ENTREPRENEURSHIP THEORY AND THE FINANCIAL MANAGEMENT OF SMALL BUSINESSES

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Agency theory

According to Jensen and Meckling (1976), an agency relationship is “a contract under which one or more principals engage an agent or steward to perform some service on their behalf and delegate some decision-making authority to the agent”. Agency theory argues that a firm consists of a network of complex contractual relationships between various stakeholders. Agency theory predicts a moral threat if the desires of the principal and the agent are in conflict. Literature suggests that these threats could be reduced by: (1) incentivising agents to act in the best interests of the principal, and/or (2) coming up with arrangements whereby the principal has access to the information that allows him or her to verify agent behaviour (Carey, 2008: 16).
The agency rationale is classically applied in large companies where there are external shareholders and the audited accounts play a “stewardship role” in the agency relationship between shareholder (the principal) and directors (the agents) (Collis, 2012). The auditing services offered by external accountants serve as a method of providing principals with the assurance that the financial information supplied by the agent is a fair representation of the actual state of affairs in that organisation (Carey, 2008: 17).
In the past, the owners or shareholders of the organisation were considered the major and only principal/s of an organisation. However, resulting from stakeholder activism, supported by a drive for improved corporate governance, the understanding of what constitutes a principal has been broadened to include all stakeholders. In small companies, a principal will therefore be regarded as anyone with an interest in the organisation who is distant from the actions of management and is unable to verify them (Collis, 2003: 15). Principals in a small business context would therefore include external shareholders, lenders, creditors and tax authorities.
Financial reporting is undertaken to address the decision-making and control needs of investors, who are identified as the defining group of users of large company accounts. However, whilst investors in large companies require financial statements that will allow them to assess the stewardship of management, the investors in small companies are in most cases both owner and manager. Therefore, the agency relationship that exists between the shareholders and directors of large companies is not replicated in small Chapter 2: Financial management in SMMEs the role of the small accounting practitioner Page 65 companies. Nevertheless, previous research demonstrates that there is a demand for audited accounts by the owner-managers of many small companies, who are identified as the main users of the statutory financial statements. This suggests the possibility that other agency relationships exist in small companies or that the audited accounts of small companies have different uses from those of large companies (Collis & Jarvis, 2000: 19)
Small businesses are known for close-knit agency relationships, i.e., as mentioned, the owners are normally the managers of the business, reducing the need for auditing services (Sian & Roberts, 2009: 290). As a result, non-public entities (i.e. those businesses that have limited public liability) in most jurisdictions are now exempt from the compulsory audit requirement and, at most, require an independent review (Blackburn & Jarvis, 2010; Carey, 2015; Collis, 2012).
The RBV, TCE theory, and the agency theory combined, provide insight into the reasons why SBOs outsource accounting related functions and therefore, into what the role of the small accounting practitioner should be. Transaction cost economics (TCE) and the RBV are concerned with decisions regarding the outsourcing of the accounting and/or finance functions in an attempt to overcome the lack of skills and resources within the small business (Hafeez & Andersen, 2014: 19; Kamyabi & Devi, 2011: 81). Agency theory, on the other hand, is concerned with how statutory and compliance services offered by accounting practitioners mitigate agency risks.
Based on the principles of TCE, the RBV and agency theory, it could be argued that through the outsourcing of accounting and finance related functions, small accounting practitioner assist small businesses in the following ways:
 As trained professionals with specialised knowledge and skills, the external accounting practitioner is able to provide higher quality financial information and financial management skills (Barbera & Hasso, 2013: 272; Everaert et al., 2007: 719; Hafeez & Andersen, 2014: 20; Kamyabi & Devi, 2011: 81)
 By providing value for money services, accountants could assist in the effective utilisation of resources in that they are theoretically able to provide higher quality financial skills at a reduced rate (Blackburn & Jarvis, 2010: 15)
Chapter 2: Financial management in SMMEs the role of the small accounting practitioner Page 66
 Outsourcing provides owners/entrepreneurs with the opportunity to focus on core capabilities and resources to create new opportunities through optimised utilisation of external sources (Kuene & Kuene, 2015: 3)
 Sourcing compliance and related services overcome issues relating to agency risks (Carey, 2008: 16).
It could therefore be argued that the theoretical role of the small accounting practitioner is to:
1. Assist SBOs or entrepreneurs to overcome the constraints that they experience relating to a lack of financial skills and resources, so as to ensure that the purpose and benefits resulting from effective financial management are achieved and 2. Provide statutory and compliance services in order to address the agency concerns present within the business venture.

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Conclusions

The purpose of this chapter was to contextualise the study within the broader field of entrepreneurship, to derive a definition of financial management as it applies to small businesses and entrepreneurial ventures, to describe the benefits that SBOs should obtain from effective financial management, and to establish the role of the small accounting practitioner.
The social reality view of entrepreneurship accepted in this study is that of the owner manager and his/her role in small business management. In terms of schools of thought, it was argued, from a micro activity perspective, that SBOs or entrepreneurs need financial management skills as an ‘entrepreneurial trait’. From a macro perspective, it was further reasoned that effective financial management would ensure sufficient funding to support SMME survival and growth.

CHAPTER 1 INTRODUCTION 
1.1 Introduction
1.2 Background to the Study
1.3.1 The types of services sourced
1.3.2 Levels of service quality offered by SAPs
1.3.3 Relationship between types of services sourced and service qualit
1.3.4 A South African perspective on the relationship between the small business owner and small accounting practitioner
1.4 Defining the Constructs and Terminology
1.4.1 Small business
1.4.2 Entrepreneurial venture
1.4.3 Small business owner (SBO) .
1.4.4 Small Accounting Practice (SAP)
1.4.5 Small Accounting Practitioner
1.4.6 Service quality
1.4.7 Advisory services
1.4.8 Compliance services
1.5 Research Problem
1.6 Research Objectives
1.7 Hypothesised Model
1.8 Research Design and Methodology
1.9 Contribution of the Study
1.10 Delineation of the Study
1.11 Ethical Considerations
1.12 Chapter Layout …
CHAPTER 2 ENTREPRENEURSHIP THEORY AND THE FINANCIAL MANAGEMENT OF SMALL BUSINESSES .
2.1 Introduction .
2.2 Contextualising the Study within the Field of Entrepreneurship
2.3 Financial Management in Small Businesses
2.4 Benefits of Preparing Relevant, Accurate and Timely Financial Information
2.5 The Relationship between the Benefits, Purpose and Financial Management Activities of SMMEs
2.6 The Role of the Small Accounting Practitioner
2.7 Conclusions
CHAPTER 3 SERVICES AND BENEFITS OFFERED BY THE SMALL ACCOUNTING PRACTITIONE
3.1 Introduction
3.2 The Benefits Obtained From the Services Sourced from the Small Accounting Practitioners
3.2.1 Measurement of benefits
3.3 The Factors Affecting the Benefits that SBOs Obtain from the Relationship with their Small Accounting Practitioner
3.4 The Types of Services Offered by Small Accounting Practitioners
3.5 The Relationship between the Frequency of the Types of Services Sourced and the Benefits that SMMEs should obtain from Sourcing Accounting Services
3.6 Conclusion
CHAPTER 4 SERVICE QUALITY AND PERCEPTION OF BENEFITS 
CHAPTER 5 RESEARCH DESIGN AND METHODOLOGY
CHAPTER 6 DATA ANALYSIS 
CHAPTER 7 FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

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