Issuu on Google+


accounting and business small business special edition 2012

a lighter touch? Getting the balance right on regulation

beyond banks access to finance developing SME FINANCE FUNCTIONS

SME_front_cover.indd 1

27/02/2012 12:09

s t n a t n u o c g Ac i b k n i h ll) t a m s o d (an wh

es t r ain e e o ur r u g r asp s a n We e h ave s r e b em . ic t ure an d m g ger p i b d e n h of t der st a ls o un ss an d And a b u sin e l a ’s n o i at . That in te rn is sue s t e e r k a r a t an t s l o c al m cc o un a r A i C C Th e why A ness. r b u si o f lows l d a o go inin g a r t s u e an d rig o r o f fe c tiv e e b to an d them a teve r h w , t n le n ge. r eleva e c h al h t r e v where

3 Fuelling the recovery Small businesses have long formed the backbone of the global economy, but the challenges of the financial crisis and its difficult aftermath have highlighted how critical they are to recovery. To describe SMEs as a ‘sector’ underplays their vast importance. In ACCA’s top-20 global markets they consistently make up the vast majority of businesses – from 85% to 99.9%. They also provide over three quarters of all employment in these markets. The Global Entrepreneurship Monitor estimates that there were some 388 million entrepreneurs worldwide actively engaged in starting and running new businesses in 2011. It classified some 141 million of these as early-stage entrepreneurs expected to create five or more new jobs in the next five years. It is this potential for growth that is so important for debt-laden governments – and for the economic welfare of billions of individuals around the world. The surest way for governments, businesses and households to deal with their debts is to increase incomes, and hence tax receipts, and it is the creation of SME jobs and livelihoods that will drive this. ACCA, through its membership, activities and values, has long been involved in SME issues. This special edition looks at some of the critical issues facing them, and explores how best to create the right conditions for their health and growth. In many countries over-regulation is holding back SME development, but can deregulation make things worse? How can SMEs access finance now that many banks have tightened their lending criteria? And how can we ensure that microfinance properly helps small-scale entrepreneurs in emerging economies? We also explore the vital role that small and medium-sized accountancy practices (SMPs) play, with their evolution into reliable, one-stop sources of advice and support. And we should not forget that SMPs themselves are SMEs, making them well placed to provide advice that is practical, realistic and of real help. Whether working for an SME, SMP or in the public sector, I believe that accountants, with their broad-based and businessfocused training, are in a great position to play a vital role in the recovery. Mark Gold FCCA is chairman of ACCA’s Global Forum for SMEs, a former ACCA president and a partner at Silver Levene

CONTENTS 4 Regulation Creating the right climate for micro businesses 7 Steve Forbes How to lay a path for innovation 8 Beyond the banks A look at alternative access to finance options 10 SME finance functions How they grow and evolve 12 Future SMPs What small accountancy practices can do to thrive and how they can adapt 14 Microfinance Is it always the right answer for developing economies? 16 Feeling the squeeze Times are tough for Singapore’s SMEs 18 ACCA on SMEs More research and intelligence on SME-related issues

SME_intro.indd 3

About ACCA ACCA offers businessrelevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. We support our 147,000 members and 424,000 students through a network of 83 offices and centres. Accounting and Business is the ACCA members’ magazine:

Editors Rosana Mirkovic, Chris Quick Designer Robert Mills Sub-editors Dean Gurden, Vivienne Riddoch Copyright ACCA 2012 The Council of ACCA and the publishers do not guarantee the accuracy of statements by contributors or accept responsibility for any statement they may express in this publication. No part of this publication may be reproduced, stored or distributed in any way without the express permission of ACCA.

Global Forum for SMEs ACCA’s Global Forum for SMEs provides a unique platform for promoting the role of SMEs in the global economy. Representing over 15 countries and a wide range of backgrounds – from finance institutions, academics and professional advisers to entrepreneurs – the forum enables ACCA to represent the sector’s needs at a global level and facilitate the sharing of best practice. To talk to someone at ACCA about SME issues, contact: Rosana Mirkovic, head of SME policy, Manos Schizas, senior policy adviser,

29/02/2012 10:20



Driving down regulation While reducing the regulation of micro businesses might be necessary to kickstart recovery, wholesale red tape slashing can be counterproductive, says ACCA’s John Davies If there is one straw that politicians in much of the world are currently clutching at in their plans to pull their economies out of the economic mire, it is that private enterprise, and especially SMEs, will help them do this. By providing the right conditions in which businesses can start up, thrive, take on staff and make profits, the private sector will – they hope – respond and we will see a reduction in unemployment, lower dependence on welfare spending, a boost to tax revenues and, ultimately, restoration of sustainable economic growth. Creating the right conditions for encouraging enterprise means ensuring a climate in which it is worthwhile for entrepreneurs to take the risk of starting up and running a business. This simple fact lies behind the initiatives now being undertaken by governments and regulatory bodies in many countries to encourage entrepreneurial activity. And since the vast majority of enterprises are ‘small’, or even ‘micro’, the SME sector is currently receiving more than its fair share of attention from politicians and regulators. This makes perfect sense: in the EU, micro businesses account for 92% of

SME_regulation.indd 4

all enterprises and small firms account for a further 7%; together they make up over half of the EU workforce. The pattern is similar worldwide – in Hong Kong SMEs account for 98% of all business units and 48% of the workforce, while in Australia the figures are 97% and 49% respectively. It also appears that SMEs are responsible for proportionately more

governments embellish minimum EU legal requirements with additional requirements of their own). The headline commitment in this plan is to exclude micro entities from the scope of all proposed EU legislation, unless the case can demonstrably be made for including them. Therefore, there will henceforth be a basic presumption that micro

THE MANDATORY AUDIT REQUIREMENT FOR THE SMALLEST COMPANIES HAS BEEN ABOLISHED IN COUNTRIES LIKE FRANCE AND SINGAPORE job creation than large firms, meaning that the sector is seen as key to solving that most dangerous of political problems – mass unemployment. So with all this in mind we are seeing a pattern of deregulatory activity across much of the world, aimed primarily at facilitating growth in the SME sector.

