Early Warning System for Crisis in SMEs : Preliminary Evidence from Finland and the UK

This paper presents a model for predicting crises in small businesses using early-warning signals. It summarises the results of two separate studies carried out in Finland (with 72 percent response) and the UK (26 percent) on the decision process of corporate analysts (Finland) and bank managers (UK) in predicting the failure of small and medium-sized enterprises (SMEs). Both studies consist of seven main headings and over 40 sub­headings of possible factors leading to failure. Weighted average were used for both studies to show the importance of these factors. There are significant similarities in the results of the two studies. Management incompetence was regarded as the most important factor, followed by deficiencies in the accounting system and attitude towards customers. However, low accounting staff morale was considered a very important factor in Finland but not in the UK. Unlike Finland, the UK results emphasised the importance of accounting systems and internal control. These two studies differ from previous studies as managerial auditing elements like the importance of internal control departments (UK evidence) and budgetary control systems were included. Similarities in the results of these surveys conducted under two separate EU environments imply that it would be interesting and beneficial to extend these studies to other member states.MANAGERIAL AND POLICY IMPLICATIONS• Investors, lenders, auditors and managers would benefit from a formal early-warning system to predict crises in SMEs.• In both Finland and the UK, there is a need for owners and managers in SMEs to continuously improve their managerial and accounting skills, acquiring necessary knowledge on appraising investments and focusing on the needs of proper internal accounting control systems.• SMEs should pay special attention to external changes