Small-and medium-sized enterprises (SMEs) remain the lifeblood of global economies.  The World Trade Organization reports that 95 percent of companies across the globe are micro, small or medium enterprises and that they provide 60 percent of the world’s total employment. The UN has designated 27th June as MSME Day to raise awareness of their enormous contribution to the achievement of the UN Sustainable Development Goals.

Despite these remarkable statistics, we must acknowledge that the operating environment for many SMEs is increasingly tough. Work carried out by the Small Business Administration in the United States established that, prior to the Coronavirus pandemic, only a third of SMEs survive the 10-year mark. Not all who did not survive have necessarily failed, but this figure does highlight the challenges SMEs face. If we then think of all the increased volatility since the pandemic, including inflation, interest rate increases, energy security fears, and supply chain issues, it is clear the challenges remain demanding.   

The significance of financial literacy

While there are many causes of SME closures, there are important steps SMEs can take to build resilience, including improvements in financial literacy that could play a critical role in helping to navigate uncertainty. This is where small- and medium-sized practices (SMPs) can provide a lifeline. Business decisions can be challenging for SMEs if they fail to identify key metrics to measure performance by, and this is often an area that needs support. The following are some of the ways that SMPs can help SMEs with financial literacy.

Provide valuable business advice. IFAC research shows that accountants from SMPs are the most frequently utilized source of business advice for SMEs. Furthermore, accountancy or business advice received by SMEs from SMPs is associated  with better performance, including improved growth and profitability, better survival rates, and better decision making. SMPs as trusted advisers are therefore the ideal partner to help build capabilities in SMEs, helping them to develop strong and successful businesses.

Improve financial understanding and awareness. SMPs can help provide a critical advantage to SMEs through improving financial awareness and reporting. Many SMEs count on SMPs to support preparation of accurate and meaningful financial accounts as well as the interpretation of these accounts. For many business owners, having someone ‘demystify’ the financial information and provide meaning to the numbers allows them to make informed decisions regarding their future operations. SMPs can also help modernize finance departments by introducing such practices as finance-business partnering and the tailoring of reporting information to the needs of decision makers. Such support can be imperative in unpredictable times, when planning tools such as forecasting gain greater importance. SMPs can also harness their skills and knowledge to provide training. Moreover, SMPs can give SMEs the structure needed to improve their predictive abilities by sharing best practices and templates. The robust information such measures can provide can help underpin business plans and facilitate actions that will help the business grow, such as access to finance.

Effectively manage liquidity and debt. In the current financial climate, recoverability of debts has also been an important factor for many SMEs and has in many cases had a significant impact on profitability. SMPs are well placed to advise on the creation of effective credit control procedures and to help SMEs identify ways to assess the credit worthiness of counterparties and develop robust credit management practices. Linked to this issue is the preservation of cash and the pursuit of liquidity. In many SMEs, efficiency of working capital is a key concern, and stock management is often a neglected area, especially where there is a slowing sales environment due to factors like inflation. SMPs are well placed to advise on the importance of cash management and highlight the risks that could arise due to being overstocked. SMEs can engage with SMPs to develop strategies to determine optimal inventory levels and create a system that is responsive to changes to the business environment.

An ever-growing remit for SMPs

Given the strong contribution SMPs make to improving financial literacy, it is unsurprising that SMEs are looking for broader support from SMPs beyond core compliance in areas such as accounting, tax, and audit. Many SMPs have branched into broader value-added advisory and consulting support in areas including business development (strategy, marketing, etc.), human resources, and employment regulations, as well as on management accounting and corporate advisory services. Key management positions in some SMEs can also be filled by practitioners working for SMPs; for example, the growth of virtual CFOs, utilizing the cloud to service a number of businesses and provide appropriate, relevant advice, around the clock. SMPs have therefore become drivers of business strategy and long-term value creation in many SMEs, reinforcing how accountants are an integral part of economic resilience.

Where competition and price wars might be hampering performance in SMEs, SMPs can help SME management think more strategically. SMPs can support the development of short, medium, and long-term plans, tying these to both the organization’s strategy and the strategic context of the environment the SME finds itself in. Effective planning in this way can help arrest declines in performance and can provide constructive challenge to approaches SME management was considering. To perform optimally, in addition to strategy and planning, businesses also need capable information systems to capture, collate and interpret data in a way which facilitates decision making. Where financial accounting and reporting systems are lacking, or where they don’t consider factors such as profitability margins, expense ratios, cashflows, taxes and capital investments, only a partial picture of performance will ever be painted—making monitoring and management challenging. SMPs can help develop robust reporting procedures which allow insightful reporting to support decision making.