Action plan Late in 2011 the European Commission published an action plan designed to minimise the regulatory burden on micro enterprises and to eliminate the practice of ‘gold plating’ (where national

businesses should not be covered by new compliance obligations. In the UK, the government has undertaken a process of reassessment of the value of all existing business regulations, and has specifically proposed that micro businesses should be able to get rid of unwanted workers more easily, by exempting them from the employment protections that currently exist. ‘Red tape’ has already become one of the touchstone issues of the US presidential election campaign and seems likely to form a substantial issue in the general election in November.

27/02/2012 12:10



Professor Francis Chittenden In order to make good decisions, business owners need reliable accounting information, as do their suppliers, their banks and the public agencies with whom they transact, such as tax authorities. As the economic recovery begins to gather pace in Europe, it is important that Commission policies should support practices that enable good business decisions to be made. This is especially important for SMEs that are recognised as the ‘engine of recovery’ and the vast majority of these are micro businesses – ie they employ fewer than 10 staff. The availability of low-cost accounting packages for such businesses has changed the cost of keeping records and producing accounts and this should be taken into account in any decisions. Francis Chittenden FCCA is professor of small business finance at Manchester Business School, an ACCA Council member, chairman of the ACCA UK SME Forum and a member of the ACCA Global Forum for SMEs

SME_regulation.indd 5

REGULATORY REFORM: WHAT NEXT? Accountancy can sometimes itself be the target in this grand effort to deregulate. We have seen a concerted effort by politicians in the EU to eliminate statutory requirements for micro businesses to prepare annual accounts, and to publish them on the public record, on the grounds that such requirements represent a ‘burden’ on businesses. On similar grounds, the mandatory audit requirement for the smallest companies has in the recent past been abolished even in countries like France and Singapore, which have long championed the universal audit.

Adding value So where should accountancy stand on the issue of deregulation in the current economic climate? First and foremost, we must remember that the core function of accountants is to add economic value to the affairs of their clients or employers. Accountants do this by promoting the cause of efficiency in the way that businesses are run; the aim is to save businesses money and help them become more profitable. For this reason accountants are always likely to be instinctively attracted to and supportive of any initiative which promises to save compliance costs for their client or employer.

As far as the profession is concerned, therefore, the guiding principle must be that regulatory measures which impose costs in excess of their benefits (if any) should be scaled back or eliminated; accountants are always likely to support meaningful efforts to reduce burdens and to free up businesses to get on with the job. The process of deregulation must, however, be careful to acknowledge both sides of the cost-benefit equation. A simplistic approach of cutting business costs by scrapping regulatory requirements risks being counterproductive in the long run if by doing so you eliminate a valuable benefit. Since all regulatory requirements will have been originally introduced with the aim of achieving some form of stated benefit, the objective of the exercise must be to establish what the net benefit of abolition would be. So the costs and benefits of individual measures have to be weighed up carefully on the basis of the available evidence. Where the projected benefits of regulation are financial or economic, they can be more easily assessed than where they are more intangible, making the decision as to whether to retain individual

27/02/2012 12:11



requirements relatively straightforward. The exercise must also take into account the argument that businesses should owe obligations to wider society and to individuals and groups within society, and that the maintenance of this situation is good for them and for the economy as a whole. For example, businesses will often employ staff, they will obtain credit from clients and customers, and they will owe debts to the state in the form of taxes. For businesses to owe reasonable obligations to their stakeholders, in the form of what is sometimes called a social licence to operate, may result in indirect benefits for those individual businesses, in that individuals will be more willing to work for them and providers of finance and other businesses will be more willing to lend and extend credit to them. On this basis, what is an appropriate regulatory burden for businesses should always be considered on the

basis of the assessment of the net benefits of regulation, taking into account, primarily, the reasonable interests of a firm’s external stakeholders, but not forgetting the indirect benefits for businesses themselves. Those net benefits are

but should also be highlighting those areas of regulation which represent the biggest burdens on individual businesses and which result in the highest net costs. The increasing number of businesses, in many countries, which

TO GET PEOPLE WORKING, WE NEED TO ADDRESS THE CONCERNS OF BUSINESSES AS TO THE COSTS AND COMPLICATIONS OF TAKING ON STAFF always likely to be less evident for small and micro businesses because of their proportionately lower impact on the outside world and because of the relatively higher cost of compliance at this level: it is therefore right that the focus of governments and regulatory bodies should be at this level. However, the process of deregulation should not only be focusing on the sectors that are in the greatest need,

Dr Andrea Benassi, UEAPME Simplifying legislation and reducing useless and excessive administrative requirements is vital for the European economy in general and for smaller companies in particular. However, assimilating accounting to a mere administrative burden is contrary to the business reality. On the contrary, robust accounting is essential to business management and growth, to the proper functioning of markets and to the development of a sound and sustainable economy.

have no employees at all seems to reinforce the view that excessive employment-related regulation is seen by many entrepreneurs and prospective entrepreneurs as a deterrent factor. New business activity of all kinds, including self-employment, is of course much to be welcomed. But if we are to get more people working, we also need to address the concerns of businesses as to the costs and complications of taking on staff. Setting up in business always has been and always will be a calculated risk. In these hard economic times governments need to encourage as many individuals as possible, including those who have never run a business before, to take this risk. They must be incentivised to do this, though, and this means providing them with real encouragement to believe that the potential rewards outweigh the dangers. Stripping away layers of regulation that act as a disincentive has to be a key part of that process.

