Management Control Systems for SMEs: Case Study of Mosaicoon

1. “The importance of Management Control Systems for Small-Medium Enterprises: The case study of Mosaicoon” Università degli Studi di Palermo Scienze economico-aziendali LM-77 Entrepreneurship and Management Tesi di Laurea di: Natalie Lesley Calabrese Relatore: Sonia Quarchioni Anno accademico: 2017/18

2. Research motivation • The current and future market scenario is attractive for Small-Medium Enterprises: • Many new-born Fintech companies • Development of Blockchain technology • Digital Trade Chain Consortium • ELITE programme (London Stock Exchange Group), in partnership with the Italian government for Southern Italian start-ups and SMEs. • Due to such an attractive and challenging scenario, the risk of incurring into debt are high, and MANAGEMENT CONTROL SYSTEMS act as a navigator, supporting short-term and long-term planning. • The goal is to improve micro data and micro level analysis and promote a culture of evaluation, which are essential to identify the competitive advantages and understand the market.

3. The aim of the research • To explore the Management Control Systems (MCS) for SMEs and how they may be adapted in order to comply with their specific characteristics. • Keeping in mind that: “Measuring systems are not merely simple tools for MCSs, but become the powerful means for communication and learning, and especially set the basis for an innovative strategic management for competitive advantage and long-term ongoing success”. (Analoui et al. 2003; Baschieri, 2014; Chapman, 2005)

4. Management Control Approaches Traditional Control Approaches Advanced Control Approaches Statistical Reports Avg./ % / Ratios / Correlation (Graphs/tables tools to measure performance) Current vs. previous periods Personal Observation Responsibility accounting Cost, revenue, profit, investment centres. • ROI • Return on investment= operating profit before tax/Net operating assets (total assets-current liabilities) • Residual income= (Controllable Operating Profit after tax) - • Imputed interest (Controllable Profit after interest and tax) – (Required rate of return x Investment). • EVA= (after-tax) adjusted operating profit (replaces Income) - (after-tax) weighted average cost of capital x total assets - current liabilities. Break-even point = Fixed costs selling price per unit – variable cost per unit Management Audit Systematic appraisal of management performance. Budgetary Control Numerical statement of Plans/Policies & goals Operating budgets (commercial, production, admin, R&D); investment budget (linked to a technical or structural feasibility study); financial budget (treasury or cash and statement of sources and uses). It is conceded by financial (S-U) and monetary (I-E) feasibility. Network Analysis PERT (program evaluation and review); CPM (critical path management programme, evaluation and review) to deal with time scheduling and resource allocation. Ratio Analysis Liquidity ratio (current ratio= C. Assets/C. Liabilities; Quick ratio= C. assets-Inventories/c. liabilities) Solvency (Debt equity ratio=Total Debt/Total Equity; interest coverage ratio= EBIT/Interest expenses) Profitability (Gross profit margin=Gross Profit/sales; Net profit margin=Net profit/Revenue; ROCE%=Profit/capital employed x100) Turnover (Inventory turnover ratio=costs of sales/avg. inventory level; stock turnover ratio=COGS/avg. stock; debtors turnover ratio=Net Credit sales/Avg. net receivables). Management Information System Processing data into info at the right time, communicated to all levels for appropriate decision-making.

5. Critical Key points from Literature • Considering SMEs specific characteristics, immaterial influences the material dimension components of control (responsibility centres, control process, management accounting); • Control may lead to managerial myopia or over focus on figures rather than strategy or losing track of scope; • “Network structures” (formalised) links among BUs, managed in an integrated way to exploit potential synergies to achieve objectives; • Use of a single and common language for the planning, decision-making and evaluation process; • Excessive emphasis on short-run results compromises competition in the long-run & less investments in R&D increases Net Income/year, but less innovation capacity in the long-run; • IBM Intranet Experience Suite to manage control. Offers a Single View.

6. Research methodology • Research methodology: Case Study • Data collection: documental analysis, semi-structured interviews to the CEO and CFO; secondary data (Bianchi, 2002; Cosenz, 2012) • Founded in 2009, was the first data-driven marketplace. The online platform connected video makers seeking to monetize on their projects with brands and agencies needing video creatives at scale.

7. The controlling system flow By Bianchi C., 2002 • To assess the company’s performance, business unit linkages are analysed by using a feedback loop system (Cosenz, 2012) • Issues!!! • The controlling system was focused on the operational side, BUT what about COSTS? • KPI were identified, BUT did employees understand their use? • Were these inter-related mechanisms actually mapped? - too much space for randomness. • What about setting deadlines? - for incentives and feedback. • How did feedback, improvements, ideas, vision, perceptions get shared?

8. Dysfunctionalities • Numbers did not add up It was on the costs side that the company failed. The goal was to create a platform which should have revolutionised the market. Although, it had no immediate impact on sales and lack of ex-post evaluation of its usefulness. • Success Formula = BEST+TIPS + COOP + CHECK • Spreading of best practices through networks, platforms and hubs. (Mosaicoon failed in this) • Turn research into innovative products and services that create new markets. (Mosaicoon failed in this) • International cooperation in areas of mutual benefit. (Mosaicoon failed in this as well). • Control, payingheedto externalities, entrepreneurialcapabilities and know-how! • Without an effective and efficient MCS, all of these success components cannot be managed. • “Mosaicoon closed down because they concentrated all their efforts on a platform that the marketdid not even want and had no positioning or managementefficiencyand effectiveness strategy” (ex-CFO, 2018)

9. Proposal 1: focus on Cause-effect relationships, Measure & Align Human, Info & Organisational capital -> The “If…then” strategic flow Output Number trained/ Sensitised; Purchased equipment; Built Structures; Facilities; Developed policies, products, Staff; Services delivered; • Outcomes • 1-3 /4-6 years • Short-term • Learning; • Awareness; • Knowledge; • Attitudes; • Skills; • Opinions; • Aspirations; • Motivations; • Medium-term action; • Behaviour; • Decision-making; • Policies; • Social action; Activities Workshops; Meetings; Deliver Services; Develop Products; Resources; CVs/Train; Facilitate; Partners; Assumptions and risks Priorities; Problem Analysis; Stakeholder Analysis; Set objectives; Risk analysis; Monitoring framework • Impact • 7-10 years • Conditions: • Social • Environmental • Civil • Economic Inputs Staff Time Money Materials Equipment Technology Partners Stakeholders Co-producers Incentives - Reassess profitability – Measure results Management information system (MIS) CPM, access new markets, financing The right leadership and control style must be identified CPM (critical path management program evaluation and review Identify specificities of SME= innovation Dynamic capabilities: exploitation and exploration • Activity Based Budgeting • Awareness of externalities (market needs, competition) and new calls Research conducted by University students (to reduce R&D costs) • KPI flexible cards By Author

10. Proposal 2: KPI flexible cards By author

11. Conclusions and Recommendations • SMEs should include suppliers and customers in their analysis: including demographic trends, quality measurement, distribution costs. -> Involve university students for R&D! • SMEs need to focus on key variables of results and suitable MCS, providing user-friendly KPI. • Internal process control systems must take into account externalities and immaterial dimensions of control. • Applying MCS means improving business conduct, commitment to results and collaboration. Use a Lead with results approach! • KPI translate complexity into simple indicators, that allow decision makers to assess the current situation and act upon them promptly. Not just for large companies!

12. Thank you for your attention! Any questions? Author: Natalie Lesley Calabrese Supervisor: Sonia Quarchioni M: +39 3278277753 email: natalie.calabrese8@gmail.com website: www.artfusions.it