Improving Performance Efficiency among SMEs via Accrual Accounting Systems - Essay Example

and Number Lau Kin San 347467 MSc Strategic Business IT Project Improving Performance Efficiency Among SME's Via Accrual Accounting Systems Task 1 - Research Question and Analysis (868 words) This project will look at the role of accounting systems in SMEs but will focus on the extent to which the adoption of an accrual-based accounting software package can enhance firm efficiency insofar as it allows it to benefit from budgeting. Project Subject Area and Angle Description (176 words) Small to medium enterprises are major components of developed economies as they constitute 99% of the total number of business operations in these countries. Given the space that SMEs occupying within developed economies and their importance therein studying the methods by which these enterprises can utilise IT tools to maximise organisational efficiency and effectiveness, and enhance organisational performance, is extremely crucial. In direct relation to the aforementioned, accounting and organisational management scholars have determined that the right accounting software package can substantially contribute to organisational performance and the maximisation of efficiency and effectiveness (Hirst and Hopkins, 1998). In explaining the importance of selecting accounting software, Johnston (2003) highlights the concept of budgeting versus accounting. Line-based cash accounting software packages are only capable of measuring a firm's financial performance and position. Accrual based accounting packages, on the other hand, fulfil that function in addition to the more important budgetary one. Through the former, SME's may determine, not just their financial position, but are given access to invaluable data on the optimal division and distribution of organisational resources. Problem to be Solved and Personal Theory (282 words) Although, in this highly developed economy, there is hardly an SME which does not manage its accounts through the use of accounting software, few understand the imperatives of adopting an accrual-based accounting package as would aid in the adoption of a budgetary process which, in itself, will substantially contribute to efficient organisational performance and realisation of strategic objectives. Currently, there is an influx of accounting software packages tailored to the needs of various customers. The greater majority of these accounting packages, as mentioned by Bresnahan et al. (1998), are based upon the traditional cash-based, line-accounting system due to the overriding perception that this particular accounting system is the easiest to use, on the one hand, and the most popular among SMEs, on the other. However, the market also provides a choice of accrual based accounting software packages, primarily used by the larger organisations (Bresnahan et al., 1998). These packages execute both accounting and budgetary functions. However, SMEs are often reluctant to adopt them, assuming that they are problematic to implement and difficult to use, on the one hand and that the size of their business concerns and activities does not necessitate the adopting of a budgetary process. Within the context of the above stated, the problem to be investigated is the exigencies of adopting an accrual-based accounting software package. In investigating this problem, the report will outline the strategic business value of doing so and outline a strategy for implementation. From a personal perspective, the transition to an accrual based accounting package will invaluably enhance an SME's capacity for growth and development insofar as it will provide it with the tools needed for the more strategic distribution and utilisation of organisational resources. Research Question (59 words) How can the adoption of an accrual accounting system positively contribute to an SME's operational efficiency and effectiveness Implicit in this question is the need to provide an answer which will measure the costs and benefits of adopting accrual based accounting packages, on the one hand, and comparing the stated with the costs and benefits of cash-based accounting systems. Idea for action and Data Outline (276) As suggested by Ingram, Albright and Baldwin (2004) decisions pertaining to the adopting of an accrual based accounting software package have to proceed long a clearly defined framework. Organisational decision-makers need to study the benefits of accounting and budgeting on the one hand, and the organisation's specific budgetary and accounting requirements on the other. Should they find that the two coincide and that, in fact, the organisation can benefit from the implementation of an accounting system which simultaneously undertakes budgetary functions, decision-makers then need to study the characteristics of the firm's organisational structure and the capacities of its human resources. Doing so will enable a more accurate determination of whether or not the current structure can absorb and embrace such a system and whether or not employees within are capable of working with and alongside such a system (Baldwin 2004). Bearing this in mind, the project shall focus on whether or not the general needs and structures of Hong Kong SMEs, operating within