Why financial literacy matters for small and medium enterprises' growth

Joy Rwamwenge The lack of funds has been cited as a major handicap to business growth universally by most small-and-medium enterprises (SMEs), which always affects entrepreneurs’ capacity to start or run their businesses profitably. The challenge of lack of funds undermines a business’ potential and impedes its kickoff, or growth and stability, a situation that is even made worse when the owner’s personal goals and lifestyles override the interests of the business and it is becomes difficult to separate the business from the owner in a financial context. The need to have a financial plan at every stage of the business cycle cannot be overemphasised as the blueprint ensures continual improvement and performance of the business. It guides a business owner to manage cash flow efficiently by identifying the most important expenditures, those that bring about immediate improvements in productivity, efficiency, or market penetration, versus those that can be postponed until cash is sufficient. It is vital for every business to do adequate market research, benchmark and then craft a realistic business plan before they venture into business. This helps business owners not to overestimate or underestimate the amount of money the business will require as start-up costs that is costs that the business will incur before it even starts operating and generating revenue; expenses such as salaries, rent, utilities, taxes and for growth. Quite often SME owners confuse their company’s success with how quickly they can expand their business. A situation that leads to bankruptcy yet it can be avoided if business owners can consider expanding their operations after building a strong customer base and are sure of their businesses’ profitability. For a growing business, cash flow is critical, lack of strict cash flow management and failure to raise more capital, affects the business as it grows. In most cases money is held up in the hands of suppliers or debtors therefore lack of cash flow coupled with a weak collections policy eventually culminates into lack of funds to cover their overhead costs; rent, transport, taxes, salaries and other daily business operations yet their sales increase year-on-year. Often, when SMEs are faced with challenges like mounting debt, and the need for survival or expansion, they resort to getting more debt instead of seeking financial advice. This is wrong approach. Engaging financial management experts would be the most logical step to take at such a time to bring your business back on track. This could be seen by many as an unnecessary expense, but it always pays off in the long-run. Expert engagement in addition to the usual basic accounting services will help analyse the cash flows to ensure the unstable situation of the enterprise is not a result of poor cash flow management and will provide accurate information that will guide business owners in reviewing the efficiency of their operations and making proper business decisions so as to effectively manage the challenges that come with the success and growth of their enterprises. The business owner is, therefore, able to cut costs and improve the financial situation by trimming inventory levels, lowering overheads, improving supplier credit relations, speeding up debt collections from clients, reinvesting excess cash during the boom period to prepare for cash shortages. After careful assessment of the overall financial health and efficiency of the business you may also consider internal sources to fund your business which include relying on retained net profits and personal resources commonly known to entrepreneurs as boot-strapping, an option that saves the company from sharing the hard earned revenue with funders. Most entrepreneurs resort to seeking for external financing in form of bank loans and banks are particularly pessimistic to giving loans to start-ups and small businesses because the they do not want to invest their money in risky business ventures that do not guarantee assured returns. In the interest of mitigating risks, banks request for collateral and credit history which most start-ups and small businesses do not have. Added to the list of requirements from the bank is a business plan which sometimes is not a true reflection of the business entity. One fact to remember is that banks do not fund a business plan, but the business. Having a sound business plan with realistic financial goals that can be achieved eventually will make easier for you to get a bank loan. Today with the dynamism in the entrepreneurship and SME development space, being dominated by young, vibrant and innovative entrepreneurs, the true value of companies is also not just measured by their tangible assets commonly referred to as collateral, but includes their intellectual capital. A move towards more dynamic approaches should therefore be considered by funders in assessing the true value of the small businesses which should go beyond collateral and historical performance. A wealth of external finance options other than conventional bank loans exist that many start-ups and SMEs are not aware of, these include asset-based funding, alternative debt, hybrid and equity instruments to mention but a few. Asset-based funding enables a business to obtain cash, based on the value that a particular asset generates in the course of its business. The company is able to access working capital in a relatively short time and under more flexible terms. The use of assets to generate cash flow presents gains for start-up companies, which have limited credit history. As a business owner you may want to consider alternative debt away from the common traditional lending; alternative debt instruments are viewed as “innovative” financing mechanisms for SMEs and entrepreneurs. These include corporate bonds, securitised debt and covered bonds for supporting SMEs in which investors in the capital markets, rather than banks, provide the financing for SMEs. A single financing vehicle; commonly known as the hybrid instrument has remained one of the most attractive form of finance for businesses that are approaching a turning point in their life cycle, when the risks and growth opportunities of the business are increasing, a capital injection is definitely needed. Equity instruments such as venture capital funds, business angel funding and trade financing can be helpful finance options for your business. A business angel will provide additional support beyond finance, giving the owner room to develop the capability of running and growing of the business. While crowd funding (equity) is perfect for entrepreneurs with an idea they want to develop or very new businesses who want to get off the ground. Trade Financing is a great option for any serious entrepreneur especially when involved in international trade, it helps with trade transactions by financing the cost prior to the seller receiving payment. It allows working capital to be freed up and offers cash cushioning for financial management and easy takeoff of the business where cash flow is an issue. SMEs need to understand how different financial instruments can serve different financing needs at specific stages of their business’ life cycle, the advantages and the likely risks involved. SMEs should also adopt best practices in financial management to ensure their businesses are sustainable. In the face of rapidly changing financial and economic environments and the dynamism of the entrepreneurship landscape there is need to offer a full package of financial products and services that SMEs can utilise from advisory services offered by experts, networking platforms to a range of financial options that could be, leveraged upon by the SMEs to improve their financial status. Meanwhile, different players in the financial arena need to continuously be ahead of innovation and the new SME growth areas to be able to take into consideration the new related risks in their assessment and be able to offer appropriate cash cushioning when needed. The writer is an SME development expert. shiphrahrwamwenge@yahoo.com

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Why financial literacy matters for small and medium enterprises' growth