Fostering Small Business Growth and Entrepreneurial Learning through Accounting and System Dynamics Models

Empirical research on business failure shows how lack of understanding the peculiar context underlying the small business system is often a primary factor of crisis. Particularly when implicit operational growth policies are pursued, high entrepreneurial involvement in current activities and lack of relevant strategic information are major causes of bias and bounded rationality in decision making. As a consequence of this, dynamic inter-relationships between different business sub-systems – on a side – and the firm and other relevant external variables – on another side – are often misperceived. Unintended consequences, such as limits to growth or negative effects produced by escalating and emotional policies, are often
experienced and detected on a longer time horizon, when it is too late or expensive to correct the course of action. This paper shows how matching accounting and system dynamics simulation models into computer-based ‘microworlds’ can support decision makers in understanding small
business complexity and unpredictability, thereby improving mental models and awareness of dynamic inter-relationships between short and long term decisions. An example illustrating how a ‘microworld’ can support policy making in a small firm through the analysis and diagnosis of feedback loops
affecting operational growth, liquidity and profitability is provided in the last section of the paper.