M01180
ACCOUNTING FOR SMALL
AND MEDIUM ENTERPRISES
(SMEs) IN INDONESIA
Elisabeth Penti Kurniawati
Department of Economics and Business
Satya Wacana Christian University
www.uksw.edu
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
*Center
For Micro
And Small
Enterprises
Dynamics
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,
absorb 99.9% of the workforce (BPS, 2010).
Accounting information (AI)
is an important element for a business,
Which is useful for:
Business decision making
Performance assessment
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).
*SMEs face various hindrances in applying accounting including the educational factor, knowledge factor, and low
level of awareness about the importance of accounting (Kurniawati, Nugroho, and Setiawati, 2011).
Q1:What kind of AI owned by
SMEs ?
Q2:How they use it for:
a) Business decision making ?
b) Performance assessment ?
SMEs in Central Java, Indonesia
Most of SMEs:
- are proprietorship companies (97.33%),
- managed by the owners (94.67%),
- use their own capital as their source of fund (68.00%),
- do not apply business entity concept (81.33%).
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:
• Their memories, estimation and third party
information (from the market, suppliers and
customers)
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
(usually provided by Statement of
Cash Flows)
Most of SMEs do not have :
Income Statement,
Balance Sheet, and
Statement of Changes in Equity
Do not have Income Statement?
Get information of profit?
Record of sales >< record of expenses,
including purchases
Estimate: record of receipts >< record of
disbursements (For SMEs which have only
cash transaction)
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
Document of bank loan (& notification)
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
liabilities
Q2a:AI for Business Decision Making
Business Decision
Written Information
Information
Q
%
Purchasing (When
and How Many)
Record of
Inventories
Determining COGS
Purchase Notes,
Price List
Unwritten Information
Total
Information
Q
%
Q
%
Memory of the manager
about the rest of the
25 33,33% inventories, estimation of
50 66,67% 75 100%
business needs, physical
checks of the inventory
Memory of the manager
64 85,33% about CoGS, estimation of
11 14,67% 75 100%
purchasing prices
Highest Retail
Percentage of the expected
Price
Determining Selling
Determined,
30 40,00% profit margin (10-20%),
Price
estimation of market prices
Price List, Record
of Sales
Servicing and
Sales Order,
Memory of the manager
Producing (When
Production
20 74,07%
about customer order
and How Many)*
Schedule
45 60,00% 75 100%
7 25,93% 27 100%
Business decision mostly decided by the owner (94.67%)
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 nonfinancial side
Financial:
Use information of increased/decreased:
Profit/Revenue, Sales,
Customer Order, Inventory Turnover,
Equipment and Supplies,
Ability to pay debts, Investment,
Production, and Purchasing
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
attendance)
Written and Unwritten Accounting Information for
Performance Assessment Benchmark in SMEs
Benchmark of
Performance
Assessment
Increased Sales
Increased Profit
Ability to Pay
Account Payables
Ability to Pay Long
Term Debt
Written Information
Information
Record of Sales,
Income
Statement,
Record of Cash
Inflows/Outflows
Record of Sales,
Income
Statement,
Record of Cash
Inflows/Outflows
Record of Sales,
Sales Report
Record of Sales,
Sales Report
Account Receivables Record of Account
Turn Over
Receivables
Inventory Turn Over
Record of
Inventory
Q
Unwritten Information
%
Information
Q
%
Total
Q
%
52 69,33% Estimated Sales
23 30,67% 75
100%
Estimated Sales,
Estimated Profit
40 53,33% 75
100%
35 46,67%
Estimated Sales,
11 37,93% 29
Cash on Hand
Estimated Sales,
9 90,00%
1 10,00% 10
Cash on Hand
Memory of the
Manager about
8 72,73%
3 27,27% 11
Account
Receivables
Physical Checks of
7 28,00%
18 72,00% 25
inventory
18 62,07%
100%
100%
100%
100%
Can it be classified into these ratios:
How SMEs measure their
Liquidity?
performance without
Leverage? financial ratio?
Activity?
Profitability?
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
efficiency PROFITABILITY
Ratio in Comparison with Benchmarks Used
by SMEs for Performance Assessment
Financial Ratio Classification
Benchmarks Used by SMEs
To measure a company's Availability of cash
Liquidity ability to meet current Ability to pay account
receivables on time
liabilities.
Benefits of long-term debt
for business development
To
measures
how Profit is greater than the
Leverage effectively the company
long-term debt interest
is funded by debt.
Ability to repay long-term
debt and maintain business
continuity
Inventory turnover
To measure company's Account receivables turnover
Activity effectiveness to use its
fund resources.
To
measure
the
effectiveness of overall
Profitabilit
management, as shown
y
by profit from the sales
and investment.
Increased sales
Increased profit
Level of business efficiency
Information used by SMEs
Cash on Hand
Record of Sales and Sales Report
Estimated Sales
Increased Equipment/ Investment
Estimated profit
Record of Sales and Sales Report
Estimated Sales
Record of Inventory
Inventory Physical Checks
Record of Account Receivables
Collection
Record of Sales
Record of Sales and Sales Report
Estimated Sales
Income Statement
Estimated Profit (>10-30%)
Record of Cash Inflow/Outflows
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
Business can keep running
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
when the business is managed by employees
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
bookkeeping
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
Important for planning and production or service schedules
AND MEDIUM ENTERPRISES
(SMEs) IN INDONESIA
Elisabeth Penti Kurniawati
Department of Economics and Business
Satya Wacana Christian University
www.uksw.edu
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
*Center
For Micro
And Small
Enterprises
Dynamics
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,
absorb 99.9% of the workforce (BPS, 2010).