The challenge of dealing with the unusual and unexpected is amplified for those SMEs that enter into complex transactions such as business combinations, integrations or exits. In these cases, consultation with SMPs can help SMEs unlock maximum value from such situations as well as helping them with matters such as tax planning where rules and regulations can be fast moving.

SMEs are absolutely critical to each nation’s economic prosperity, but running an SME can be very challenging and the early failure rates are daunting. They must be able to rely on trusted professional guidance to make sure they are successful. The odds of survival are significantly increased if SMEs improve their financial literacy, and SMPs can provide a lifeline to help them achieve this aim.

Quotes from IFAC’s network

The theme of financial literacy for SMEs resonates around the world. Below are messages from experts in the global accountancy profession on the importance of these issues.

  • “Financial literacy is a critical factor in the success or failure of a small business. It is however often an afterthought in many education systems. Accountants should impart their financial expertise to SMEs for the sustainable growth of this globally vital business sector.” Olivier Boutellis-Taft, CEO, Accountancy Europe
  • “Embracing the digital frontier, SMPs ignite a financial revolution, equipping SMEs with the wisdom to conquer the economic landscape. Through financial education, they empower businesses to navigate the digital realm, harness opportunities, and forge a prosperous yet sustainable future.” Anastasia Chalkidou, Accounting Director and Co-Founder, Quantum Business & IT Solutions
  • “If SMEs are the engine room of an economy, financial literacy is the grease to help the engine run effectively. SMPs have a critical role to play as facilitators of knowledge-sharing to build capacity and boost the resilience of SMEs.” Andrew Conway, CEO, Institute of Public Accountants
  • "The support needs of SMEs are becoming increasingly complex and diverse. Small and medium sized practices are ideally placed to respond to these needs and help SMEs both navigate uncertainty, build resilience, and unlock their potential for growth and profitability.” Monica Foerster, Chair, IFAC SMP Advisory Group
  • “As experts in standards and best practices, SMPs educate a large number of SMEs in economic and financial citizenship. SMPs must also become facilitators of finance, drivers of performance, and levers of development for SMEs.” Cosme Goundété, Outgoing President, Pan-African Federation of Accountants (PAFA)
  • “Small businesses are critical to the success of the Australian and New Zealand economies. Financial literacy, which trusted professional accountants can embed in small businesses, enables them to thrive and continue making a major contribution to vibrant local communities and economies.” Simon Grant, Group Executive Advocacy and International Development, Chartered Accountants of Australia and New Zealand (CAANZ)
  • “Small-and medium-sized practices (SMPs) are the key business advisors to their SME clients and personal financial advisors to SME owner managers. In the past few years SMPs have advised SMEs on how to survive in the wake of a global pandemic. More recently they have advised SMEs on how to emerge stronger from this pandemic and navigate an acute cost of living crisis. And now and going forward they are advising SMEs on how to embrace sustainability. SMPs are now helping SMEs with financial and sustainable literacy.” Salvador Marin, President, European Federation of Accountants and Auditors for SMEs (EFAA)
  • "Fuel SME success with financial literacy, igniting innovation and economic growth. SMPs lay the groundwork for resilient and thriving businesses, offering unwavering support and expertise." Muhammad Hunain Sikander, Chief Financial Officer, Pakistan International Container Terminal
  • “In a fast-changing world, it is more important than ever to have a clear view on the financial status of your business, convince potential investors or banks, and ensure the continuity of the company. Entrepreneurs further develop their financial literacy in cooperation with their professional accountant as trusted advisor for their company. They set up a well-functioning reporting system and provide thorough insight in the core data of the SME, providing appropriate advice based on the performance of the company. This is particularly important for SMEs to be the driving force for transitions.” Véronique Willems, Secretary General, SME United
Harpal Singh
Harpal Singh

Principal

Harpal's role at IFAC entails contributing to and promoting the development, adoption, and implementation of high-quality international standards. Harpal also has responsibility for IFAC’s SME (small- and medium-sized entities), SMP (small- and medium-sized practices), and research initiatives, which include developing thought leadership, public policy, and advocacy materials.

Prior to joining IFAC, Harpal spent ten years working for Grant Thornton UK LLP, where he was first part of the Public Sector and Commercial Assurance practices, before joining the Financial Reporting technical team. Harpal helped develop the firm’s Financial Reporting advisory offering outside of London and then joined the Business Consulting team specializing in finance consulting and talent solutions. Prior to joining GT, Harpal was a Public Sector auditor for the Audit Commission in the UK.