Management Accounting Systems in Micro-SMEs

THE SMALLEST OF SMALL AND medium-sized enterprises (SMEs)-micro enterprises (or micro businesses)-are an important segment of the U.S. economy. They constitute the vast majority of all businesses (97.7%) (SBA Office of Advocacy, 2012; U.S. Census, 2012), employing approximately 42 million workers with an annual payroll approaching US$300 billion (U.S. Census, 2012).Management accounting systems in organizations facilitate decision making and thereby business performance. While larger firms routinely employ management accounting systems to enhance business performance, there is little known evidence on the use and effects of management accounting systems in micro enterprises (micro-SMEs) in the U.S. (see, for example, NFIB, 2007; Wijewardena et al., 2004). Given the common business advice to small businesses exhorting the importance of planning and control functions (U.S. Small Business Administration, 2013) such as establishing a budget, computing breakeven to determine pricing, and comparing actual to budgeted expenses, this is somewhat surprising. For example, breakeven analysis, computation of the point where revenues equal costs (Garrison et al., 2015), is viewed as a "key part" of a business plan that provides an "important reality check" (Baron and Shane, 2008, p. 217). Attention to such accounting considerations is integral to small business success (Hunter, 2011; d'Amboise and Muldowney, 1988). However, both the extent of use of different elements of management accounting systems and, more importantly, their relationship to business performance in micro-SMEs is unknown.This research seeks to address this gap in our understanding of micro-SME management. Information on the use and outcomes of management accounting systems in micro-SMEs will extend understanding of the management of very small businesses, as distinct from larger SMEs and large firms. Acknowledgment of these businesses as a separate category such as the European Commission has done (European Commission, 2005) denotes not only their importance to the economy but also highlights their distinctive characteristics and potentially different management requirements and problems. Information from this research can help small business owners target their performance enhancement efforts by incorporating practices that evidence suggests lead to more successful outcomes. Small business counselors may apply our results to pinpoint important areas for advice and training.This study provides evidence on the following research questions:1. Do micro-SMEs use management accounting systems?2. If micro-SMEs do use management accounting systems, then which elements of management accounting systems do they use?3. Does the use of management accounting systems affect micro-SME performance?Review of the literatureManagement accounting systemsManagement accounting systems are a subsystem of a broader management control system (Davila and Foster, 2005). A management control system is a "recurring and formalized set of institutionalized protocols, routines or information gathering mechanisms designed to assist managers to make decisions or fulfill their responsibilities" (Davila and Foster, 2005, p. 1040). It includes "procedures and routines used by managers to establish and maintain patterns of organizational activities" (Simons, 1995, p. 5).Management accounting systems are used by businesses to reduce agency costs and to facilitate decision making (Baiman, 1982). Agency costs occur when there is a separation of owners and managers. In micro-SMEs, the separation of ownership and management is minimal because most micro-SMEs are operated by the owners themselves (U.S. Census, 2012). For this reason, the primary function of management accounting systems in micro-SMEs is to facilitate decision making.Two important categories of business decisions are those associated with planning activities and control functions. …