Dr Andrea Benassi is secretary general of UEAPME (the European craft and SME employers’ organisation) and a member of the ACCA Global Forum for SMEs

John Davies is ACCA’s head of technical


SME_regulation.indd 6

27/02/2012 12:11




Making room for the ‘big idea’ Enterprise and innovation still thrive in economic adversity, but business leaders shouldn’t neglect the basics, says Steve Forbes, editor-in-chief of Forbes magazine Last year it often felt as though Europe seemed to be at the centre of the world. Every week brought with it either one more deal to end the turmoil in financial markets or one more threat of an apocalyptic endgame. Now, as cash-strapped governments are being forced to cut spending and banks are struggling to strengthen (or shrink) their balance sheets, Europe’s businesses are being called on to pick up the slack. Many question whether they can. This question was on our minds, too, as we surveyed our readership ahead of the launch of our new Forbes Europe publication. From the shopfloor to the boardroom, the spirit of enterprise and innovation thrives in economic adversity, but this doesn’t mean that business leaders and policymakers can afford to take it for granted. If our research demonstrates one thing, it is just how hard it is to pick winners. Trying to identify ‘rising stars’ or obsessing about a ‘great idea’ can blind leaders to their organisations’ true potential. As for innovative ideas, they are not nearly as hard to come up with as they are to implement. It is the inelegant and largely unsung task of securing everyone’s buy-in and mobilising resources that makes an idea into an innovation. That’s why governments increasingly find that innovation can’t be engineered. If anything, innovation tends to suffer when risk-taking is outsourced to the government. Often the top-down way in which businesses manage their own resources is the biggest barrier to innovation. Does this mean that planning and budgeting is unnecessary? No. Serendipity on a shoestring will only take a business so far. But it makes more sense to make room for innovation where possible than to try to anticipate it.

SME_Forbes.indd 7


The ACCA/Forbes survey, conducted in early 2011, studied the personalities and experiences of 1,245 executives across Europe – focusing on France, Germany, Italy, Poland, Switzerland and the UK. The resulting report, Nurturing Europe’s Spirit of Enterprise, provides a glimpse into the process of enterprise and innovation in businesses big and small. Although the study set out to make international comparisons, these were superficial. What it discovered instead is the value in diversity. ‘Movers and shakers’ are great at coming up with new ideas, but have trouble seeing them through. ‘Star pupils’ are better at getting buy-in from superiors. ‘Experimenters’ provide energy and drive. ‘Hangers-on’ are important in gaining organisational buy-in. In the current environment, it is perhaps not surprising that poor access to finance emerged as the biggest obstacle to innovation. But it was not the inability to raise finance externally that most frustrated executives; rather, it was the difficulty of securing funds internally. While innovation cannot be predicted, ensuring that a diversity of people are in the right functions, and having a finance team that supports and understands the needs of entrepreneurial business, as well as resources to serve them, is a good way of ensuring that when innovation does happen, businesses are in a position to grow on the back of it. Manos Schizas, senior policy adviser, ACCA

27/02/2012 12:09



The innovation burst One of the by-products of the banking crisis is the range of increasingly innovative financing options now on offer to SMEs looking to grow and develop, says Andy Davis If there’s one word that trumps all others for importance across the developed world today it’s growth. As economies in Europe and the US try to emerge from beneath the vast debt load built up during three decades of financial deregulation and breakneck credit expansion, the importance of sustaining economic growth has become painfully clear. The surest way for governments, businesses and households to tackle their debts is to increase their income – and that means creating jobs that let individuals earn more and provide governments with higher tax receipts. This explains why the financial health of SMEs is prompting so many policy initiatives – from improved tax breaks for business angels to large-scale loan guarantee schemes. SMEs are the biggest employers in most economies and also the main source of new jobs. So ensuring they are able to finance themselves during a period when the banks they have traditionally relied on are tightening lending criteria has rarely been as important as it is now. The first thing to acknowledge here is that banks are by far the most important source of finance for SMEs across the developed world. However, the ongoing re-regulation of the banking sector, for example via the Basel III rules on capital adequacy, will mean that credit supply will be more restricted than it was in the years leading up to the financial crisis. The widely expected pullback by banks has prompted a burst of innovation in SME finance and business owners are beginning to see a far wider choice of ways to raise equity and debt capital. Not surprisingly, the internet has proved a critical catalyst for many of the new initiatives, particularly those often described as ‘peer-to-peer’ or

SME_beyondbanks.indd 8

‘crowdfunding’ options. Businesses such as Funding Circle and ThinCats in the UK are beginning to show what can be achieved by using the internet to bring together people with money available to lend and aggregating their individual amounts into loans that are then channelled to SME borrowers. Since its launch in August 2010, Funding Circle has so far arranged total loans of about £24m to 590 borrowers, and its loan book’s rate of growth is accelerating. Typical APRs are around 9% to 10% and personal guarantees are usually required; but for many business owners, availability of finance is as important, if not more so, than simple cost.

Equity developments Similar developments are emerging on the equity side. Crowdcube, a one-yearold startup, allows companies that are already trading to raise equity finance using the same crowdfunding method. It recently completed its biggest deal so far – the sale to 149 investors of a 10% stake in the Rushmore Group, which operates bars and clubs in

London, for £1m. The number of companies seeking finance via this route – and the number of people willing to invest – is growing. The internet has also enabled the emergence of alternative sources of working capital for companies that are finding access to bank overdrafts – the default option for most – more difficult. The template here is The Receivables Exchange, set up in the US in 2008. This site enables businesses to auction their outstanding trade invoices to financial buyers, who advance a percentage of the invoice’s face value to the business in return for a fee, the debt being repaid when the end-customer finally settles the invoice. This form of finance is a long-established, though often expensive, way for companies to improve their cashflow and release working capital back into the business. The addition of an online auction element to the process, however, seems to have had the effect of driving


