Issue 5

SMALL BUSINESS GROWTH NEEDS AN EFFECTIVE FINANCE FUNCTION

By Craig Vickery, Head of ACCA Scotland

It is well known in the corridors of power at both Westminster and Holyrood how important the SME (Small and Medium sized Enterprises) sector is to the economy. 99% of Scottish companies are classed as SMEs and they employ more than half of all employed Scots.

The SME sector is a major employer of finance professionals. Although relatively few finance professionals start their career with a small businesses, 45% of ACCA members have at some point in their lives worked for an SME.

The finance function is hugely important to SME’s. Small businesses with a well-developed finance team can achieve faster, more sustainable growth for longer and can attract investment to help them develop.

Although it is sometimes assumed that SMEs’ accounting needs are driven by regulation, they are in fact mostly driven by genuine business and stakeholder needs. SME stakeholders, from business owners and management to finance providers, government agencies and employees, need the raw material of the finance function – information – distilled into actionable insights.

99% of Scottish companies are classed as SMEs and they employ more than half of all employed Scots.

Building the finance function begins before start-up, at least when business planning is done properly. Once they begin trading, micro-enterprises build finance capabilities to ensure compliance with the law and cement the owner-manager’s control over a growing business. As small businesses mature, their finance teams devote their time to the standardisation and monitoring of business processes, often under pressure from third parties such as investors or customers; but once this process is complete, the finance function can reach its potential and help the business position itself for growth.

Young businesses rely to a great extent on external accountants and maintain relationships with them even after they build their own in-house finance teams. This bond, based on competence and trust, has earned practitioners their reputation as SMEs’ most trusted advisors. Accountants in practice and in-house finance staff are not competitors, because SMEs’ demand for financial skills is not a zero sum game. Rather, financial expertise and capabilities, correctly matched to the businesses changing needs, help SMEs grow and hence develop their demand for the more diverse, value-added advice that proactive practitioners offer them. This is possible because financial capabilities in SMEs are not just a consequence of success but, rather, one of its causes. SMEs with well-developed financial capabilities are much more likely than others to be growing rapidly and sustainably. The impetus for finance function development often comes from investors or supply chain partners, most of the value stays with the business itself. In other words, a well-resourced finance function is a source of competitive advantage.

Accounting for Growth

The goal of the vast majority of SMEs, once the business is established is to grow and expand. To be able to do this in a planned and sustainable way the finance function, be it in-house or external, must be heavily involved. The insights they bring to the table can show what is realistic through organic growth, what the right sort of external finance will be and what the long term financial implications of sourcing external finance are.

Management reporting, business planning and the use of trained finance staff are now tied to supporting growth. The finance function’s role expands substantially in most commercial and strategic directions. The focus tends to be on enabling businesses to access finance, make and assess the case for new products and services, monitor the businesses supply chains and manage its headcount.

ACCA research shows that financial capabilities in SMEs are not just a consequence of growth, but one of its causes. Even after accounting for turnover, headcount, age and sector, SMEs with well-developed financial capabilities are much more likely than others to be growing rapidly (at 30% a year over three years or more) and still retain a ‘low’ or ‘minimal’ risk rating.

SMEs with well-developed financial capabilities are much more likely than others to be growing rapidly (at 30% a year over three years or more) and still retain a ‘low’ or ‘minimal’ risk rating.

As SMEs grow it is more likely they will develop their own in-house finance function, but that doesn’t mean the role of external finance help ends. It is more likely that the business will retain the help of external finance professionals, but the type of advice will change. ACCA does not see accountants in practice as being in competition with in-house finance staff. SMEs demand for financial skills is not fixed. Rather, financial expertise and capabilities, correctly matched to the businesses changing needs, help SMEs grow and develop demand for more diverse value-added advice.

The development of a professional finance function transforms small businesses and helps release their potential. Simply put, SMEs with well-developed finance teams achieve faster more sustainable growth for longer.

To achieve this, finance professionals in SMEs need a broad skillset and growing businesses need to build financial capabilities that they can “grow-into”. This includes hiring or developing finance professionals who can run the large businesses that they may soon become.

From accessing finance and managing cashflow to managing employment relations and protecting intangible assets, early planning and capacity building in-house can achieve at a modest cost what no amount of last-minute advice can deliver later.

Resources

A new, free guide for small businesses as well as other useful support initiatives have been launched by ACCA aimed at helping SMEs with their finance operations, covering a range of issues, including hiring and training financial staff, outsourcing finance functions, software and systems advice as well as planning for future growth. Other useful support and guidance is also to be made available. Find out more at http://www.accaglobal.com/en/research-insights/small-business.html

By Craig Vickery, Head of ACCA Scotland

Issue 5

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