the service industry, warrant the adoption of accrual based accounting systems and re capable of working with such systems. Essentially, the idea for action is to list the primary functions of service industry SMEs in Hong Kong and compare the list to the functions executed by accrual based accounting packages on the one hand, and by cash-based line accounting systems on the other. The stated comparison will enable a more accurate determination of whether or not the needs of SMEs warrant the transition from the one system to the other and whether or not, given the nature of their human resources and organisational structure, they have the capacity to make such a transition. Task 2 - Strategic Business IT Intention (198 words) The adoption of accrual-based accounting software systems has the potential to positively enhance the business and financial performance of SMEs. While large business enterprises recognise this and have, accordingly, switched from line-based cash accounting systems to accrual based systems, SMEs have been reluctant to do so, assuming that the size of their operation and business concerns does not warrant doing so. The strategic importance of this work is that the outcome will illustrate that the transference from line based accounting systems to accrual based ones will not place an undue stress on an SME's limited financial and non-financial organisational resources and, in the long run, will contribute to cost reduction and operational efficiency. The importance of this is that it demonstrates that the use of IT tools should not be limited by an organisation's size. A second added value is that the outcome of the study will demonstrate that the transition to accrual accounting systems will provide SME's with the opportunity to benefit from the strategic importance of budgeting, as opposed to simple accounting. A third value is that the study shall demonstrate the strategic business importance of the transition in terms of designing and meeting organisational objectives. Task 3 - Literature Review (1,967 words) Small to medium sized enterprises (SME) comprise over 95% of all the business and corporate concerns operating within both under-developing and developing nations and are immediately responsible for the employment of the majority of the blue and white collar labour force. First-world, industrialised nations, they comprise an equally substantive economic force, calculated at around 60% and are responsible or the employment of at least half of the workforce (Samitas and Kenourgios, 2005; Wilton and Reavill, 1997; Rogerson, 2000). Accordingly, one may safely identify SMEs as, not only a major componential element of national and global economies but, as business entities whose financial health and performance directly reflects upon the national economies in which they operate. Accordingly, strategies for organisational development and performance measurement and management, should not be limited to large-scale enterprises but need be articulated and implemented in relation to, and by, SMEs. In analysing the means by which SMEs may operate towards greater efficiency and effectiveness, Drury (2004) determines that budgeting methodology is the optimal one. In order to better understand this it is necessary to refer to Drury's (2004) definition of budgeting as the coordination of various activities within a company by the preparation of plans of actions for the future. The capacity of budgeting to inform and articulate short and long term organisational plans and strategies for implementation are due to the fact that the budgeting process embraces the six activities which are integral to doing so. These are planning, coordination, communication, motivation, control and performance evaluation (Drury, 2004). In other words, budgeting is not simply the preparation of financial reports on the performance of a particular SME, nor the distribution of available resources among the SME's various departments and activities but is a multi-dimensional process which embraces the variant activities which can positively contribute to organisational development and growth by providing such data as would aid in the articulation of realistic and applicable short and long term strategies and goals. Precisely how the budgeting process may do so is clarified in Figure 1, below. Figure 1: Budgetary Process Strategies and their integration into organisational planning, decision making and the articulation of strategic objectives and short and long-term plans (Drury, 2004, p. 591) While large-scale enterprises, consequent to both their financial and human resources have been able to exploit the above articulated budgeting process for greater organisational development, growth and profit, SME's have not. As noted by Acs, Carlsson and Karlsson (1998), the capacity of SME's to constructively exploit the budgeting process was severely constrained by both their human and financial resources. Quite simply stated, without the requisite financial and human resource backing, the purpose of budgeting was confined to the allocation of resources among activities and between departments and the preparation of financial projections and statements and could hardly be expanded to embrace activities such as performance measurement, performance