M01180

ACCOUNTING FOR SMALL AND MEDIUM ENTERPRISES

(SMEs) IN INDONESIA

Elisabeth Penti Kurniawati

Department of Economics and Business Satya Wacana Christian University

 _SMEs  _{have an important role in the economic} development in Indonesia

 _Data:

 _{99.8 % of the total number of business unit} _SMEs  _{97.3 % of the total work force} _{involved in SMEs}

(91.8 million people, in 2012)

 _{Provide job opportunities}

Photos by CEMSED, 2013

Considering the importance of SMEs

_{Business management of SMEs need more}

attention!!!

SMEs need:

_{Qualified information} _{to improve their} business

_{Accounting information}  _{daily operations} management

*SMEs in Indonesia reached 52 million, accounted for 54% of GDP,

_{Accounting information (AI)}



_{is an important element for a business,}

_{Which is useful for:}

_{Business decision making}

_{The accounting information}

 _{is resulted from financial reporting process}

_{Based on previous researches*}

 not all SMEs _{apply accounting and do financial reporting}

* 69.56% of SMEs had done recording, but only 34.78% of them made financial statements (Kurniawati and Hermawan, 2012).

Q1:What kind of AI owned by

SMEs ?

Q2:How they use it for:

SMEs in Central Java, Indonesia

Most of SMEs:

- are proprietorship companies (97.33%), - managed by the owners (94.67%),

Q1:Accounting Information Owned by SMEs

_{Written information:}

• Trans_Documents purchase (96%) & sale receipt (76%)

• Transaction records cash in/outflows (52%) & sales (38%)

• Reports simple operational reports, only few of them made FS

_{Unwritten information:}

FS: (1)Balance Sheet, (2)Income Statement, (3)Statement of Owner's Equity, (4)Statement of Cash Flows

SMEs have:

Cash inflows/outflows report

_{They can get information about}

cash availability

_{Most of SMEs do not have :}

_{Income Statement,}

_{Balance Sheet, and}

Do not have Income Statement?

Get information of profit?

_{Record of sales >< record of expenses,}

including purchases

_{Estimate: record of receipts >< record of}

Do not have Balance Sheet?

Get information of asset?

_{Record of cash flows,}

_{Record of inventory} and “list” of _equipment

Get information of liabilities?

 _{Record of account payables}

Do not have Statement of Changes in Equity?

Get information of increased/decreased equity?

_{Estimate by increased/decreased:}

_Cash,

_Inventory,

_Equipment,



_{a.l.a. there is no difficulty to pay their}

Q2a:AI for Business Decision Making

Information Q % Information Q % Q %

Purchasing (When and How Many)

Record of

Inventories 25 33,33%

Memory of the manager about the rest of the

inventories, estimation of business needs, physical checks of the inventory

50 66,67% 75 100%

Determining COGS Purchase Notes,

Price List 64 85,33%

Memory of the manager about CoGS, estimation of purchasing prices

11 14,67% 75 100%

Determining Selling Price

Highest Retail Price

Determined, Price List, Record of Sales

30 40,00%

Percentage of the expected profit margin (10-20%), estimation of market prices

45 60,00% 75 100%

Servicing and Producing (When and How Many)*

Sales Order, Production Schedule

20 74,07% Memory of the manager

about customer order 7 25,93% 27 100%

Written Information

Business Decision Unwritten Information Total

Q2b:AI for Performance Assessment

Companies evaluate their business performance by using financial ratios,

But SMEs?



