Effect of Modern Finance on Small and Medium Enterprises – SMEs
Website design By BotEap.comThere are views on the relevance of modern finance that are generally adapted or formulated taking into account the vision of large organizations, thus ignoring small businesses (McMahon et al, 1993). It is understood that this neglect of financial management in SMEs is the result of neglecting SMEs in the development of economic theory. However, the situation is changing due to globalization. Therefore, there is a view that small business financial management has not been developed with the small business in mind. New empirical evidence raises the possibility that size may affect financial relationships in important ways. These findings could by themselves justify a greater emphasis in research on the effect of firm size on financial policy. Sahlman (1983, 1990) refers to what he calls “primitive rules” in modern finance. Indeed, this attitude explains the inefficiency of small businesses in financial management.
Website design By BotEap.comGhanaian SMEs, like other SMEs, are missing out on modern financial theories. For example, CAPM is based on the following:
o The principle of risk aversion, that is, investors seeking higher yields and lower risks under equal conditions.
o The principle of diversification, that is, investors do not put all their wealth in one investment portfolio, and
o The principle of balance between risk and return, that is, the willingness to face a higher risk in exchange for a higher return. (Emery et al, 1991). Website design By BotEap.comThis may be related to the behavior of the owner who is not risk averse, looking to make a lot of profit by importing from other countries with an unstable political situation. Website design By BotEap.comThese SME uses of CAPM are truly unmatched in the study. Most owner-managers in Ghana are risk averse but seek higher returns on their investments. Website design By BotEap.comThe working capital policy is somewhat related to SMEs in terms of their operations. In relation to the reasons why an owner-manager operates a business, there is no obligation to account for his actions. Thus, the management of working capital is influenced by this style of small business management. Website design By BotEap.comWorking capital management seeks to meet two objectives: Website design By BotEap.comi. minimize the time between the initial entry of materials and other materials in the operational process, and the eventual payment of goods and services by customers; and Website design By BotEap.comii. finance those assets in the most efficient way possible to obtain an optimal return on the capital employed. Website design By BotEap.comIt was found that the operations of SMEs in Ghana are related to the working capital policy in its pursuit to be efficient and timely.
For all purposes, the control and management of debtors are difficult tasks. To effectively manage debtors, the following issues must be carefully considered, well planned and controlled: Website design By BotEap.comCredit period – The credit period granted to each customer must be considered in terms of the customer’s credit rating; if the costs of the credit increase coincide with the profits that will be obtained from the sales generated by the terms of the credit; and the general credit period offered in the industry. Website design By BotEap.comCredit standards must be established. For example, customers must go through credit evaluation qualifications to weigh the risk they represent. Generally, when extending credit to customers, the appropriate standard rule is to check the maximum period of credit extended; the maximum amount of credit; and payment terms, including early payment discounts and interest charges on past-due accounts. Website design By BotEap.comFrom my work experience in Ghana, one of the effective means was to accept post-dated checks in addition to the payables. These must be spread over the duration to make the payment as agreed with the client. However, default is inevitable in all circumstances. Despite any shortcomings, the techniques used above can improve a company’s ability to control working capital effectively. For most small businesses whose total investments are represented in greater proportion by current assets, the techniques discussed above prove to be as useful to their management as the importance of their financial management. Website design By BotEap.comThis is very important here because it clearly shows that most SMEs could stay in business for a long time if they could apply financial management techniques effectively. Website design By BotEap.comThere is much published research, including that of Olsen et al. (1992); Higgins (1977 pp. 7); and Babcock (1970), who strongly believe that growth must be seen in a strategic context of financial management. They emphasize a concept, which has been variously referred to as sustainable, affordable, or achievable growth. This sustainable growth is defined by Higgins (1977) as “the annual percentage increase in sales that is consistent with the financial policies established by the company.” Website design By BotEap.comAccording to this definition in this context; Suffice it to say that it makes sense to relate the growth of a company to its financial