DOI: [10.9774/GLEAF.3709.2016.ja.

00004]

Management Accounting
Systems in Micro-SMEs
Jeff Shields
Shields, J., & Shelleman, J. M. (2016). Management
accounting systems in micro-SMEs. Journal of University of North Carolina Asheville, USA
Applied Management and Entrepreneurship, 21(1),
19. Joyce M. Shelleman
University of Maryland University College, USA

This research provides the first known empirical evidence on the use and outcomes
of a broad range of management accounting system elements in small U.S. busi-
nesses. Data gathered from a sample of 55 micro-SMEs reveal that they employ many
elements of management accounting systems to facilitate decision making, including
computation of product/service profitability, taking action on comparisons of actual
to budgeted performance, and assessment of customer profitability. More frequent
OO Small business
use of the management accounting system to compute product or service profitabil-
OO Small business
ity and to assess customer profitability has significant positive effects on return on management
investment (ROI). Results provide insight to the relative importance of management OO Management
accounting information for micro-SME owners. The study also offers evidence that accounting
policy makers and business advisors/trainers can apply to tailor programs for micro- OO SMEs
SME owners. OO Micro-business

Jeff Shields is an assistant professor at UNC Asheville where he teaches in the area of cost u 209 Owen Hall, CPO #1850, One
and management accounting. He earned his in Ph.D. in Business Administration from the University Heights, University of
University of Pittsburgh. His research interests are in the use of management accounting North Carolina Asheville, Asheville,
information by small businesses in making business decisions (e.g. cost management, NC 28804, USA
revenue management, seasonality, and sustainability).
2 (0)828-251-6843
! [email protected]
Joyce M. Shelleman is Adjunct Professor of Management in The Graduate School, u The Graduate School, University of
University of Maryland University College, and also serves as adjunct faculty in the Maryland University College, 3501
Leadership MBA Program at St. Joseph’s College. She earned her Ph.D. in Business University Blvd. East, Adelphi, MD
Administration from the University of Pittsburgh. Her current research interests 20783, USA
include small and micro-SMEs, planning and control systems, and sustainability
management strategy. ! [email protected]

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 jeff shields, joyce m. shelleman

T
he 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), employ-
ing approximately 42 million workers with an annual payroll approaching
US$300 billion (U.S. Census, 2012).
Management accounting systems in organizations facilitate decision mak-
ing 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 sys-
tems 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 account-
ing 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 account-
ing systems in micro-SMEs will extend understanding of the management of
very small businesses, as distinct from larger SMEs and large firms. Acknowl-
edgment 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. Informa-
tion 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 ele-
ments of management accounting systems do they use?
3. Does the use of management accounting systems affect micro-SME
performance?

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 management accounting systems in micro-smes

Review of the literature

Management accounting systems

Management 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 infor-
mation 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 sepa-
ration 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. Planning is the process of “selecting
an organization’s goals and strategies, predicting results under various alterna-
tive ways of achieving those goals, deciding how to attain the desired goals, and
communicating the goals and how to attain them to the entire organization”
(Horngren et al., 2015, p. 11). Control is “taking actions that implement the
planning decisions, evaluating past performance, and providing feedback and
learning to help future decision making” (Horngren et al., 2015, p. 11). Manage-
ment accounting systems incorporate elements that address both planning and
control decision making.
Management accounting systems that support planning include budgets,
breakeven analysis, and use of budgets to set performance targets (Garrison
et al., 2015). Control (management accounting) systems involve evaluating per-
formance relative to targets, computing differences between actual and budg-
eted amounts, computing product or service profitability, and taking remedial
actions if performance is unfavorable (Garrison et al., 2015).
The purpose of adopting management accounting systems is to assist the
organization to improve its performance. This includes an ability to deal with
increasing complexity both internally and externally as the business grows and
to deal with a variety of problems and opportunities. There is evidence in large
startup SMEs (50–150 employees) that the adoption and use of elements of a
management accounting system varies by the complexity of the management
accounting system. Management accounting system elements like calculation
of customer profitability, assessment of customer acquisition costs, and product
profitability analysis that are more complex are adopted later in time relative to
less complex management accounting system elements like operating budgets

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 jeff shields, joyce m. shelleman

or comparing financial performance against targets. The latter are adopted and
used sooner relative to start up in these larger SMEs (Davila and Foster, 2007).
What’s more, the adoption and use of management accounting systems has
been shown to have positive effects on performance (Lee et al., 2013; Davila
et al., 2010).
Management accounting systems also offer a way to track important informa-
tion. Information quality can affect the trust within small businesses’ supply
chains (McDowell et al., 2013). The management accounting system contrib-
utes to more complete and accurate data, such as product and service costs
(Horngren et al., 2015).

