loss thenmanagers can identify the reasons for poor performance and make suitable as well asrational decisions. In order to maximize revenues, they can make appropriate pricing policy, advertisement strategy, optimum use of scarce resources and design efficient resource allocation system to minimize the wastage and overspending.
Similarly, Hoyle, Schaefer &Doupnik, (2015) stated that statement of financial position also helpsindetermining the gearing level, financial risk, efficiency of managersto optimally usetheir resources, proprietor’s fund and liquidity position through measuring relationship between current assets and short-term liabilities. Through this, senior authorities can determine their financial health at the end of reporting period and make right decisions to perform better in the upcoming scenario.
However, on the other hand, Bachmann, Baumann & Richter, (2015) argued that SMEs maketheir P&L account on cash basis, hence, companies report only those transactions as revenues and expenditures which are generated or paid in cash and do not report credit transactions. Thus, it does not give completeinformation about the promises made by establishments to pay to external parties and expectations about potential receipts. It is just like keeping cash book to report cash revenues and expenditures and thus, such system cannot be considered suitable for SMEs and it does not give full information about the net results.
Role of an accountant in SMEs
Bhimani&Willcocks, (2014)stated that it is the duty of accountant to produce reliable and accurate financial accounts to measure the results of business operations. Thus, they playan inevitable role because authentic and prominent reporting system will facilitate SMEs to examine their performance properly so that smarter strategic decisions and policies can be formulated to ensure stability. In the study of Hin& Ibrahim, (2014)it has been explained accountants areresponsible for the record-keeping system; more importantly, to communicate the results to taxation authorities.
However, Zimmerman, (2015) argued that with the changing period, their roles havebeen widened and now-a-days, accountant also give proper advices and suggestions to decision-makers in a way that SMEs can deal with the financial difficulties and bring success. It is important for the policy formulators because accountants have an excellent financial knowledge and skills.Henceforth, they are highly able to recommend right choices and strategies to firms to eliminate the hurdles and achieving success.
Furthermore, as per the findings of Vander Bauwhede, De Meyere& Van Cauwenberge, (2015) with the introduction of GST, demand for skilled and experienced accountants has been significantly increased to report to the statutory taxation bodies. In today’s era, SMEs started the use of professional accountants to keep-up-to-date records to convey information about their profit and financial position to varied users.
Evaluation of business performance through performance indicators
As per the views of Deegan, (2013)SMEs can usenumber of key performance indicators (KPIs) to measure their monetary strength and financial success for making qualitative and smarter decisions. In this respect, strategic financial analysis technique, that is, ratio analysis is considered to be highly suitable way of performance evaluation. Decision-makersofSMEs can usevaried ratios such as profitability, short-term liquidity, solvency and activity ratio to examine results mentioned in P&L account and balance sheet.
Anwar & et.al., (2016)explained that profitability ratios determine corporate strength to examine the way in whichfirmhaseffectively obtained enough revenues over the cost incurred to get maximum yield, can be measured through gross profit ratio, net margin, expense ratio & others. On the other side, firm’s capabilities to meet deferral short-term obligations especially to suppliers & trade payables can be analyzed through liquidity ratios like current and quick ratio. Furthermore, Rakićević& et.al., (2016) said that manager’s ability to optimally utilize their assets can be evaluated through activity ratios like assets turnover, inventory turnover, debtors days, payable period and others. In contrary to this, solvency position to repay long-term obligations as per the debt covenants can be examined through assessing gearing and leverage position.
On the critical note,Lakshm, Martin &Venkatesan, (2016)commented that yet every ratio quantify the results of business performance, but still, it can be ensuredthat results are accurate and reliable if data already has alreadybeen manipulated in the final accounts. As a result, management may take misleading decisions that have a negative impact towards performance. Furthermore, change in accounting policies & regulations also have a significant impact on the results obtained through ratios that is one of itslimitations. Apart from this, it is quite difficult for SMEs to interpret ratios, especially when ideal ratio do not exists. In such situation, companies will not be able to examine their own performance in a proper way.
Methodology comprises a set of tools and techniques that will be used by the investigator to gather, collate and integrate the entire data set into analytical form so as to evaluate the information for better decisions. With the stated study, proposed methodology is described as below:
Philosophy: The selected issue is of qualitative nature that aims to investigate the usefulness of accounting information system for the Australian-based SMEs. Concerning the current topic, interpretive paradigm is foundto bean appropriate way to interpret the entire study and results in a suitable way (Mackey and Gass, 2015).
Approach: Out of inductive and deductive, first is considered to be suitable which developed questions keeping in mind the formulated objectives that are desired to be achieved after completion of the study.
Quantitative V/s qualitative: It will follow qualitative investigation which gathers non-statistical or non-numerical information to investigate and examine the importance of accounting system for making smarter business decisions for the performance enhancement (Silverman, 2016).
