Effect of modern finance on small and medium-sized enterprises (SMEs)

There are opinions about the relevance of modern finance that are generally adapted or formulated with the vision of large organizations in mind, thus ignoring small companies (McMahon et al, 1993). It is understood that this neglect of financial management in SMEs is due to the neglect of 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. The new empirical evidence raises the possibility that size may affect financial relationships significantly. These findings could in themselves justify a greater emphasis on research on the effect of company 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 companies in financial management.

Ghana’s SMEs, like other SMEs, are losing out on modern financial theories. For example, CAPM is based on the following:

o The principle of risk aversion, that is, investors who seek higher returns and lower risks under equal conditions.

o The principle of diversification, that is, investors do not put all their wealth in a single investment portfolio, and

o The principle of risk-return compensation, that is, the willingness to face a higher risk in order to obtain a higher return. (Emery et al, 1991).

This may be related to the behavior of the owner, who is not averse to risk, who seeks to obtain a lot of profit by importing from other countries with an unstable political situation.

These uses of the CAPM to SMEs are truly unmatched in the study. Most owner-managers in Ghana are risk averse, but seek higher returns on their investments.

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. Therefore, the management of working capital is influenced by this style of small business management.

Therefore, the management of working capital seeks to meet two objectives:

i. minimize the time between the initial input of materials and other materials into the operational process and the final payment for goods and services by customers; Y

ii. to finance those assets in the most efficient way possible for an optimal return on capital employed.

SME operations in Ghana were found to be related to working capital policy in their quest to be efficient and timely.

For all intents and 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:

Credit period: the credit period granted to each customer should be considered in terms of the customer’s credit rating; if the costs of the credit increase coincide with the profits to be obtained from the sales generated by the terms of the credit; and the general credit period offered in the industry.

Credit standards must be established. For example, clients must undergo credit evaluation ratings to weigh the risk they pose. Generally, when extending credit to clients, the appropriate standard rule is to check the maximum period of credit granted; the maximum amount of credit; and payment terms, including prepayment discounts and interest charges on past due accounts.

Based on my work experience in Ghana, one of the effective means was to accept post-dated checks in addition to debtors. These must be distributed throughout the duration to make the payment as agreed with the client. However, default is unavoidable in all circumstances. For most small businesses whose total investments are represented in a greater proportion by current assets, the techniques discussed above are just as useful for their management as the importance of their financial management.

This is very significant here because it clearly shows that most SMEs could stay in business for a long time if they could apply financial management techniques effectively.

There are many published investigations, including that of Olsen et al. (1992); Higgins (1977 p. 7); and Babcock (1970), who strongly believe that growth should be viewed in a strategic financial management context. They emphasize a concept, which has been variously referred to as sustainable, affordable or achievable growth. Higgins (1977) defines this sustainable growth as “the annual percentage of increases in sales that is consistent with the financial policies established by the company”.

According to this definition in this context; Suffice it to say that it makes sense to relate a company’s growth to its financial policies. By adapting 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 your permanent current assets as well as non-current assets due to the rapid expansion of the market. increase.

However, it can be argued that the sales growth rate can be influenced. For a company that intends to realize its full long-term growth potential despite difficulties in obtaining external equity financing, the only viable growth strategy is profitability from the company’s operating activities and careful policy. profit sharing. 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.

It is believed that the financial management of small businesses is different from that of large companies. In an article entitled ‘The uniqueness of small businesses and the theory of financial management’ Ang (1991), and ‘On the theory of finance for private companies’ Ang (1992), Ang considers that companies are small if they have certain characteristics and small dimensions. businesses to share common circumstances, respectively. He later concluded: “Small companies do not share the same financial management problems with large companies … the differences could be attributed to several characteristics unique to small companies. This uniqueness in turn creates a whole new set of management problems. financial … .. There are “enough differences between the practices and theory of financial management of large and small companies that justify the research effort to study the latter.”

Another 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.

CAPM is a simple, market-based and objective means of estimating the required rates of return for investments that reflect the collective preferences of all investors in the capital market. For a small business, however, it is difficult to estimate systemic risk – the risk of the entire system failing, for example the stock market – because the small business is not publicly traded or the investment is in a physical asset without a well. 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?

In a real-life situation, when there is some degree of uncertainty, the financial manager (as well as the owner-manager) decides the course of action to determine the level of financing required and therefore the long-term financial strategy. term.

Because Owner-Managers have many roles to perform, it was found in the study that they often do not have enough time to spend on long-term business planning. Instead, most of their time is spent on day-to-day operational activities and solving today’s crisis. The higher the seasonality, the less permanent capital a company has relative to its total needs in peak periods. SMEs are vulnerable to the working capital management fiasco that can degenerate into poor financial management.

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