Micro enterprise
Like the term “small business”, there is little agreement on the definition of
a micro enterprise. The U.S. Small Business Administration offers no clear
guidelines (e.g. SBA Office of Advocacy, 2012) and no common definition exists.
One widely employed definition in the U.S. is a business with five or fewer
employees (e.g. Association for Enterprise Opportunity, 2013). Yet a recent
opinion poll conducted jointly by the Association for Enterprise Opportunity,
the National Association for the Self Employed, and Small Business Majority
(Opinion Poll, 2012) viewed a micro business as having 10 employees or fewer,
the definition adopted by the European Union in 2005 (European Commission,
2005). Other definitions are used as well; for example, the State of California
defines a micro business as one having gross annual receipts less than $3.5
million or a manufacturer with 25 or fewer employees (California Department
of General Services, 2013).
While there is little agreement on the specific definition, the importance of
this segment of all small businesses to the entire U.S. economy is undisputed.
Micro-SMEs with solo owner/operators and up to 20 employees make up
97.67% of the total number of businesses in the U.S. (SBA Office of Advocacy,
2012; U.S. Census, 2012). Nonemployer businesses, those without employees,
alone constitute 78.5% of small businesses (SBA Office of Advocacy, 2012).
These businesses employ approximately 42 million workers with an annual
payroll approaching $300 billion (U.S. Census, 2012).

Management accounting systems and micro enterprise

There is a dearth of research on the use and effects of management accounting
systems in small and micro-SMEs. Several authors have noted the lack of empir-
ical evidence on financial accounting systems and reports in small and micro-
SMEs (McMahon, 2003; Walker and Brown, 2004; Dyt and Halabi, 2007) and
a similar situation exists with respect to management accounting systems and
reports. Yet such systems are important, with implications for performance.

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 management accounting systems in micro-smes

For example, in a study of predominantly micro-SMEs in Kenya, both financial

management and budgeting, a subset of the management accounting system,
were identified as major problems that suggested a need for greater training for
business owners in these areas (Mwobobia, 2013). The 2008 U.S. recession led
to lost sales for many SMEs (Dennis, 2010; National Small Business Associa-
tion, 2010) and micro-SMEs may be those affected most acutely by such busi-
ness cycles due to their size and access to available funding (Miller et al., 2011).
Business skills, presumed to include accounting, along with the experience of
the owner appear to have significant effects on micro and small businesses’
performance (Tundui and Tundui, 2012).
Although available evidence is far from complete, there is some indication
that micro-SMEs may not make extensive use of management accounting sys-
tems. The National Federation for Independent Business has reported that 58%
of micro-SMEs do not even use a budget, a single element of a management
accounting system (NFIB, 2007).
Based on the apparent deficit of information about micro-SME use of man-
agement accounting systems, we posed these two research questions:
1. Do micro-SMEs use management accounting systems?
2. If micro-SMEs do use management accounting systems, then which ele-
ments of management accounting systems do they use?
Similarly, there is limited evidence that the use of management accounting
systems in the form of a budget and comparing actual to budgeted amounts has
positive effects on small business performance. Wijewardena et al. (2004) and
Wijewardena and De Zoysa (2001) found that SMEs that used either detailed
budgets or simple budgets had increased performance in the form of sales
growth over SMEs that did not use budgets. SMEs that made many comparisons
between actual and budgeted amounts had higher levels of sales growth over
SMEs that made few or no comparisons between actual and budgeted amounts
(Wijewardena et al., 2004; Wijewardena and De Zoysa, 2001). This evidence
of the performance effects in SMEs from the use of management accounting
systems to facilitate planning and control decision making is consistent with
the general expectation that the use of management accounting systems will
lead to better performance by micro-SMEs.
Based on this prior evidence, our third research question was:
1. Does the use of management accounting systems affect micro-SME
performance?
Following from this literature, the hypothesis that we employed to examine
our third research question was: More frequent use of management accounting
system elements will be associated with higher levels of micro-SME performance.