Valerie Veira, Jamaica Business Development Corporation The profile of the SME entrepreneur is rapidly changing as training institutions at all levels introduce programmes on entrepreneurship. The increased creativity and innovation in new business ideas is evidence of the impact this is having on economies globally. There is now an obvious need for complementary and innovative funding alternatives to traditional banking products. It is encouraging that organisations such as ACCA are actively involved in assisting in mainstreaming the issues for the SME sector. Unleashing the potential of the sector could provide solutions to some of the economic challenges on the global economic agenda. Valerie Veira is CEO of the Jamaica Business Development Corporation and a member of the ACCA Global Forum for SMEs

27/02/2012 12:07




Sylvia Banda, Sylva Group of Companies SMEs in Africa in general have a huge challenge in accessing finances from financial institutions as they are considered to be high-risk businesses and attract high interest rates. As an alternative, the African Women’s Entrepreneurship Programme – of which I am chairperson in Zambia and interim president in Africa – encourages SMEs to access procurement financing with lending institutions. The programme – an initiative of US Secretary of State Hillary Clinton – operates in 44 African countries and assists African women who are major contributors to the world economy but get very little in return. The programme ensures that women in SMEs retain a portion of their contributions and promote investment growth due to reduced diversion of funding. Sylvia Banda is managing director of the Sylva Group of Companies and a member of the ACCA Global Forum for SMEs

SME_beyondbanks.indd 9

down the cost of working capital to companies who choose this route. Users of The Receivables Exchange report falls of 30% to 50% in their working capital costs, thanks to the competitive bidding that the online platform enables. Other initiatives abound. Entrex, a Chicago-based company, enables small private companies to raise highyield loan finance based on a fixed share of revenues over a seven-year period, which has the attraction for family-owned businesses of enabling them to raise cash without having to give up equity. Stephen Watkins, the founder and CEO of Entrex, says that his company has so far arranged the issue of US$1.3bn of these securities in the past year, mostly in the US, though a European expansion is on the agenda. A growing number of companies in the UK, meanwhile, are deciding to issue bonds direct to the public, without listing them on an exchange, meaning that there is no secondary market in the securities so they are akin to a private debt placement. This makes them illiquid, but also removes the need to comply with UK Listing Authority and EU Prospectus Directive requirements, which would increase the cost of arranging a bond issue and push the minimum viable size far beyond the level relevant to SMEs. It is often said that the most dangerous words in investing are ‘this time it’s different’, but perhaps, at least for SMEs looking to grow and expand, those words will for once prove true. Certainly, one positive legacy of the banking crisis will be a far wider set of choices open to business owners to raise money. Andy Davis is a freelance journalist, former editor of FT Weekend and author of NESTA’s Beyond the Banks

27/02/2012 12:07



From shoebox to cubicle ACCA’s Manos Schizas draws on new research to examine how the SME’s finance function can evolve to become a professionally managed and led department A substantial part of the accountancy profession globally works within small businesses, yet it is often hard to think of them as finance employers – there are just too many of them, and they are too diverse in their characteristics and needs. Moreover, as much as the profession might hate to admit it, no entrepreneur ever set out to build a top-notch finance department; rather, over time they find, sometimes reluctantly, that they need finance to help them get there. Somewhere along the way, finance develops from an afterthought to a necessity and from the proverbial shoebox to a professionally managed and led department. To help us understand how, ACCA turned to a rich source of data on SMEs in the UK: the 10,000-strong sample of the SME Finance Monitor. The Monitor, which is funded by the UK’s major banks and

SME_professionals.indd 10

which ACCA helped design, collects information about management reporting, business planning and employment of financially trained (though not qualified) staff among SMEs, as well as a host of other information on business characteristics

mostly not about size, but about changing business needs.

Establishing controls As very small businesses begin to generate consistent revenues (mostly while they still have fewer than 10

AS SMALL BUSINESSES BEGIN TO GENERATE CONSISTENT REVENUES, OWNER-MANAGERS REALISE THAT THEY CAN’T CONTROL EVERYTHING and challenges. This offers us a unique glimpse into the development of the finance function. The Monitor data tell us that, generally speaking, the development of the finance function proceeds through three distinct stages. Although we use turnover and employment thresholds to define these, the three stages are

members of staff and a turnover of under £100,000), owner-managers begin to reconcile themselves to the fact that they can’t control everything or everyone, nor operate without giving an account of themselves. The earliest uses of management reporting, formal business plans and financially trained staff are therefore all about monitoring

27/02/2012 12:10

11 SME FINANCE MONITOR employees and aligning their incentives to business objectives, putting internal controls into place and, in the case of newly incorporated businesses, living up to the obligations to stakeholders. These priorities become even more pressing if the business is growing particularly fast, in which case both the use of financially trained staff and business planning are even greater.

Standardising and monitoring At the next level (turnover from £100,000 to £1m, up to 50 staff), small businesses with diversified internal resources begin to use information in order to optimise their processes and gradually become better at producing standardised information and feeding this into formal business plans. At this stage, quality management and online revenue become important drivers of both management reporting and business planning. In addition, financially trained staff are hired to monitor cashflow and manage credit, as well as report on the progress and resource implications of improving business processes. It’s not entirely clear why online activity helps strengthen the finance function, but it is worth noting that back in the days of the dotcom bubble, research on management accounting in particular boomed just as impressively as internet stocks. E-commerce means that it’s cheaper and quicker to generate information about the business, while going virtual and addressing a global audience makes it much more challenging to allocate and control costs or understand what drives sales.