policies. By tailoring one’s financial management policies to the annual percentage increase in sales (which could be controlled), there is the possibility of achieving sustainable growth and the ability to finance its permanent current assets, as well as non-current assets due to the rapid growth expansion. Website design By BotEap.comHowever, it can be argued that the growth rate of sales can be influenced. For a company that intends to realize its full growth potential over the long term despite problems securing outside capital financing, the only viable growth strategy is profitability of the company’s operating activities and careful policy profit distribution. It could also be argued that those SMEs that “don’t want to grow” can also apply financial management techniques effectively and survive in the market. Website design By BotEap.comIt is believed that the financial management of small businesses is different from that of large companies. In an article entitled ‘The Uniqueness of Small Firms and Financial Management Theory’ Ang (1991), and ‘On Finance Theory for Private Firms’ Ang (1992), Ang considers firms to be small if they have certain characteristics and are small. business to share common circumstances, respectively. He later concluded: “Small businesses do not share the same financial management problems as large companies…the differences could be attributed to several characteristics unique to small businesses. This uniqueness, in turn, creates a whole new set of problems.” of financial management… .. There are ‘sufficient differences between the financial management practices and theories of large and small firms to justify the research effort to study the latter’. Website design By BotEap.comAnother significant difference between SME financial management and modern financial management theories is the capital asset pricing model (CAPM) theory. It is a financial model that captures the relationship between profitability and risk; specifying how it affects the valuation of financial and physical assets. Website design By BotEap.comCAPM is a simple, objective, market-based means of estimating required rates of return for investments that reflect the collective preferences of all capital market investors. However, for a small company, it is difficult to estimate systemic risk (the risk of the entire system failing, for example, the stock market) because small business companies are not publicly traded or the investment is in a physical asset without good. informed market because the parameter is more effective if the investment is publicly traded. (McMahon et al. 1993). Then the question arises. So what does this have to do with a small business business? Website design By BotEap.comIn a real life situation, when there is some degree of uncertainty, the financial manager (like the owner-manager) decides the course of action to determine the level of financing required and, indeed, the long-term financial strategy. . Website design By BotEap.comBecause owner-managers have many duties to perform, the study found that they often do not have enough time to devote to long-term business planning. Instead, most of your time is spent on day-to-day operational activities and solving the current crisis of the day. Also due to the cyclical or seasonal nature of many small businesses, the amount of working capital required can vary greatly. The greater the seasonality, the less permanent capital a company has relative to its total requirements in peak periods. SMEs are actually vulnerable to a working capital management fiasco that can degenerate into financial mismanagement.
o The principle of risk aversion, that is, investors seeking higher yields and lower risks under equal conditions.
o The principle of diversification, that is, investors do not put all their wealth in one investment portfolio, and
o The principle of balance between risk and return, that is, the willingness to face a higher risk in exchange for a higher return. (Emery et al, 1991). Website design By BotEap.comThis may be related to the behavior of the owner who is not risk averse, looking to make a lot of profit by importing from other countries with an unstable political situation. Website design By BotEap.comThese SME uses of CAPM are truly unmatched in the study. Most owner-managers in Ghana are risk averse but seek higher returns on their investments. Website design By BotEap.comThe working capital policy is somewhat related to SMEs in terms of their operations. In relation to the reasons why an owner-manager operates a business, there is no obligation to account for his actions. Thus, the management of working capital is influenced by this style of small business management. Website design By BotEap.comWorking capital management seeks to meet two objectives: Website design By BotEap.comi. minimize the time between the initial entry of materials and other materials in the operational process, and the eventual payment of goods and services by customers; and Website design By BotEap.comii. finance those assets in the most efficient way possible to obtain an optimal return on the capital employed. Website design By BotEap.comIt was found that the operations of SMEs in Ghana are related to the working capital policy in its pursuit to be efficient and timely.