Accounting information (AI)
is an important element for a business,
Which is useful for:
Business decision making
Performance assessment
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).
*SMEs face various hindrances in applying accounting including the educational factor, knowledge factor, and low
level of awareness about the importance of accounting (Kurniawati, Nugroho, and Setiawati, 2011).
Q1:What kind of AI owned by
SMEs ?
Q2:How they use it for:
a) Business decision making ?
b) Performance assessment ?
SMEs in Central Java, Indonesia
Most of SMEs:
- are proprietorship companies (97.33%),
- managed by the owners (94.67%),
- use their own capital as their source of fund (68.00%),
- do not apply business entity concept (81.33%).
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:
• Their memories, estimation and third party
information (from the market, suppliers and
customers)
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
(usually provided by Statement of
Cash Flows)
Most of SMEs do not have :
Income Statement,
Balance Sheet, and
Statement of Changes in Equity
Do not have Income Statement?
Get information of profit?
Record of sales >< record of expenses,
including purchases
Estimate: record of receipts >< record of
disbursements (For SMEs which have only
cash transaction)
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
Document of bank loan (& notification)
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
liabilities
Q2a:AI for Business Decision Making
Business Decision
Written Information
Information
Q
%
Purchasing (When
and How Many)
Record of
Inventories
Determining COGS
Purchase Notes,
Price List
Unwritten Information
Total
Information
Q
%
Q
%
Memory of the manager
about the rest of the
25 33,33% inventories, estimation of
50 66,67% 75 100%
business needs, physical
checks of the inventory
Memory of the manager
64 85,33% about CoGS, estimation of
11 14,67% 75 100%
purchasing prices
Highest Retail
Percentage of the expected
Price
Determining Selling
Determined,
30 40,00% profit margin (10-20%),
Price
estimation of market prices
Price List, Record
of Sales
Servicing and
Sales Order,
Memory of the manager
Producing (When
Production
20 74,07%
about customer order
and How Many)*
Schedule
45 60,00% 75 100%
7 25,93% 27 100%
Business decision mostly decided by the owner (94.67%)
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 nonfinancial side
Financial:
Use information of increased/decreased:
Profit/Revenue, Sales,
Customer Order, Inventory Turnover,
Equipment and Supplies,
Ability to pay debts, Investment,
Production, and Purchasing
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
attendance)
Written and Unwritten Accounting Information for
Performance Assessment Benchmark in SMEs
Benchmark of
Performance
Assessment
Increased Sales
Increased Profit
Ability to Pay
Account Payables
Ability to Pay Long
Term Debt
Written Information
Information
Record of Sales,
Income
Statement,
Record of Cash
Inflows/Outflows
Record of Sales,
Income
Statement,
Record of Cash
Inflows/Outflows
Record of Sales,
Sales Report
Record of Sales,
Sales Report
Account Receivables Record of Account
Turn Over
Receivables
Inventory Turn Over
Record of
Inventory
Q
Unwritten Information
%
Information
Q
%
Total
Q
%
52 69,33% Estimated Sales
23 30,67% 75
100%
Estimated Sales,
Estimated Profit
40 53,33% 75
100%
35 46,67%
Estimated Sales,
11 37,93% 29
Cash on Hand
Estimated Sales,
9 90,00%
1 10,00% 10
Cash on Hand
Memory of the
Manager about
8 72,73%
3 27,27% 11
Account
Receivables
Physical Checks of
7 28,00%
18 72,00% 25
inventory
18 62,07%
100%
100%
100%
100%
Can it be classified into these ratios:
How SMEs measure their
Liquidity?
performance without
Leverage? financial ratio?
Activity?
Profitability?
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
efficiency PROFITABILITY
Ratio in Comparison with Benchmarks Used
by SMEs for Performance Assessment
Financial Ratio Classification
Benchmarks Used by SMEs
To measure a company's Availability of cash
Liquidity ability to meet current Ability to pay account
receivables on time
liabilities.
Benefits of long-term debt
for business development
To
measures
how Profit is greater than the
Leverage effectively the company
long-term debt interest
is funded by debt.
Ability to repay long-term
debt and maintain business
continuity
Inventory turnover
To measure company's Account receivables turnover
Activity effectiveness to use its
fund resources.
To
measure
the
effectiveness of overall
Profitabilit
management, as shown
y
by profit from the sales
and investment.
Increased sales
Increased profit
Level of business efficiency
Information used by SMEs
Cash on Hand
Record of Sales and Sales Report
Estimated Sales
Increased Equipment/ Investment
Estimated profit
Record of Sales and Sales Report
Estimated Sales
Record of Inventory
Inventory Physical Checks
Record of Account Receivables
Collection
Record of Sales
Record of Sales and Sales Report
Estimated Sales
Income Statement
Estimated Profit (>10-30%)
Record of Cash Inflow/Outflows
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
Business can keep running
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
when the business is managed by employees
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
bookkeeping
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
Important for planning and production or service schedules