Accounting for growth On reaching turnover of roughly £1m or 50 members of staff, a growing business may still appear relatively small to casual readers of the financial press or to government officials, but internally its resources are stretched to the limit. At this stage, management reporting, business planning and the use of trained finance staff are

SME_professionals.indd 11

typically tied to supporting growth by enabling businesses to access finance, make and assess the case for new products and services, monitor their supply chains and manage their headcount. Not all growth is the same, of course. The steady-state growth of mature enterprises at this stage tends to generate more business planning than the explosive growth of what are commonly known as ‘gazelles’ – perhaps because there is time for reflection, or perhaps because businesses become more introverted and less dynamic as they begin to exhaust their potential. And then there is that other kind of growth: the rising tide that lifts

all boats. In an economic boom, businesses can grow explosively for a while without building the crucial foundation of a finance function focused on growth. For instance, medium-sized UK businesses born between 2002 and 2007 are less likely to have a financially trained person in charge of their finances. Alternatively, SMEs in countries with strong financial industries may find good finance staff to be too expensive during such times. Either way, many such businesses will have regretted their decision during the recent downturn. Manos Schizas is a senior policy adviser at ACCA


Mike Dixon The benefits of utilising the skills of a finance professional within an SME include improving financial management and commerciality while reducing financial risk. With strategic input to commercial decision-making and business planning, finance professionals can ensure that margins and profitability are achieved while instilling effective internal controls to protect assets. This skill base provides a good balance to the opportunistic approach of many SME owners. Mike Dixon FCCA is an ambassador for SMEs and a member of the ACCA Global Forum for SMEs


Arjumand Minai Finance professionals, armed with the skills for reporting, accounting, compliance, risk management and performance analysis, can play a pivotal role in ensuring the funding and growth of SMEs. These companies make a positive contribution to the socioeconomic development of emerging economies, and could become growth engines, but are characterised by deficient documentation, lack of planning, limited access to funds, ineffective management and lack of sustainability. Arjumand Minai FCCA is CEO of Standard Chartered Leasing (Pakistan) and a member of the ACCA Global Forum for SMEs

27/02/2012 12:10



Small firms: big future? IFAC’s Dr Giancarlo Attolini looks at how small accountancy practices should adapt to the new global landscape in order to capitalise on the emerging opportunities

Dr Giancarlo Attolini

The global economy has changed a lot in the past few years and the accountancy industry has not escaped these changes. Hence, it’s no surprise to find that small and medium-sized accountancy practices (SMPs) are facing a changed economic and regulatory landscape – one characterised by significant challenges, tempered by emerging opportunities, and sprinkled with cautious optimism. The IFAC SMP Quick Poll: 2011 Round-up has revealed that regulatory burdens and economic woes continue to top the list of challenges faced by SMPs and their small business clients. Of course, the overall results mask some significant regional variations. But a key lesson for SMPs is that they are best placed to thrive in the new global economy by embracing change. The fourth quarter Quick Poll pulled in more than 2,400 respondents worldwide. In Europe, economic uncertainty followed closely by difficulties accessing finance ranked as the top two challenges faced by practitioners’ SME clients. Meanwhile, burden of regulation ranked as the top challenge in all regions except for Europe and Asia. When accountants

SME_IFAC.indd 12

were asked to name the biggest challenge, keeping up with new standards and regulations ranked first, followed by attracting and retaining clients in all regions except for Asia. Europeans were noticeably less positive about the future than those from other regions, but according to the European Commission’s Economic Sentiment Indicator, sentiment increased in January for the first time since March 2011. As the economy starts to pick up, there will undoubtedly be opportunities for SMPs. So what do they need to do to curb challenges and capitalise on opportunities? How best to adapt will depend very much on the particular characteristics and circumstances of each practice, but here are some general suggestions. Ramp up marketing and promotion According to the Quick Poll, SMPs feel that the growth in practice fees will be driven primarily by securing business from new clients. This will demand more and smarter promotion and marketing of the practice, its services and its expertise. Marketing efforts should focus on what distinguishes SMPs, including their reputation for competency and trust, responsiveness and geographical

proximity, according to IFAC’s paper, The role of SMPs in providing business support to SMEs. Compilation is an area that may be worth increased promotion as the International Auditing and Assurance Standards Board recently released a new standard on compilation engagements. Compilation and accounting was said to be the fastest growing source of revenue by 40% of respondents. Harnessing emerging technologies like cloud computing offers the opportunity to both increase your service offerings and do more with less. SMPs can now provide SMEs with a full range of remote services, from basic bookkeeping and payroll to virtual CFO, in a way that is safe, secure and more costeffective than traditional face-to-face delivery. SMEs can thus enjoy many of the benefits of having access to the expertise of an in-house professional accountant that larger entities enjoy. Focus on advisory/consulting services Business advisory, from tax consulting and financial management to newly emerging services like advice on sustainable practices, is a crucial growth area. The poll found it was the second fastest-growing source of revenue after


Professor Robert Blackburn is director of the Small Business Research Centre, Kingston University Business School, and a member of the ACCA Global Forum for SMEs The needs of SMEs are changing and this provides new opportunities for SMPs – hence they need to refresh their professional services. This has implications for the way in which SMPs are organised, as well as their professional competencies. Many will specialise or work increasingly with others through networks. Those in SMPs will have to develop their own professional competencies to ensure they become recognised as the source of professional business advice for SMEs.

27/02/2012 12:21


GROWTH RESEARCH PAPER accounting and compilation. But perhaps most telling was that insufficient partner time and marketing services to clients jockeyed for the position as the top challenge in building advisory/consulting services work. SMPs clearly need to free up partner time to make it work, perhaps use value-based pricing to ensure a good return and, again, ramp up their marketing. The poll revealed that the main reason SMEs seek advisory/ consulting services from a practice is an existing customer-client relationship, suggesting that this should be marketed to existing clients where ethical rules permit, even though new clients are driving business growth overall.