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Methods

Sample and data collection

A convenience sample of small businesses was provided by the statewide Small
Business Development Center (SBDC) in a state in the northeast United States.
The 507 small businesses had been clients of the SBDC during the prior two
years.
A mail questionnaire collected the data via three timed mailings conducted
according to the survey mailing methodology recommended by Dillman et al.
(2008). Potential respondents received a letter from the state director of the
SBDC informing them that they would be receiving a survey in a few days.
The questionnaire was mailed two days later with two cover letters, one from
the principal investigator and one from the state director of the SBDC. Two
weeks later, a second mailing with replacement surveys was mailed to those
who did not respond to the initial mailing. One hundred and four surveys were
returned for a response rate of 20.5%. For purposes of this study, micro-SMEs
were defined as those businesses having 20 or fewer employees. After selecting
micro-SMEs with no more than 20 employees and those that had been in busi-
ness for a minimum of one year, the usable sample consisted of 55 businesses.
Respondents’ reported business types included retail (32%); arts, entertain-
ment, and recreation (22%); wholesale (16%); restaurant (10%); agriculture,
forestry, hunting, and fishing (9%); tourism-related (7%); and lodging (4%). A
third (33%) reported no employees aside from the owner. A somewhat larger
number of respondents (41%) had two to five employees, 16% had six to ten
employees, 7% had 11–15 employees, and even fewer (3%) had as many as
16–20 employees. Respondents’ average annual sales ranged from $300,000
to $349,000.

Measures and analysis

A questionnaire instrument was developed to measure the use of management
accounting systems. Items for the questionnaire were based on Davila and
Foster (2005). The frequency of the use of management accounting systems
was measured by seven point Likert-type scales. The stem was worded, “For
each of the management accounting systems below, please use the following
categories to indicate the frequency it is used in your business.” Anchors were
labeled as follows: 1 = “Rarely or Never”, 2 = “Annually”, 3 = “Semi-annually”, 4 =
“Quarterly”, 5 = “Monthly”, 6 = “Weekly”, 7 = “Daily”. The items were: “ Prepare
an operating budget”, “Compare actual performance to budgeted”, “Compute
breakeven”, “Compute product/service profitability”, “Assess customer profit-
ability”, “Assess customer acquisition costs”, “Use operating budget to set
performance targets”, “Evaluate performance relative to your target”, “Compute
differences between actual and budgeted amounts”, and “Take remedial actions
if actual performance is unfavorable relative to budgeted performance”.

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 management accounting systems in micro-smes

Additional measures were taken of total sales revenue, total asset balance
for the last fiscal year, and business income for the last fiscal year. These meas-
ures employed ranges in order to encourage disclosure and potentially avoid
missing data given the potentially sensitive nature of the financial information
requested. The ranges spanned $0–$9,999 to $5,000,000 or greater. The vari-
able return on investment (ROI) was computed with data from the variables
business income, total sales revenue, and total asset balance.
Data were analyzed using SPSS. In the next section of this paper, results of
the analysis are presented.

Results

The first research question guiding this study asked: Do micro-SMEs use
management accounting systems? As shown in Table 1, t-tests indicated that
the means of all of the measures of management accounting system elements
were significantly different from one.
The ranked order of the means ranged from a high of 3.84 (Computing profit
and service profitability) to the lowest at 2.57 (Assessing customer acquisition
costs). This ranking addresses the second research question: If micro-SMEs do
use management accounting systems, then which elements of management
accounting systems do they use?

Table 1  Use of the elements of management accounting systems (N = 55)

Variable Mean t p
Compute product/service profitability 3.84 11.23 .000
Take remedial actions if actual performance is unfavorable
relative to budgeted performance 3.66   9.73 .000
Assess customer profitability 3.51   9.93 .000
Compare actual performance to budgeted 3.47 10.05 .000
Compute differences between actual and budgeted amounts 3.24   8.33 .000
Evaluate performance relative to your target 3.16   8.80 .000
Compute breakeven 3.00   8.84 .000
Prepare operating budget 2.96   8.16 .000
Use operating budget to set performance targets 2.73   6.81 .000
Assess customer acquisition costs 2.57   7.14 .000

The third research question was: Does the use of management accounting
systems affect micro-SME performance? The hypothesis examined was: More
frequent use of management accounting system elements will be associated with higher
levels of micro-SME performance. Stepwise regression analysis was used to investi-
gate the effects of management accounting systems on micro-SME performance.

