Management Control for SME


Management Control for SME

"What doesn't benefit the hive doesn't benefit the bee either."
Marco Aurelio

In the company, each function invests resources to achieve its objectives in due time.

The purpose of Management Control is to help people who work in the company achieve their objectives effectively and efficiently.

This path is never direct and linear and requires facing and overcoming difficulties and unpredictable situations, such as wars, political crises, and epidemics, which have now become a rule.

This means making decisions, and it is essential to know at all times whether the measures applied bring us closer to the objective.

To this end, people need adequate tools to read and analyze data and information to correct the path if necessary.

SMEs often do not provide their employees with relevant information relating to the development of the business, especially if they only have the statutory documents required by law.

It is a correct choice because these documents refer to the company as a whole, while operational staff need dedicated reports to work well.

Every entrepreneur desires that the employee knows what he or she has to do in the company.

For this reason, a well-organized business concern relies on a clear identification of the tasks and responsibilities of the staff. This applies to daily activities and those related to the development of the strategic plan.

For this reason, the strategic plan, which involves significant investments, has a qualitative section that describes the activities to be carried out, and a quantitative one that evaluates the resources to be used.

However, even without having a plan, as is the case in many SMEs, you can start by making good use of the general accounting entries by adding the cost center to them.

In this way, we can provide the various employees with specific reports that, at least quantitatively, represent a simple roadmap within which to proceed.

"It is the customers who make it possible to pay salaries and without customers, there is no business."

It is a quote that needs no explanation.

However, only with an ad hoc report, which allows the various employees to be aware of the costs of their structure, can the aforementioned statement be understood well and completely.

Why are the Statutory Balance Sheet and the P&L account not adjusted to the needs of the various departments?

We shall limit the evaluation only to the P&L accounts prepared following the provisions of the law, with the specific report that Management Control can provide to operational personnel. This way it is easy to see the advantages of an ad hoc report.

Statutory P&L account Management Control P&L acc. Advantages
Fixed format established by law Specific accounts for each Cost Center Each function seeks its efficiency as well as working for the general objective
Unique and faithful representation of the company as a whole Specific accounts for each Cost Center Each function seeks its efficiency as well as working for the general objective
Drivers of booking of accounts by nature Drivers of booking of accounts by destination (Cost Center) Evaluation of results achieved with invested resources
General accrual criterion Cash criterion adapted to the productive sector Investment recovery time is shortened
FIXED ASSET focus (looks to the past) FINANCIAL ECONOMIC focus (looks to the future) The dynamic vision pushes the company toward its growth
The Income result is too generic and synthetic Gross Margin and Operating Income have distinct meanings The management can understand how and where to take action
Too much item of the financial capital is not useful for operational purposes The return on working capital is an important item in the income statement Operational functions are driven to seek a high turnover of invested capital

In summary, the statutory balance sheet aims to give information intended for third parties who are institutional investors or public bodies (Internal Revenue Service, Social Security).

For this reason, it applies unique and homogeneous criteria for all categories of companies.

The document focuses on the asset value and the value of residual debts among liabilities.

Management control, on the other hand, provides an adequate information tool to the various departments so that each of them can contribute to balanced and sustainable growth in the long term.

Every company does not work for third parties, but for itself, and only with this approach can it focus on the accumulation of wealth and the development of its strengths that allow it to overcome any crisis.

The reconciliation account statement.

As mentioned, the database used by management control is the general accounting ledger.

It must also be taken into account that management control distributes reports in the first days following the monthly closing, the aim is to quickly share data and information knowing that they may have a negligible approximation.

Differently, general accounting has a different approach because the correctness of the data is essential, which is why it requires more time to carry out its activity.

However, other reasons lead to differences between the two income values of the respective income statements, because management control normally considers, A) only the aspects linked to operational activity, B) only ordinary costs and revenues, C) calculates the charges on working capital which must be covered by operating activities.

Therefore, the accounting reconciliation account is an important report that must be drawn up at least with the same frequency as the statutory financial statements, therefore once or twice per year, to always have a connection between the two statements.

Practical experience confirms that the accounting reconciliation statement, which requires about a couple of working hours, closes with slight differences between the two income values. Practically, in the first years of application of the model they fluctuate between 5 and 10% and then reduce to just 3% starting from the 5th year.

Size of companies interested in the project

All businesses, even small ones, could benefit greatly from the application of management control.

If we examine the data released by the Chambers of Commerce of the different European countries, it appears that a large number of companies, approximately 55/60% of those registered, do not exceed 5 years of existence.

Therefore, since no entrepreneur is so reckless as to invest capital to create a business and close it after a few years, it would be better to approach a growth path in the right way from the beginning. This is why every company should have management control.

In practice, only companies that want to follow a path of balanced and lasting growth obtain real advantages from management control.

Among them, it is sufficient that a company uses little working capital and is minimally structured to manage complex activities, to justify the adoption of the model.

In summary, management control is of great help to any company that seeks balanced and lasting growth objectives, with its financial independence.

In conclusion, SMEs should not think that management control is a function that only benefits large companies and requires incurring high costs to hire specialized personnel.

Kenning Consulting can carry out a customized management control project for SMEs at a very convenient cost and with tangible results in the short term.

Advantages obtainable out of this project:

  1. The company is a complex system but management control breaks it down into simpler subsystems on which to intervene;
  2. Each function has a tool for reading and analyzing information suited to its specific needs;
  3. Company management improves when each function applies small corrective measures and is subsequently able to measure the results;
  4. Costs take on the much broader meaning of invested resources that must produce a return;
  5. It allows people to acquire a dynamic vision of management, and the awareness that every action affects the development of the company;
  6. A single, easy-to-read statement to evaluate both the economic and financial components of company management.

Non-disclosure agreement

Kenning Consulting undertakes to sign a non-disclosure agreement to protect the confidentiality of the company’s data and information which it will come to know during the consultancy.

Find out more about our projects for management improvement and you will see they can be useful for your company!