Concerns around regulation and standards are still uppermost in the minds of SMPs and SMEs. According to an earlier IFAC poll, the nub of this concern seems to be the pace or speed with which regulation and standards are changing, more than complexity and volume. Fortunately, there are encouraging signs. Politicians, policymakers and regulators seem to be increasingly aware of the concerns around regulations and standards. The European Commission is committed to reducing ‘administrative burdens’, while in the US, there is growing pressure to simplify the tax code and financial


Rosanna Choi FCCA is a partner of CWCC, chairman of the ACCA Hong Kong Committee,and a member of the ACCA Global Forum for SMEs To survive in an increasingly complex, flat and fastpaced environment, the needs of SMEs are changing every minute. While audited financial statements are still preferred by most stakeholders, the change in needs has expanded SMEs’ requirements for SMPs from mainly compliance works to business advisory services, including forming business plans and financial forecasts, identifying and managing risk, information technology, and mergers and acquisitions.

Ken Lee FCCA is a partner with Lee & Lee Associates, and a member of the ACCA Global Forum for SMEs The SMEs in China’s dynamic environment are facing more and more challenges including, but not limited to, tax compliance, tax planning, and labour and market risks. Therefore, on top of traditional accounting, audit and tax filing services, they are also working with our team, an SMP, to seek professional advice such as transfer pricing, financial planning, mergers and acquisitions, employment, or even performance management and corporate culture building.

SME_IFAC.indd 13

reporting for private companies. But one needs to ask whether these steps go far enough, are the right steps to take, and if no change is a better option. See to learn more about the IFAC SMP Committee and its support for SMPs, where the SMP Quick Poll and other information can be accessed. Dr Giancarlo Attolini is chair of IFAC’s Small and Medium Practices Committee. He is a board member of CNDCEC, the Italian accountancy profession’s governing body, and a founding partner of accountancy, tax, and law firm Attolini Spaggiari & Associati, based in Reggio Emilia, Italy

*VIEW FROM: ROMANIA Mihaela Ioana Niculescu FCCA is general manager, Foqus Accounting SRL, and a member of the ACCA Global Forum for SMEs SMPs need to be always up to date with legislative changes which affect their client’s activities. Therefore, the role of SMPs has changed from providing accounting and audit services to providing business advisory services, such as financial forecasts and information technology. Continuous professional improvement is the most important way for SMPs to meet the increasing needs of SMEs, along with a dedicated professional attitude towards clients’ needs.

27/02/2012 12:21



Big role for small loans? Small business finance in developing economies has some way to go, and while microfinance can help, it should not be seen as a miracle cure, says ACCA’S Rosana Mirkovic Microfinance was, until recently, universally considered the ‘critical tool in the fight against poverty’. In 2006 Professor Muhammad Yunus, founder of Bangladesh’s Grameen Bank, was awarded the Nobel Peace Prize for his role in developing the sector. In the last 25 years, the bank has loaned around £3bn to more than six million of the very poorest in Bangladesh. Most notably, the bank boasts a 95% to 99% repayment rate, demonstrating that the poor – otherwise considered un-creditworthy – do indeed make good borrowers. Professor Yunus’s prize consequently catapulted the sector beyond the


Professor Muhammad Yunus, founder of ethical lender Grameen Bank

MICROFINANCE CANNOT BE THE SORT OF PANACEA THAT POLICYMAKERS HAVE TOO OFTEN CLAIMED IT TO BE international development community and into mainstream consciousness. However, 2010 and 2011 were not good years for those working in microfinance. A spate of widely publicised suicides in the Indian state of Andhra Pradesh was believed to be linked to the high interest rates and heavy-handed tactics of microfinance institutions. Then a number of studies emerged calling into question the evidence for the sector’s poverty reduction claims. Finally, the global financial crisis shook the common perception that the microfinance industry was largely cushioned from international capital market developments. In fact, the large growth rates observed in the sector decreased significantly in Central America and the Caribbean, Eastern Europe, and the Middle East and Central Asia as a direct result of what was happening in the financial markets across the globe.

SME_microfinance.indd 14

Whatever these developments may be signalling, the stark truth that financial services are not reaching the majority of the world’s population remains. The World Bank estimates that in many developing countries, less than half the population has an account with a financial institution. On the other hand, in Western Europe and North America, over 80% of the population have an account, compared to only 20% in Sub-Saharan Africa. It is the small firms in developing economies that especially benefit from microfinance services, as they are often excluded from conventional sources of funding. In fact, access to finance is one of the most frequently cited obstacles to growth by small firms in developing economies. And there is a much wider interest in opening up the funding channels than in the benefits for the individual entrepreneur; increasing the flow of finance to viable

Borann Kea, AMK Cambodia With more than one million clients, a US$0.5bn loan portfolio and almost 10,000 employees, microfinance is one of the most vibrant sectors in the Cambodian economy. Most microfinance institutions (MFIs) began as non-governmental organisation (NGO) programme activities in the 1990s. The sector has grown consistently, with formal licensing and regulation established by the National Bank of Cambodia in the early 2000s. There are now 30 licensed MFIs, most of whom concentrate on credit/loan activity. Seven MFIs also have deposittaking licences. Measured by client numbers, the MFIs sector is larger than the commercial banking sector. But most MFI loans are small, catering to the agricultural and SME sectors. Many Cambodian MFIs pursue a double bottom-line strategy, targeting financial returns, but also working to reduce poverty. The sector survived the global financial crisis without any major disruptions and grew by 40% in 2010 and 52% in 2011. Borann Kea ACCA is deputy CEO and CFO of AMK Cambodia

27/02/2012 13:05


This Bangladeshi woman used a loan from Grameen Bank for her dyed-cloth business businesses helps new firms enter the market, grow and innovate, which in turn helps drive economic growth. Microfinance indeed can be a pivotal enabler in this process. But it cannot be the sort of panacea that policymakers have too often claimed it to be. In our increasing frustration at the persistence of world poverty, we want to believe in a powerful tool to solve it. The mistake we cannot make again is to believe that microfinance is the entire solution. In the case of microloans for small business, we know the demand for SME finance in the developing economies has still largely not been met. But to start and grow a business, opportunities need to first exist. Therefore, financial inclusion is only part of the equation and must be considered against a backdrop of other elements responsible for economic advancement, including education, infrastructure and technology. After all, recent crises have shown that building sustainable financial markets is a challenge in many parts of the world. Microfinance is no exception and we should not abandon its cause at the first sign of trouble. Rosana Mirkovic is head of SME policy at ACCA