evaluation and the articulation of organisational objectives and the short and long term plans required to attain them (Acs, Carlsson and Karlsson, 1998). While size, implying limited financial and human resources, functioned as an obstacle towards SME's use of the budgeting process for all of the previously mentioned purposes, Karmel (2002) contends that IT allows for the surmounting of that obstacle. Concurring, Levy and Powell (2002) contend that IT has enabled the positive exploitation of the budgetary process for the articulation of organisational objectives and long and short term strategic plans, not to mention performance measurement and evaluation, concomitant with the more efficient and effective allocation of resources, through the automation of the process. Quite simply stated, the greater majority of SMEs, calculated at around 75-80% carry out the budgeting function through the line-based cash system which, although accurate, is cumbersome and largely inefficient. Within the context of the stated, it has been proposed that SME's make the transition to accrual accounting systems which, in the main, are automated and efficient (Karmel, 2002; Levy and Powell, 2002). Christiaens (2002), emphasises that a vast number of private sector organisations, realising the limitations imposed upon their capacity to efficiently and effectively allocate organisational resources and attain strategic goals by their cash-based, line accounting software systems, have elected to implement Oracle Systems accrual-based software accounting packages. The transition, while often a complicated and troublesome process, is justified by studies on the innate inability of cash-based accounting software systems to aid the realisation of organisational expansion and attainment of strategic goals. A the same time, these studies have articulated the advantages of the accrual based software accounting packages and he extent o which hey aid in the articulation and realisation of strategic goals and in organisational growth (Christiaens, 2002). Christiaens (2002) summarises the difference between the two systems through the contention that the accrual based accounting packages have propelled organisations into the information age and have allowed them the full benefits of IT while the cash-based software accounting packages have not. Concurring with the above argument, Kelly (2003) notes that accounting systems effectively functions as the nerve centre of business enterprises. Therefore, the selection of a system which would maximise an organisation's capacity to efficiently allocate resources, flexibly re-allocate resources between departments when and if the need arises, effectively aid in the articulation of strategic goals, enhance organisational capacity to evaluate performance and measure progress, and contribute to system transparency, therefore, accountability, is one of the most important and strategic decisions that an organisation can ever make. In light of the fact that over the past twenty years, cash-based line budgeting accounting software packages were incapable of doing so due to a fundamental flaw in the accounting methodology itself, the adoption, or continued use of the aforementioned accounting system packages makes very little sense. In direct and immediate comparison, Kelly (2003) contends that over the past decade a veritable wealth of empirical, theoretical and experiential evidence has unequivocally established the merits of accrual-based software accounting packages. Presenting a similar argument, Dees and Neelissen (2004) articulate the benefits accrued by organisations which have discarded the cash-based line accounting packages and implemented the accrual-based software accounting systems. These software systems, of which the Oracle System is the most popular have proven a constructive contribution to organisational growth and development. Besides overcoming the limitations imposed upon SMEs by the cash-based accounting systems and which effectively inhibit their growth and expansion, accrual systems provide an organisation with detailed financial position statements which are generated by the continued processing of data inputted on a daily basis by all departments. The importance of the stated lies in the fact that the system is capable of statistically analysing based on stored data, the annual resource requirements of each unit/department in the organisation and, subsequently produces a set of ideal resource allocation suggestions (Dees and Neelissen, 2004). Even if the organisation does not apply the recommendation, as produced by the system, the recommendations still function as an invaluable resource-allocation decision-making aide. As additionally explicated by Haythornthwait (2004), due to the fact that accrual accounting packages have an inbuilt capacity for the production of ideal resource allocation guidelines, based on the processing of stored data, they function as an invaluable aid to organisational planning and the articulation of organisational strategic goals. On the basis of the data produced by the system, organisational decision-makers can articulate realistic strategic objectives which are formulated according to an accurate picture of the organisation's resources. Not only