Data collection: The secondary resources usealready published or unpublished resources to acquire the required set of data (Flick, 2015). This study will conduct the use of secondary sources to gather required information to generate the outcomes.In this way, it will use historical published articles, firm’s database, website and statistical reports published by statutory bodies about SME’s book-keeping system. Data will be gathered to investigate the frequency and number of Australian SMEs who prepare annual reports for decision-making purpose.
Data analysis: In order to interpret the results, thematic analysis technique and graphs will be presented. In this, themes will be designed by the scholar keeping in viewthe findings through web research and other secondary resources.
Limitations: As it will use the secondary data, therefore, proper precautions should be maintained to assure that gathered data isin line with the investigator’s own objective and aim of the study.
Ethical aspect: Giving full credit to the authors by using APA style of reference will help to provide evidence and eliminate copy pasted content. In addition, security of information will be maintained through complying Data Protection Act. Further, prior permission will be taken by the researcher to ensure ethnicity and reliability of data.
Findings And Analysis
Data analysis is one of the most crucial and inevitable partsof every research investigation.Here with the stated aim, results of secondary data havebeen analyzed:
Theme: 1.Australian SMEs followGenerally Accepted Accounting Principles (GAAP) for the preparation of annual accounts
Findings: In the report published by Zsidisin, (2016), it has been evaluatedthat inAustralia, companies are liable to follow GAAP with exceptions while preparing their annual accounts. The report reveals that although few companies prepare their annual accounts complying with the necessary GAAPs, however, exceptions means exclusion of adhering to several specific accounting rules, regulations and practices for SMEs from the reporting requirement. However, UK, Ireland & NZ based SMEs have to comply with 2-GAAPs to construct their financial statements to report business performance. At the same time, Mkasiwa, (2014)indicated that there is no legal requirements for Australian SMEs to follow accounting & reporting standards such as IFRS and IAS to prepare their annual accounts every year and report it to convey information to the external users. As per the findings of Blackburn and et.al., (2006) it has been stated that in Australia, 65% micro firms and 80% small-sized businesses prepare their profit and loss account to measure the net return.However, on the other side, only 44% micro companies & 74% small business produces statement of financial position and balance sheet summarizing the assets and liabilities (Australian Securities& Investment Commission, 2015). While, on the other side, only 26% micro & 34% small-sized establishments makestatement of cash flow (SOCF) to find out the reasons for differences in cash flow at two different datesof balance sheet (Blackburn et.al., 2006).
Theme: 2. Poorly designed business model and inexperienced managers are the most important reasons for SMEs failure
Findings: Looking to the table, it can be seen that SMEs do not prepare any business plan and well-structured corporate model, caused failure as the reported %age were very high to 55%. Similarly, inexperienced and less-skilled managers is a significant reason for the corporate failure as data evidenced that 55% SMEs failed just due to unskilled and untrained management. While, on the other hand, inadequate access to funds, professional advices, too quickly expansion (overtrading) have been supported by 46%, 37% and 35%. On the other hand, inadequate book-keeping as SMEs do not keep any detailed records of their operations and monetary activities through preparing accounts is also another reason as research founded that 26% SMEs failed due to ineffective book-keeping.
Theme: 3. Performance measurement is the main reason for preparation of final accounts
Findings: As per the study of Lakshm, Martin &Venkatesan, (2016) it has been assessedthat Australian SMEs such as Stellar Solution, Snaga Job and others who prepare their annual account mainly aimto measure the results of their performance through measurement of profitability. However, on the other hand, balance sheet is made by micro, small and medium sized establishments to examine their financial status and position at the end of every accounting year. Firms prepare Balance sheet to measure creditworthiness and solvency position so as to examine their strengths to make timely payments to the payables as well as debt-holders. Apart from this, few companies prepare Statement of Cash Flow (SOCF)to keep track of their cash incoming & outgoing caused due to operations, investing and financing activities. (Zsidisin, 2016)
Theme: 4. Decision-makers use final accounts to make suitable policies and strategic plans for the performance enhancement
Findings: Reviewing the article published by Pratt (2013), it has been found that decisions makers of SMEs make assessment of annual accounts, Statement of Comprehensive Income (SOCI), Statement of Financial Position (SOFP), and Statement of Cash Flows (SOCF), to identify that whether business has brought any improvement or not in their operational success or monetary health. They use SOCI to detect ifit has gathered enough return or not after making payment of all the expenses whilst SOFP is used to determine total assets, liabilities, liquidity position andgearing level. It helpsthe policy makers such as top executives, managers, directors and others to make appropriate strategic plans and policies to maximize their performance and create an optimum capital structure through a right mix of debt and long-term equity. It helps the decision-makers to reach at their monetary targets and maximize competitiveness.