SME_microfinance.indd 15


Anne Kimari, Jitegemee Trust The microfinance sector in Kenya has grown in significance recently, with real strides being made in financial inclusion. A study in 2009 by Financial Sector Deepening (FSD) and Central Bank of Kenya (CBK) showed that financial exclusion in Kenya reduced from 38.4% to 32.7% between 2006 and 2009 on the back of expansion in the microfinance space. That gap has now closed even more. A large part of the expansion was also attributable to the success of institutions like Equity Bank and the start of mobile banking through Safaricom’s M-pesa, launched in March 2007. The increase in ‘formal’ and ‘semi-formal’ financial services such as microfinance institutions led to an increase in financial inclusion from 26.4% to 40.5% of people by the end of 2009. In the same year the ‘informal’ financial service providers declined from 35.2% to 26.8% on the back of this expansion. Kenya still has a long way to go and I believe microfinance still has a significant role to play. Thankfully, the kind of negative sentiments elsewhere have not been felt in Kenya, meaning the populace appreciate what institutions are doing in enabling the poor Kenyan to access finance. Anne Kimari FCCA is CEO of Jitegemee Trust and a member of the ACCA Global Forum for SMEs

MICROFINANCE POLICY PAPER ACCA’s conference, ‘Better Business Kenya 2011’, asked what the prospects of the microfinance industry are and how professional accountants can ensure that it lives up to its promise. ACCA published a policy paper summarising the resulting insights for the present and future leaders of industry in Kenya.

27/02/2012 13:05



Little gem: this jewellery store is one of 140,000 SMEs in Singapore

Small but giant More than half of Singapore’s SMEs started in the last 10 years no longer exist, yet still they contribute 50% to its GDP. It is a sector that cannot be ignored, says Mint Kang If there is one class of business that cannot be overlooked, it is SMEs. Of all the enterprises in Singapore, 99.3% are SMEs and small components – subsidiaries, branches or joint ventures – of multinational corporations (MNCs) operating in Singapore. They contribute up to half of its gross domestic product (GDP). ‘SMEs are an employment engine,’ says Victor Tay, chief operating officer of the Singapore Business Federation. ‘We have over 140,000 SMEs in Singapore; if each one employs 10 people, that’s 1.4 million jobs.’ SMEs are also an integral part of the supply chain for MNCs in Singapore and around the region, in the form of contract manufacturing, outsourced services or even research and development. ‘Their support is important in drawing foreign companies to come here,’ says Tay. At the same time, however, SMEs are uniquely vulnerable. Citing statistics showing that, over the last 10 years, as

SME_Singapore.indd 14

many as 55% of SMEs begun during that period have died off, Tay points out that many are simply not resilient enough to weather economic vagaries. This is despite indicators of a definite improvement in the performance of SMEs over the last few years. The stronger ones, in particular, are doing well, says Chen Yew Nah, managing director of the DP Information Group. ‘More and more of them are passing the $100m turnover mark,’ she observes, adding that at that point, many are no longer even classified as SMEs.

Feeling the squeeze However, even the better performers are facing a squeeze in profit margins, despite their increase in revenue. The reasons, says Chen, are rising costs and human capital; economic downturn notwithstanding, the Singapore labour market is still tight. ‘The main ongoing issues for SMEs are the ability to recruit, reward and retain the staff necessary for the

*VIEW FROM: SINGAPORE Kaka Singh FCCA is president of ACCA Singapore The incentives from the government seem to cover expenditure on equipment that improves productivity. However, SMPs can increase productivity in other ways. Government incentives will be welcome if they cover, for example, post-merger integration costs and for SMPs to join regional and international network alliances (if the government’s aim of making Singapore a regional accountancy hub is to materialise).

27/02/2012 14:31


Dr Ng Boon Beng, Oracle Malaysia The unyielding struggle of Malaysia SMEs in the competitive business environment has been a key driver in fuelling and sustaining Malaysia’s economy. SMEs are identified as players in the country’s Economy Transformation Plan to secure highincome status by 2020. However, many surveys have indicated SMEs need lots of help, as the business environment is becoming increasingly complex, due to additional regulatory burdens, global competition or innovation in business finance and transactions. Therefore, they think that more qualified accountants will be needed to help SMEs operate successfully. Dr Ng Boon Beng FCCA is finance director of Oracle Malaysia and a member of the ACCA Global Forum for SMEs

increasing sophistication of their business, and the concerns relating to the high cost of doing business here,’ says Kaka Singh, president of ACCA Singapore. There is, he says, a need for SMEs to focus on improving productivity to maintain their staff retention and profits at an acceptable level.

Incentives offered In 2010, the Singapore Budget featured a strong emphasis on raising both productivity and innovation, offering a slew of incentives to SMEs ranging from grants to tax credits; these are still going strong. Significantly, many SMEs reacted to the Budget by stating that they had already implemented productivity and innovation initiatives of their own. The incentives have caught on rapidly, however. Statistics from SPRING Singapore – the government’s economic growth agency – indicate that in 2011, close to 4,000 SMEs received SPRING’s support to upgrade their capabilities. Chung Lai Thoe, director for enterprise services at SPRING Singapore, admits that it faces a real challenge in reaching out to SMEs. Some are aware of the programmes but are too preoccupied with the necessities of day-to-day business; others may not be aware of the programmes at all. ‘We are focusing on education for the micro-SMEs,’ she says. ‘We hope to see more SMEs undertake upgrading and innovation to improve their competitiveness.’