that, but as data is daily entered into the system, the accrual accounting packages further functions to analyse developments, produce a numerical analysis of organisational performance and determine whether or not the organisation is efficiently and effectively moving towards the realisation of its strategic objectives, according to plan (Haythornthwait, 2004). Consequently, the system has many strategic uses apart from basic accounting. The adoption of automated accrual accounting systems, through the implementation of an IT tool such as Oracle Systems, will not just allow for the articulation of organisational gals in accordance with realistic assessments of organisational resources and capacities, and the concomitant clarification of the short and long term strategic plans requisite for the attainment of these goals but, will lend to effective performance measurement and management. In order to understand the extent to which PM may aid in the growth and development of SME's, it is contingent upon us to define this term. PM is a process of quantifying past actions, and a means by which organisations may maintain effective control over projects, ensuring that their progress is consistent with the previously articulated strategic plan It is the process which ensures that an organisation follows the organisation's strategic plan for the fulfilment of its defined goals and objectives while, simultaneously assessing whether or not the organisation is successfully implementing its strategy. (Amaratunga et al., 2001; Neely, 1998; Nanni et al., 1990; Fitzgerald et al., 1991; Lawrie et al., 2004). Traditionally, the PM focus has been on financial measures such as sales growth, profits, return on investments and cash flows (Chan, 2004). It is important to consider non-financial measures such as customer satisfaction, business processes and employee learning and innovation. Having non-financial measures would describe the organisation's current and potential effectiveness in achieving their objectives and strategy (Chan, 2004; Ittner and Larcker, 1998; Amaratunga et al., 2001; Brignall and Ballantine, 1996; Hyndman, 1997). Traditional financial measures are essential but not sufficient for performance evaluation (Ho and Chan, 2002). Performance indicators systems should be forward-looking and historical to identify and observe the trend on which the performance of organisation is heading. It is also necessary to focus on external relationships, internal functions or processes and track leading financial and non-financial indicators. Assessing PM through financial measures alone leads to the production of lopsided results which inhibit the articulation of the roots of the strengths and weaknesses of performance. As directly pertains to accounting systems, the exploitation of financial measurements for PM, while essential, must be fortified by a consideration of the relevant non financial measurements. Doing so enables the integration of the variant parts of the financial statement, culminating in the production of such information as would lend to a more accurate assessment of PM and the extent to which an organisation's strategic plan has been efficiently implemented and is producing the desired goals (Ingram, Albright and Baldwin, 2004). Non-financial performance measurements, when used in conjunction with the financial ones, provide a more accurate and comprehensive picture of PM. Since PM, in the final analysis, measures performance it is relevant to assess the flexibility of the system and quality of service (Ingram, Albright and Baldwin, 2004). Measurement of flexibility assesses the extent to which a system is capable of efficient, effective and timely response to environmental change, while measurement of quality of service assesses a system's ability to extend acceptable service (Ingram, Albright and Baldwin, 2004). Consideration of these two non financial measurements are integral for the accurate evaluation of PM since financial data alone cannot expose efficiency of performance or a system's ability to interact with its surrounding environment and respond to changes occurring within it while not sacrificing quality of service. Automated accrual based accounting systems, such as that provided by Oracle Systems, allows for the stated. As may be determined from the above review, therefore, the transition from line-based cash accounting system to accrual based ones, through the adoption of IT-based budgeting software such as Oracle Systems, will significantly contribute to an SME's organisational development and growth. Not only will it lend to the more efficient and effective allocation of organisational resources but it significantly aids in the articulation of realistic and achievable organisational objectives, concomitant with the provision of the long and short term strategic plans required for attainment, not to mention a strategy as would enable continued performance measurement and evaluation, as based upon both financial and non financial data. Task 4 - Research Design The research design has been formulated to correspond to the requirements established by both my research question and identified problem regarding the budgetary costs and benefits of accrual based accounting packages versus line-based cash