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Regression analysis was run with management accounting system elements

as the independent variables and ROI as the dependent variable. The regression
analysis resulted in a series of three regression models. The first regression
model was significant (F = 5.02, p = .03) with an adjusted R2 of .07 (see Table
2). The coefficient for the variable Compute product/service profitability was
significant and positive (b = .287, t = 2.24, p = .03). The second model was sig-
nificant (F = 5.35, p = .00) and had a significant F change of .03 with an adjusted
R2 of .13 (see Table 3). The coefficient for the variable Compute product/service
profitability was significant and positive (b = .387, t = 4.52, p = .00). The coef-
ficient for the variable Assess customer acquisition cost was significant and
negative (b = -.329, t = -3.02, p = .03).

Table 2 Regression analysis: first model (N = 55); dependent variable: ROI;

independent variables: elements of management accounting systems

Regression t for F for Adjusted Sign F

Independent variables coefficient variable equation R2 change
Compute product/service .287 2.24** 5.02** .07 .03
profitability
***p ≤ .01 **p ≤ .05 *p ≤ .10

Table 3 Regression analysis: second model (N = 55); dependent variable: ROI;

independent variables: elements of management accounting systems

Regression t for F for Sign F

Independent variables coefficient variable equation Adjusted R2 change
Compute product/   .387    .452*** 5.35*** .13 .03
service profitability
Assess customer –.329 –.3.02**
acquisition costs
***p ≤ .01 **p ≤ .05 *p ≤ .10

The final regression model was significant (F = 5.18, p = .00) and had a signifi-
cant F change of .05 with an adjusted R2 of .18 (see Table 4). The coefficient for
the variable Compute product/service profitability was marginally significant
and positive (b = .2.69, t = 1.63, p = .10). The coefficient for the variable Assess
customer acquisition cost was significant and negative (b = -.465, t = -3.02, p
= .00). The coefficient for the variable Assess customer profitability cost was
significant and positive (b = .371, t = 2.05, p = .05).

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 management accounting systems in micro-smes

Table 4 Regression analysis: final model (N = 55); dependent variable: ROI;

independent variables: elements of management accounting systems

Regression t for F for Adjusted Sign F

Independent variables coefficient variable equation R2 change
Compute product/service   .269 –.1.63* 5.17*** .18 .05
profitability
Assess customer –.465 –.3.02***
acquisition costs
Assess customer   .371   .2.05**
profitability
***p ≤ .01 **p ≤ .05 *p ≤ .10

Discussion

Micro-SMEs use management accounting systems to facilitate decision mak-

ing for both planning and control purposes as evidenced by the results of this
research. They engage in a variety of management accounting activities. Specifi-
cally, the business owners in our sample reported that they compute product/
service profitability, compare actual performance to budgeted performance,
assess customer profitability, take remedial actions if actual business perform-
ance is unfavorable relative to budgeted performance, compute differences
between actual and budgeted amounts, evaluate performance relative to a set
target, prepare an operating budget, compute breakeven, use an operating
budget to set performance targets, and assess customer acquisition costs.
Our results provide the first known evidence on the relationship between
management accounting system use and micro-SME performance. Consistent
with expectations (Wijewardena et al., 2004; Wijewardena and De Zoysa, 2001),
the results provide evidence that supports the hypothesis that more frequent
use of management accounting system elements will be associated with higher
levels of micro-SME performance.
Micro-SMEs’ use of the management accounting system elements that include
computing product/service profitability, computing customer profitability, and
assessing customer acquisition costs affect ROI. The observed results provide
evidence that those micro-SMEs that more frequently compute product/service
profitability and those that more frequently assess customer profitability have
higher ROI, consistent with expectations based on our understanding of larger
businesses. Computation of product/service profitability enables businesses to pro-
vide a rational mix of products and services based on empirical evidence. Similarly,
computation of customer profitability allows the business to adjust the investment
of time and other resources according to the value of the customer to the bottom
line. Implications of these actions for micro-SMEs are discussed further below.

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Findings also suggest that micro-SMEs that more frequently assess customer
acquisition costs have lower ROI. This may seem contradictory to the expecta-
tion that management accounting systems have positive effects on perform-
ance (Wijewardena et al., 2004; Wijewardena and De Zoysa, 2001) but taken
in context with the positive effects of the computation of product/service and
customer profitability, it appears logical. Frequent assessment of customer
acquisition costs may lead to micro-SME business owners taking actions to
reduce these costs, e.g. by reducing targeted advertising. If more profitable
customers have higher acquisition costs, then more frequent actions to reduce
customer acquisition costs could result in acquiring less profitable customers
and result in a lower ROI. Conversely and ironically, it is possible that those
micro-SMEs that do not assess customer acquisition costs as frequently may
end up acquiring (and retaining) higher profitability customers resulting in a
higher ROI. The importance of business skills would seem to be relevant here
(Tundui and Tundui, 2012) in helping micro-SME owners understand the long
run effects of actions taken in response to data on customer acquisition costs.