SME_Singapore.indd 15

One government initiative aimed at reducing business costs for SMEs is the raising of the audit exemption threshold to S$10m. This, however, puts the squeeze on small and medium-sized practices (SMPs), many of which specialise in providing customised services to SMEs. Combined with increasingly high expectations from regulators, the impact on these SMPs will be considerable, says ACCA’s Singh. ‘There will be fewer auditees, but more regulations and audit standards, and higher technical expertise of the audit team,’ he says. ‘The result will be fewer firms offering audit services. The quality of staff will have to move up in order to deal with larger clients, and there will be a need to rework training procedures to get new hires up to speed faster and to develop the skills required for larger and/or more complex clients.’ On the other hand, the situation is ameliorated by what Singh describes as a ‘food demand’ from smaller listed companies for internal audit services,

forensic audits and management consulting services. Non-listed SMEs can also benefit from professional assistance in the development of business plans, financial projections and other documentation. And SMPs, like their clients, can take advantage of this demand by not only upgrading their capabilities, but also making themselves as relevant as possible. ‘For the many SMEs in Singapore, their choice of firm will not be affected by size, but rather the ability of the SMPs to understand their business and deliver a level of service that is commensurate with their needs,’ says Singh, adding that the same often applies to foreign companies. ‘Many of the businesses from China, India and the ASEAN economies coming into Singapore are small and are very cost conscious. They would prefer to be served by SMPs.’ Over the short and middle term at least, the preference for SMEs and SMPs seems likely to grow. On the one hand, small businesses will continue doing business with other small suppliers and service providers. At the same time, larger companies are, for cost reasons, changing suppliers from large companies to more nimble and cost-effective SMEs. Ultimately, these enterprises give the economy resilience through good times and bad. ‘SMEs might have small margins and bring in low revenue, but collectively they provide economic strength,’ says the SBF’s Tay. ‘It is a sector that cannot be ignored.’ Mint Kang is a Singapore-based journalist

SMPs IN SINGAPORE SMP ‘There are great opportunities awaiting SMPs willing to step out of their comfort zones,’ says Chiew Chun Wee, ACCA head of policy, Asia Pacific, commenting on an ACCA/ACRA (Accounting and Corporate Regulatory Authority) report published in Singapore. It found SMPs need to focus on making services more relevant.

27/02/2012 14:31




With a century’s experience of working with the SME sector, ACCA offers a range of publications at

CRD IV AND SMALL BUSINESSES: REVISITING THE EVIDENCE IN EUROPE (2012) New bank capital and liquidity regulations could hamper SME growth, but are essential to the financial stability that SMEs rely on. This paper considers the appropriate trade-off between the two. NURTURING EUROPE’S SPIRIT OF ENTERPRISE (2011) This report uses a survey of 1,245 European executives in order to assess how personalities, external support mechanisms and internal structures determine firms’ ability to innovate. A DIGITAL AGENDA FOR EUROPEAN SMES (2011) Summarises the views of ACCA’s European members who work in the SME sector and presents a series of recommendations aimed at increasing the uptake of digital solutions. FRAMING THE DEBATE: BASEL III AND SMES (2011) Policymakers still know little

about the potential impact of Basel III on lending to SMEs. With the sector contributing half of the world’s private-sector output, this uncertainty renders existing impact assessments virtually irrelevant. COMING OF AGE: WHAT NEXT FOR THE UK REGULATORY REFORM AGENDA? (2011) Based on a template of regulation-as-taxation, this builds on first principles to discuss the fundamental shortcomings of the UK’s Better Regulation programme and how it can be reformed. BUSINESS ADVICE TO SMES: HUMAN RESOURCES AND EMPLOYMENT (2011) Investigates the support in human resources and employment advice that accountants in small and medium-sized accountancy practices provide. SMALL BUSINESS: A GLOBAL AGENDA (2010) Reviews SMEs’ needs for the benefit of those involved in the design of policy,

regulation and business support around the world. SUPPORTING ENTERPRISE GLOBALLY (2010) Outlines ACCA’s active research programme, derived policy positions and case studies from across the world of how we engage with the SME sector, identifying key issues for governments, regulators and standard setters. BUSINESS ADVICE TO SMES: PROFESSIONAL COMPETENCE, TRUST AND ETHICS (2010) Presents the results of a survey into the role of professional competence, trust and ethics in the demand for business services from accountants. ACCOUNTANTS AS PROVIDERS OF SUPPORT AND ADVICE TO SMES IN MALAYSIA (2010) Examines the business model for accountants offering support and advice to SMEs, as well as guidance for government agencies developing initiatives, especially within the Asia-Pacific region.

SME INTERNATIONALISATION IN CENTRAL AND EASTERN EUROPE (2012) Drawing on four major events that took place in the autumn of 2011 in Poland, Ukraine, Romania and Bulgaria, the report explores why SME internationalisation matters, the regional imperative and barriers to cross-border trade. With the significant regional potential for increased international activity among SMEs, the paper looks at various practical steps and policy recommendations that can encourage and support SMEs in their international endeavours.

SME_reportspromo.indd 18

27/02/2012 13:07

s trainee ps its o l e v e d y, ACCA globall mbers e s u m o d r an t rigo e mos We h . t g h in it w train t n a v e l ual’s and re individ h c a e d ensure ent an velopm e for d it f n w e o they’r e lp r u s can he make o they S nd . A s . s w n gro busine io t a is ls rgan te skil your o p to da u So e . s h u owt then that gr e g a n to ma s. ody win everyb

h t w o r g r You easure m e h s t s e is c c u s r of ou

sme how to adapt

BUILDING a big future for small accountancy practices

microfinance miracle cure? SMEs IN singapore ENTERPRISE IN EUROPE

SME_back_cover.indd 20

27/02/2012 12:06

AB SME special - March 2012