_Only

_1.33

_{% use the financial ratio}



_{Have their own}

_benchmarks



_{Measured by the}

_{financial and}

Financial:

Use information of increased/decreased:

_{Profit/Revenue, Sales,}

_{Customer Order, Inventory Turnover,}

_{Equipment and Supplies,}

_{Ability to pay debts, Investment,}

Non Financial:

 _{Increased customer,}

 _{Fulfillment their own target/capacity,}  _{Increased number of employees,}

 _{Increased owner welfare,}

 _{Customer satisfaction (}_{measured by increased}

repeating customer),

 _{Increased employee benefits}

 Employee’s performance (_{measured by their}

Written and Unwritten Accounting Information for

Performance Assessment Benchmark in SMEs

Information Q % Information Q % Q %

Increased Sales

Record of Sales, Income

Statement, Record of Cash Inflows/Outflows

52 69,33% Estimated Sales 23 30,67% 75 100%

Increased Profit

Record of Sales, Income

Statement, Record of Cash Inflows/Outflows

35 46,67% Estimated Sales,

Estimated Profit 40 53,33% 75 100%

Ability to Pay Account Payables

Record of Sales,

Sales Report 18 62,07%

Estimated Sales,

Cash on Hand 11 37,93% 29 100% Ability to Pay Long

Term Debt

Record of Sales,

Sales Report 9 90,00%

Estimated Sales,

Cash on Hand 1 10,00% 10 100% Account Receivables

Turn Over

Record of Account

Receivables 8 72,73%

Memory of the Manager about Account

Receivables

3 27,27% 11 100%

Inventory Turn Over Record of

Inventory 7 28,00%

Physical Checks of

inventory 18 72,00% 25 100%

Written Information

Benchmark of Performance

Assessment

Total

Can it be classified into these ratios:



_Liquidity?



_Leverage?



Activity?



_{Profitability?}

How SMEs measure their performance without

Instead of use financial ratios,

SMEs use:

 _{Availability of cash & ability to pay AR on time}

_LIQUIDITY;

 _{Benefits of long-term debt for business development, profit}

is greater than the long-term debt interest, & ability to repay long-term debt &maintain business continuity

_LEVERAGE;

 _{Inventory turnover & AR turnover} _ACTIVITY;

 _{Increased sales, increased profit, and level of business}

Ratio in Comparison with Benchmarks Used by SMEs for Performance Assessment

Financial Ratio Classification Benchmarks Used by SMEs Information used by SMEs

Liquidity

To measure a company's ability to meet current liabilities.

 Availability of cash

 Ability to pay account receivables on time

 Cash on Hand

 Record of Sales and Sales Report

 Estimated Sales

Leverage

To measures how effectively the company is funded by debt.

 Benefits of long-term debt for business development  Profit is greater than the

long-term debt interest

 Ability to repay long-term debt and maintain business continuity

 Increased Equipment/ Investment

 Estimated profit

 Record of Sales and Sales Report

 Estimated Sales

Activity

To measure company's effectiveness to use its fund resources.

 Inventory turnover

 Account receivables turnover

 Record of Inventory

 Inventory Physical Checks

 Record of Account Receivables Collection

 Record of Sales

Profitabilit y

To measure the effectiveness of overall management, as shown by profit from the sales and investment.

 Increased sales  Increased profit

 Level of business efficiency

 Record of Sales and Sales Report

 Estimated Sales

 Income Statement

 Estimated Profit (>10-30%)

SMEs

_{69.33% have no problems in recording}

_{80% have obstacles in reporting:}



_{Argue: reporting is time-consuming,}

complicated, limited ability

_{Managed by the owners}

Owners handle their business directly

 _{SMEs realize:}

Without accounting they have limitation of information to manage their business

 _{To overcome this situation:}

_{Conduct direct supervision,}

_{Perform a physical check periodically (cash and inventory),} _{Optimizing their memory & estimation based on their}

experience

 _{Recording and reporting is required as a control, especially}

_{SMEs need a simple bookkeeping}



_{Most of the SMEs do not apply double}

entry bookkeeping

_{Recommendation:}

_{Simple basic records for SMEs}



_{in the form of a simple single entry}

SMEs must have at least 7 basic records :

1. Cash inflows/outflows, 2. Sales,

3. Expenses including purchases, 4. Inventory

1-4 Useful for daily business management

5. Account payables and 6. Account receivables

5-6 Important for SMEs which are conduct transactions on credit

7. List of equipment

Useful to keep the fixed asset

Accompanied with estimation of depreciation expenses

Additional: Record of customer order is additional record