Banks, SMEs and accountants

An international study of SMEs’ banking relationships:

(As the leading international accountancy body, ACCA operates in a challenging environment: global, continually evolving and increasingly competitive. Augmenting ACCA’s strong position in a worldwide market is ACCA’s well-respected research program, generating high-profile, high-quality, cutting-edge research with global focus, wide dissemination and strong emphasis on public policy influence and practical value. This article contains findings from relevant research reports).

The issue of small business finance, the relationship between SMEs and their bankers and the role of accountants as advisers of SMEs have been subjects of considerable research over a long period in many countries. Most of the evidence from that work establishes the importance of the banking relationship and the accountants’ role in providing advice to SMEs.

The research evidence does, however, show variations in the levels of SME satisfaction with their banking relationships.

This, together with evidence from other countries with different banking structures, has led to suggestions that banking structures may be an important determinant of SMEs’ levels of satisfaction with their banks.

The analysis provides some interesting and important insights into SMEs’ relationships with their banks and the effects of differing banking regimes and industry structures. It identifies some potential gaps in the provision of small business finance and advice and provides more understanding of the role of accountants as a source of financial and general business advice.

The cross-country comparison provides insights into the effects of structural differences in the accounting profession and an indication of the potential impact of the separation of the audit, tax, preparation of accounts and advice functions on the future relationships between SMEs and their accountants.

SMEs and their banking relationships

Services used

The banking services and methods of finance used by SMEs vary with size but the primary determinant of the variation is the country of residence.

SMEs tend to have more banking relationships where a combination of different types of bank provide different services and compete for SME business.

Cultural norms and attitudes within countries may have an effect on SMEs’ choice of financial service.

Raising finance

SMEs wishing to raise finance are generally able to do so in full or in part.

Banks are either the sole source or one of several sources of finance for SMEs in all countries studied.

Accountants from all countries identify a lack of collateral or security as a frequent reason for refusals to provide finance.

Challenges faced by SME’s

General issues

Obtaining new business and general finance-related issues are the biggest challenges facing SMEs.

Future planning is high on the list of challenges facing SMEs.

Advice, advisors and the role of the accountant

Sources of advice

Accountants, lawyers and banks are the most frequently used sources of advice.

SMEs’ use of advisors is correlated to the size of their business, with 75 percent of the largest SMEs seeking advice compared with 43 percent of the smallest.

Country variations exist in the ordering of accountants and lawyers, some of which are role related, Country-related differences are also apparent in the use of business colleagues.

From the explanations provided by the SMEs accountants, this is related to issues of attitude and trust.

Role of accountants

Accountants are the most frequently used source of advice across the whole sample.

They are used most for tax, audit and accounts preparation work.

Fewer than 40 percent of SME’s claim to use their accountants for business planning, general advice or as management consultants.

Similarly, fewer than 40 percent claim to use their accountants for advice on finance.

The accountants’ results on these areas differ - discussions suggest that advice is often sought in a less formal way and sometimes after the first approach to a financier.

Influencing factors

The effects of variations in regulations covering SMEs’ financial reporting make inter-country comparisons difficult without further in-depth research.

The separation of accountants’ roles to comply with professional guidelines on auditor independence may inhibit the use of accountants for both finance and business-related advice.

Findings from study

The findings from the study show that SMEs’ levels of satisfaction with their banking arrangements are generally very high, although there are areas where this could be improved.

The inter-country comparison shows that there are vastly different ‘norms’ for the number of banking relationships an SME might have.

Nonetheless, there does not appear to be a significant negative or positive correlation between the number of banking relationships and levels of satisfaction.

Although there is considerable evidence from other research that accountants, lawyers and bankers are the most frequently used source of advice and this is confirmed by this survey, there are factors identified within this research which may warrant further consideration. In the case of accountants, the changing structure of the profession and the impact of regulation and self-regulation to protect audit independence, although unlikely to affect tax- and accounting-related advice, may lead to problems for SMEs in accessing appropriate advice on financial and business matters.

Similarly the shifts within the banking industry away from localised banking services are having an impact upon the SME sector and are likely to have an even greater effect in future.

Recommendations

The banking industry

Although in general the banking industry is providing a service that satisfies its SME customers, there are areas that warrant further consideration and research:

*The level of satisfaction with charges, tariffs and benefits and the impact of this upon banking relationships

* The effects of moving from localised decision making to more centralised decision making in terms of banks’ understanding of an SME’s business and the business.

* Environment in which it operates, and the apparent remoteness of the decision makers from the SME.

The accounting profession

The survey results show very high levels of SME satisfaction with their accountants, but they also highlight some areas for concern:

* The relatively low use of accountants for advice on matters relating to finances, which, with an ever-increasing range of financial products becoming available, must raise the question of the sources of advice that SMEs are currently using and the adequacy and appropriateness of that advice

* The effects of regulatory and self-regulatory regimes relating to audit independence on access to accountants as a source of advice

* The question of whether accountants should be taking a proactive rather than reactive role in assisting their SME clients with finance-related advice

* The extent to which accountants can play a positive role in identifying simpler structures for accounting to meet the needs of the various users, eg to what extent the needs of the owner, the tax authorities and financiers can be met by one single form of reporting.