accounting ones, within the context of service industry SMEs. Contextualisation (288 words) This study examines the question: "How can the adoption of an accrual accounting system positively contribute to an SME's operational efficiency and effectiveness" As evident from the above question, the aim of the research is to determine whether or not the adoption of accrual based accounting systems, given the resources available to SMEs and the scope of their business activities, is feasible. It would be erroneous to simply assume that all firms, irrespective of size and scope of business activities, will benefit from the adoption of accounting systems which allow for automated budgetary processes. Instead, a wide range of variables must be examined. The variables that will be examined pertain to the functions of the budgetary process, the cost of adopting and implementing such a system, firm's activities, the scope of its human and financial resources and its strategic future objectives. The variables were selected with an eye towards constructing a framework for the determination of whether or not the scope and resources of service industry SMEs warrant the adoption of a budgetary process, as furnished through accrual based accounting systems. Within this complex set of variables, and insofar as I automated budgetary processes, this will function as my independent variable, with my dependant variable being the value of the stated for service industry SMEs. The tentative null and alternative hypotheses are: H0: Service industry SMEs will not benefit from the automated budgetary process afforded by accrual-based accounting software packages. H1: Service industry SMEs will constructively benefit from the automated budgetary process afforded by accrual-based accounting software packages. In light of the above, I will adopt a deductive method. Nevertheless, it must be conceded that it is still premature to determine final hypotheses set or propose a response. Primary Data Specification and Research Method (305 words) For this study three sets of self-administered close ended questionnaires will be designed. The first set will be distributed among all 9 accounting department personnel, the Accounting Department Head and the Human Resource Director in a service industry SME which employs accrual-based accounting systems and among the 12 accounting department personnel, the Accounting Department head and the Human Resource Director in a form which uses cash-based line accounting systems. The information gathered will focused on individual background information, such as gender, work experience, computer literacy level, age and educational level. Analysis of the data will reflect the extent to which the identified variables impact attitudes towards the problem and research question identified. Following analysis of the data, two groups will be formed. The first group will comprise those who have negative perceptions of accrual based accounting systems and the other of those who positively perceive it and adversely consider cash based accounting systems. Those with negative perceptions of accrual based accounting packages will be assigned to use a demo version of the Oracle package and those who negatively perceive of the cash based line accounting system will similarly be assigned a demo version of such a system. Following that, the second set of self-administered close-ended questionnaires will be distributed. The data collected will pertain to whether experience with, and use of either system has changed the perceptions of group members. The third set of self-administered open-ended questionnaires, distributed among members of the two groups, will gather data on participants' perception of their respective forms' budgetary and accounting requirements and whether they warrant the transition from or to an accrual based accounting system. Data shall also be gathered on participants' perception of the cost versus the benefits, within the context of their firm's human and non-human resources and activities, of adopting an accrual based accounting system. Primary Data Collection Protocols (174) Automated data collection is not an option, given the scope of the research and the resources available to the researcher. Furthermore, in light of the fact that the data size is manageable, it shall be hand collected. Accordingly, close ended questionnaires, aiming to collect data on employee perceptions of the benefit and costs of accrual versus cash based accounting systems, will be distributed among those participants who had earlier signalled willingness to partake in this study, via email. Data relating to firm activities and scope of operation will be distributed and collected among the human resource and accounting directors of the five firms who agreed to participate, via both email and snail mail, depending on the preference of the participants. The collected data shall be entered into an Excel sheet and quantitatively analysed. It should be noted that both the researcher's email and telephone contact information shall be listed in the questionnaire in case participants need to clarify some point. Furthermore, and if there is a need, follow-up interviews shall be conducted via telephone. Processing and Presentation (207 words) After the