SMEs, financial reporting and trade credit: an international study

This study investigates the value of the financial statements of small and medium-sized enterprises to trade creditors and trade credit intermediaries, including credit rating agencies and credit insurers. The research focuses on small and medium-sized unincorporated and incorporated enterprises, referred to here as SMEs. The study is set in the context of the increased internationalisation of smaller firms and growing international convergence of financial reporting requirements.

ACCA research report no. 133


Dr Jill Collis
Director, Accounting and Auditing Research Centre, Brunel University

Professor Robin Jarvis
Special adviser, ACCA and Professor of Accounting, Brunel University

Professor Michael Page
Emeritus professor, Portsmouth University and Professor Associate, Brunel University



The report addresses corporate reporting and access to finance issues, which are two of ACCA’s main strategic themes. Trade credit has been recognised in a number of surveys and research publications, from both a UK and global perspective, as an important source of finance for SMEs (Forbes 2010; ACCA/CBI 2010). Although it is known that published financial statements play a significant role in the determination of the credit decision, previous research has tended to accept the user-needs framework (IFRS 2010) based on the economic decisions made by the users of the financial statements of large, listed companies (mainly investors).

Little research has investigated the use of the financial statements of smaller entities in the context of trade credit and the customer/supplier relationship. The researchers have not found any study that has investigated the needs of the users of the financial statements of unincorporated entities as a basis for making comparisons with small, unlisted companies.

The purpose of this study is to address these gaps in the literature by providing empirical evidence of the value of the financial statements of unincorporated and incorporated SMEs in the context of trade credit decisions that support customer/supplier relationships. The specific aims of the study are to investigate the following research questions:

  • What are the main sources and types of information used by the case study SMEs when making trade credit decisions?
  • How is the information used?
  • What are the international similarities and differences in the findings in the context of institutional factors?

This report contributes to current knowledge of the processes involved in the credit decision and identifies what information is used and by whom. The findings from this research should be used as the basis for further development of ACCA’s policy with regard to:

  • access to finance – trade credit is recognised as a major source of SMEs’ short-term finance
  • financial management – the promotion of effective financial management practices in relation to trade credit decisions in the context of customer-supplier relationships
  • financial reporting – the contribution of knowledge about users of the financial statements of small companies and small unincorporated firms, and their needs.

The recognition and importance of these policy developments will be evidence-based, which is an important issue for the government, the accountancy profession and other stakeholders. The international dimension of the research will mean that ACCA will be able to develop policies based not only in the UK but also in some of the countries where overseas members are based. The findings should contribute to ACCA’s reputation with international bodies such as the IASB, IFAC and the World Bank.