Implications
This study has implications for practice. It offers clear evidence that manage-
ment accounting systems can lead to higher performance even among very
small businesses. This should encourage micro-SME owners to become more
aware of and institute commonsense management accounting systems that can
help them make better decisions.
Information about the profitability of products and services allows for better
decisions about the product/service mix that a micro-SME should carry (Gar-
rison et al., 2015). Similarly, micro-SME assessment of the profitability of indi-
vidual customers and customer segments can allow them to adjust the product/
service mix to better serve more potentially profitable segments, increase the
profitability of customers by providing better product features and/or customer
service, or increase the profitability of customers by more deliberately and stra-
tegically managing either costs or revenues (Kaplan and Narayanan, 2001). It
could also support a strategy of servitization, i.e. the addition of services to a
manufacturer’s offerings (Kinnunen and Turunen, 2012).
These results also have implications for micro-SMEs’ adoption of sustainabil-
ity practices. A benefit of engaging with sustainability issues is the opportunities
that emerge to develop new products and services and acquire new customers
(Bagur-Femenias Llach and Alonso-Almeida, 2013; Brammer et al., 2012; Revell
et al., 2010; Heras and Arman, 2010; Lawrence et al., 2006; Williamson et al.,
2006). For example, among 40–44-year-old consumers in a global study, more
than half reported a willingness to pay a higher price for goods and services
from sustainable providers (Hower, 2013). A management accounting system
can be used to evaluate these opportunities, such as the profitability of new
products/services and customers. Using an operating budget to set perform-
ance targets can also be used to address sustainability. For example, the most
commonly reported measures of sustainability include direct energy use and

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water usage (GRI, 2014). These measures can be incorporated into target set-
ting in the budget.
Policy makers and providers of training and advice to micro-SMEs can use
the evidence provided by this research in their programs for micro-SME own-
ers. These small businesses need to either begin efforts to develop management
accounting systems or further develop their usage of these systems. They should
be trained in the application of product/service and customer profitability analy-
sis. Programs for micro-SME owners should have a goal that these owners will
develop a full understanding of customer acquisition cost assessment, its full
ramifications, and learn to develop a sensible frequency with which to employ
it based on their products and services, competitors, etc. The assessment of
customer profitability to better understand and profile the characteristics of
profitable customers is useful in order to focus on, monitor, and take actions
based on the information gained from assessing customer acquisition costs.
Finally, this study has implications for scholars interested in developing a
better understanding of micro-SME start up and management. Future research
might more closely examine the sequence of adoption of management account-
ing systems by micro-SMEs. Which elements are adopted first and what events—
external or internal—precipitate the adoption and use of a particular element
of management accounting systems will extend understanding of these issues.
For example, research might explore the effects of applying for a loan, receiving
counseling from a Small Business Development Center, rapid growth, or the
need to hire workers. The variables that might trigger development of capabil-
ity to assess customer profitability in micro-SMEs are another potential topic of
study. Future research could examine a larger sample and businesses in diverse
geographic locations. The influence of scarcity of resources (e.g. time, money)
on the adoption of micro-SME management accounting systems as well as time
lags with respect to effects may also be important topics for future research.

Conclusions

This paper offers the first known detailed information on management account-
ing systems in U.S. micro-SMEs. Results show that these micro-SMEs incor-
porate elements of management accounting systems for planning and control
purposes. This ranges from the computation of product/service profitability to
use of an operating budget and to assessment of customer acquisition costs. Find-
ings of this study support the hypothesis that more frequent use of management
accounting system elements will be associated with higher levels of micro-SME
performance, thus providing the first known empirical evidence on the relation-
ship between management accounting system use and micro-SME performance.
Micro-SMEs frequently face difficult choices in allocating the scarce resources
of time and money. Evidence from this study offers important guidance to help
them make more appropriate tradeoffs. This research also benefits policy-
makers and advisors who now are better able to target training that impacts
micro-SME performance.

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