data is collected from SMEs, it will be divided into two sets namely, related to software implementation strategy used and related to accounting performance of a company. The first set of the acquired data will be used in determining the specific features of the strategy used by the SME in the implementation of its accounting software systems. The list of different strategies will be generated after the data in the first set is processed. The second section of the data will be analyzed through the employment of the devised measuring system which assigns different weights for every criterion. For example, since improvement of the quality of financial reports is more important to SMEs than minimization of labour resources used to produce financial reports, the first criterion (improvement of quality of financial reports) will assigned marks from 0 (poor quality) to 5 (highest quality), while the second group (minimization of labour resources to produce financial reports) will be assigned marks from 0 (10 or more accountants needed) to 3 (3 or less accountants needed).The researcher will then compare the interpreted data which will be in the form of report. The recommendations generated based on this report will be considered as the outcome of the research project. Outline Content List for Project 1. Introduction 2. Aims of the Research 2.1 . Background Information 2.2 . Problem Statement 3. Literature Review 4. Methodology of the Research 4.1 . General Philosophy and Design 4.2 . Participants of the Research 4.3 . Data Gathering 4.4 . Data Processing 4.5 . Implications and Ethical Considerations 5. Results of the Research 5.1 . Software Strategies used by SMEs in Improving Their Accounting Performance - the Description 5.2 . Comparing Strategies 5.3 . Recommendations for SMEs 6. References References Acs, Z.J., B. Carlsson and C. Karlsson (1998). Entrepreneurship, Small and Medium Sized Enterprises and the Macroeconomy. Cambridge: Cambridge University Press. Amaratunga, D., D. Baldry and M. Sarshar (2001) Process improvement through performance measurement: The balanced scorecard methodology. Work Study, 50(4/5), pp. 179-180. Bresnahan, Timothy et al. (1996). Technical Progress and Co-Invention in Computing and in the Uses of Computers Brookings Papers on Economic Activity. Microeconomics. , pp. 1-83 Chan, Y.L (2004) Performance measurement and adoption of balanced scorecard: A survey of municipal governments in the USA and Canada. The International Journal of Public Sector, 17(2/3). Christiaens, J. (2002) Symposium Introduction. Journal of Public Budgeting, Accounting and Financial Management. 14(4). Dees, M. and Neelissen, P. (2004) Five Countries Pioneering Accrual Budgeting and Accounting in Central Government. International Journal of Government Auditing. 31(1). Drury, C. (2004) Management And Cost Accounting. 6th Ed. London: Thomson. Haythornthwaite, A. (2004) Special Reports: Public Sector- The Public Sector Revolution. Accountancy. 134(1331). Hirst; D. Eric and Patrick E. Hopkins. (1986). Comprehensive Income Reporting and Analysts' Valuation Judgments. Journal of Accounting Research. 36, pp. 47-75 Ho, S.K and Chan, Y.L (2002) Performance measurement and the implementation of balanced scorecards in municipal. The Journal of Government Financial Management, 51(4), pp. 8-18. Hyndman, N. (1997) Performance targets and executive agencies: Some empirical evidence. Management Accounting. 75(6), p.30-33. Ingram, Robert W., Thomas L. Albright, and Bruce A. Baldwin. (2004). Financial Accounting: A Bridge To Decision Making. Mason, Ohio: Thomson/South-Western. Johnston, R.P. (2003). A Strategy for Finding the Right Accounting Software. Journal of Accountancy, Sep. Retrieved online July 16, 2005 from http://www.aicpa.org/pubs/jofa/sep2003/johnston.htm Jones, K. (2005). Beyond Bookkeeping: Software Strategies for Small Business Growth. Aberdeen Group. Retrieved online July 23, 2005 from http://www.microsoft.com/businesssolutions/beyond_bookkeeping.mspx Karmel, S. (2002) A Comparison of Small and Medium Size Enterprises in Europe and the USA. London: Routledge. Kelly, J.M. (2003) The long view: Lasting (and fleeting) reforms in public budgeting in the twentieth century. Journal of Public Budgeting, Accounting and Financial Management. 15(2). Levy, M. and P. Powell (2004) Strategies for Growth in SMEs: The Role of Information and Information Systems. London: Butterworth-Heinemann. Moser, C. and Kalton, G. (1977). Survey Methods in Social Investigation. Heinemann, London. Naani, A.J, Dixon, J.R., and Vollmann, T.E. (1990). Strategic control and performance measurement. Journal of Cost Management. Summer. pp 34-42. Neely, A. (1998) Measuring Business Performance. London: Economist Books. Rogerson, C.M. (2000) Successful SMEs in South Africa: The case of clothing producers in the Witwatersrand. Development Southern Africa, 17(5), 687-716. Samitas, A.G. and D.F. Kenourgios (2005). Entrepreneurship, small and medium size business markets and European economic integration. Journal of Policy Modelling, 27(3), 363-374. Wilton, J.T. and L.R.P. Reavill (1997). The small or medium-sized enterprise, its multinational client(s) and process oriented change: A systems approach with case study. Total Quality Management. 8(2/3). Read More