Understanding financial information used to assess small firm performance

Abstract

Purpose -The purpose of this paper is to investigate the reality of financial and management accounting in a small group of small firms. Specifically, from the owner's perspective, an exploration is undertaken to see what financial information is collected, how it is used (or not) to make business decisions and evaluate the firm's performance, and the role played by the accountant in that process. Design/methodology/approach -A phenomenological paradigm underpins this exploratory study. Semi-structured interviews were undertaken with the owners of ten small firms, where the focus was on understanding what happens in an organisational setting, as opposed to theory and textbook practice. Findings -The qualitative data supported prior research in other countries. The in-depth analysis revealed a very basic understanding of accounting information and problems with the financial literacy amongst these small firm owners. Accounting reports were not widely produced or used, so an informal assessment, such as how much cash was in the bank, was the primary means of assessing business performance. Accountants were used for taxation services, although some owners sought more general business advice. Originality/value -An understanding is developed of why there might be a gap between textbook rhetoric and reality of accounting practice in small firms. The conclusion is that accounting textbooks need to include more information about the reality of financial management in small firms.

The Importance of Mutual Understanding Between External Accountants and Owner–Managers of SMEs

“…However, it is almost impossible for an individual to excel in every domain of entrepreneurship and have all the necessary resources to hand (Halabi et al. ; Yusoff ).…”

“…SMEs are often founded and managed by individual entrepreneurs. In order to create a competitive advantage, manage their business goals, and ensure survival, owner-managers of SMEs need a range of knowledge, competencies and skills (Halabi et al 2010;Kamyabi and Devi 2012;Kirby and King 1997). However, it is almost impossible for an individual to excel in every domain of entrepreneurship and have all the necessary resources to hand (Halabi et al 2010;Yusoff 2006).…”

Accounting knowledge in innovative firms - direct contacts with external auditors for strategic actions

“…For instance, their use of accounting information is determined by their education level and comfort in interpreting such information (Shawn and Van Auken, 2013). In line with this, studies show that accountants are rated as the most used external source of advice for small firms and that they are important in situations where firm management lack finance and accounting skills (Bennett and Robson, 1999;Berry, Sweeting and Goto, 2006;Blackburn and Jarvis, 2010;Halabi, Barrett and Dyt, 2010), and where, for instance, financiers need to be convinced about a venture's investment potential (Fellnhofer, 2015;Paananen, Renders and Blomkvist, 2016). In such situations, an external auditor (Certified Public Accountant, CPA) can translate and make the accounting information from financial reporting understandable to the owner-manager (Marriott and Marriott, 2000;Perren and Grant, 2000).…”

What it Require to Become an Accounting Partner? Insights from Lived Experiences of Accounting Partners in the Kingdom of Saudi Arabia

“…The same type of research method was employed by (Halabi, Barrett, & Dyt, 2010) to shed a light on the financial information employed for the assessment of small companies performance, where they interviewed small groups of firms. Similarly, Law (2010) used the qualitative method to investigate the reasons behind the lack of female checkers in Hong Kong's accounting sector.…”