For all purposes, the control and management of debtors are difficult tasks. To effectively manage debtors, the following issues must be carefully considered, well planned and controlled: Website design By BotEap.comCredit period – The credit period granted to each customer must be considered in terms of the customer’s credit rating; if the costs of the credit increase coincide with the profits that will be obtained from the sales generated by the terms of the credit; and the general credit period offered in the industry. Website design By BotEap.comCredit standards must be established. For example, customers must go through credit evaluation qualifications to weigh the risk they represent. Generally, when extending credit to customers, the appropriate standard rule is to check the maximum period of credit extended; the maximum amount of credit; and payment terms, including early payment discounts and interest charges on past-due accounts. Website design By BotEap.comFrom my work experience in Ghana, one of the effective means was to accept post-dated checks in addition to the payables. These must be spread over the duration to make the payment as agreed with the client. However, default is inevitable in all circumstances. Despite any shortcomings, the techniques used above can improve a company’s ability to control working capital effectively. For most small businesses whose total investments are represented in greater proportion by current assets, the techniques discussed above prove to be as useful to their management as the importance of their financial management. Website design By BotEap.comThis is very important here because it clearly shows that most SMEs could stay in business for a long time if they could apply financial management techniques effectively. Website design By BotEap.comThere is much published research, including that of Olsen et al. (1992); Higgins (1977 pp. 7); and Babcock (1970), who strongly believe that growth must be seen in a strategic context of financial management. They emphasize a concept, which has been variously referred to as sustainable, affordable, or achievable growth. This sustainable growth is defined by Higgins (1977) as “the annual percentage increase in sales that is consistent with the financial policies established by the company.” Website design By BotEap.comAccording to this definition in this context; Suffice it to say that it makes sense to relate the growth of a company to its financial policies. By tailoring one’s financial management policies to the annual percentage increase in sales (which could be controlled), there is the possibility of achieving sustainable growth and the ability to finance its permanent current assets, as well as non-current assets due to the rapid growth expansion. Website design By BotEap.comHowever, it can be argued that the growth rate of sales can be influenced. For a company that intends to realize its full growth potential over the long term despite problems securing outside capital financing, the only viable growth strategy is profitability of the company’s operating activities and careful policy profit distribution. It could also be argued that those SMEs that “don’t want to grow” can also apply financial management techniques effectively and survive in the market. Website design By BotEap.comIt is believed that the financial management of small businesses is different from that of large companies. In an article entitled ‘The Uniqueness of Small Firms and Financial Management Theory’ Ang (1991), and ‘On Finance Theory for Private Firms’ Ang (1992), Ang considers firms to be small if they have certain characteristics and are small. business to share common circumstances, respectively. He later concluded: “Small businesses do not share the same financial management problems as large companies…the differences could be attributed to several characteristics unique to small businesses. This uniqueness, in turn, creates a whole new set of problems.” of financial management… .. There are ‘sufficient differences between the financial management practices and theories of large and small firms to justify the research effort to study the latter’. Website design By BotEap.comAnother significant difference between SME financial management and modern financial management theories is the capital asset pricing model (CAPM) theory. It is a financial model that captures the relationship between profitability and risk; specifying how it affects the valuation of financial and physical assets. Website design By BotEap.comCAPM is a simple, objective, market-based means of estimating required rates of return for investments that reflect the collective preferences of all capital market investors. However, for a small company, it is difficult to estimate systemic risk (the risk of the entire system failing, for example, the stock market) because small business companies are not publicly traded or the investment is in a physical asset without good. informed market because the parameter is more effective if the investment is publicly traded. (McMahon et al. 1993). Then the question arises. So what does this have to do with a small business business? Website design By BotEap.comIn a real life situation, when there is some degree of uncertainty, the financial manager (like the owner-manager) decides the course of action to determine the level of financing required and, indeed, the long-term financial strategy. . Website design By BotEap.comBecause owner-managers have many duties to perform, the study found that they often do not have enough time to devote to long-term business planning. Instead, most of your time is spent on day-to-day operational activities and solving the current crisis of the day. Also due to the cyclical or seasonal nature of many small businesses, the amount of working capital required can vary greatly. The greater the seasonality, the less permanent capital a company has relative to its total requirements in peak periods. SMEs are actually vulnerable to a working capital management fiasco that can degenerate into financial mismanagement.