Theme: 5. SMEs recruit accountant not only for the construction of annual accountsso as to report to the Australian Taxation Officer (ATO) but also to gain right advices and suggestions
Findings: As per the study conducted by Carraher& Van Auken (2013),it has been observed that Australian SMEs do not recruittalented accountant to report financial statements to the ATO but they hire accountant mainly to use their financial skills so as to develop suitable monetary policies and decisions for maximizing performance. Moreover, Zimmerman, (2015)found that accountant who failed to prepare true and valid information in the financial statements and in givingright taxationas well asfinancial advices to the firm are terminated and replaced by other experienced accountants so that more appropriate financial policies can be prepared for makingoptimum use of resources, minimizing the risk of financial scandals, report to the taxation authority and create an optimum capital structure. Here, as per the stated table, it can be seen that accountant gains 1st rank over financial adviser, partner, lawyer, mangers and others who give taxation & financial advices to the SMEs. Research supports that 69% of Australian SMEs consider accountant as a most trustworthy stakeholder who work as a financial adviser, while 79% consider it more trustworthy than family, 69%, 80% & 82% preferred accountant over business partner, manager and lawyers. Thus, it indicates that accountant plays a modern role in which, they are liable to prepare accounts, taxation reports and the best advices with recommending right choices and strategies to firms to eliminate the hurdles and achieving success.
Theme: 6. Profitability ratios is a key performance indicator for measuring the results of business operations
Findings: From theoutcomes of study presented by Lukács, (2005)it was found that profitability ratios especially, gross profit and net profit are the most important that areoften used by the Australian SMEs like Stellar Solution, SnagaJob and others to find out that whether they have performed well or not over the previous year. In this respect, policy makers viewed growth in profitability ratios as a favorable aspect that indicates those business hasmade excellent policies and strategies like pricing & others to exceed their turnover and put better control over expenditures like sales, administrative and others in order to get better yield (Lakshm, Martin & Venkatesan, 2016).
Theme: 7. Liquidity and solvency ratios are used by SMEs to keep track over their monetary strength to repay short-term as well as long-term debt holders
Findings: Nandan, (2010)explained that SME’s managers measure the relationship between current assets andliabilities to find out that whether they have enough resources such as inventory, receivables and cash or not to make outstanding payments to the suppliers. For such purpose, they use the current as well as quick ratio and also, compare it with the target ratio of 2:1 & 1:1. However, on the other hand, they use solvency ratios especially debt to proprietor’s fundto measure their financial strength so that long-term borrowings like loans can be paid on right time. With the help of this, they can assess risk and take right decisions about the source of funds to raise money for expansion and diversification.
Theme: 8. Activity ratios are used to measure capabilities and ability of managers to utilize the assets optimally
Findings: Considering the outcomes of research conducted byRakićević& et.al. (2016), it has been foundthat finance manager of Australian SMEs use turnover ratio to detect that whether managers are able to utilize their assets in an effective wayor not. Apart from this, they also compute inventory turnover ratio to analyze ifstock in the firm is optimally and efficiently utilized by the managers or not to get better turnover.
Findings the result, it can be discussed that LR founded that SMEs recruit accountant to get appropriate advices and suggestions for their monetary activities. It is properly evidenced in the data analysis as the report published by National research study in 2013 founded that accountant is the most trustworthy person to whom SMEs trust to get their right tax and financial advices for the success and growth. Furthermore, literature reviewed that poor manager skills & business model are the two most important reasons for SMEs failure and data supported the same as founded that in US, 55% SMEs failed due to unskilled managers and no well planned business model. Apart from this, similar findings have been observed that SMEs construct their accounts and analyze the same through using ratio analysis technique to keep tack over their profitability and progress of financial status over the period through measuring liquidity, solvency, efficiency and role of the managers.
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Considering the results of complete report, it can be concluded that although there is no legal requirement and necessity for the corporations to prepare their annual accounts like SOCI, SOFP and SOCF but still, with the dynamic environment, SMEs construct their financial statements to keep track on their business progress and financial position. Moreover, from the findings of themes, it has been gained that decision-makers of SMEs use final accounts to make suitable policies and strategic plans for the performance enhancement. Further, in the modern era, accountant plays a modified role in SMEs in which they donot only need to prepare the accounts for taxation compliances,but also have to give right tax advices and suggestions about the ways in whichSMEs can bring improvement in their performance. In addition to this, analysis of results revealed that managers make use of ratio analysis technique as a strategic financial analysis tool by making effectual useof Key performance indicators like profitability, liquidity, gearing and efficiency ratios. It enables businesses to take smarter decisions regarding sales maximization, control over expenditures, improved solvency position and liquidity strength as well. As a result, firm can make sure the achievement of set targets and get competitive benefits over the rivalries.
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