There are views about the relevance of present day finance which is usually tailored or formulated with the view of significant organisations in mind thereby ignoring modest enterprises (McMahon et al, 1993). This neglect of financial management in SMEs is understood to be as a result of neglecting SMEs in the development of economic theory. Nonetheless, the circumstance is changing due to globalisation. Therefore there is the view that little enterprise monetary management has not been created with the little enterprise in thoughts. New empirical evidence raises the possibility that size may possibly influence monetary relationships in an critical manner. These findings may possibly themselves justify an expanded investigation emphasis on the effect of company size on financial policy. Sahlman (1983, 1990) refers to what he terms as ‘primitive rules’ in modern day finance. In impact this attitude accounts for the inefficiency of little enterprises in financial management.
Ghanaian SMEs like other SMEs are missing out on present day finance theories. For instance, CAPM is based on the following:
oThe principle of risk aversion i.e. investors seeking larger returns and lower hazards all factors becoming equal.
oThe principle of diversification i.e. investors do not spot all their wealth into a single investment portfolio, and
oThe principle of threat-return trade-off i.e. the willingness to face a higher danger for a larger return. (Emery et al, 1991).
This can be related to the behaviour of the owner who is not risk-adverse .He is hunting up to make a lot of profit by importing from other countries with unstable political predicament.
These utilizes to CAPM to the SME are genuinely unparalleled in the study. Most owner-managers in Ghana are threat-averse however they seek greater returns from their investments.
Working capital policy is somewhat connected to SMEs in terms of its operations. In relation to the reasons with which an owner-manager operates a organization, there is no obligation to account for their actions. As a result the management of functioning capital is influenced by this style of operating the tiny enterprise.
Operating capital management thus seeks to meet two objectives-
i.to minimise the time in between the initial input of supplies and other supplies into the operating method, and the eventual payment for goods and services by buyers and
ii.to finance these assets as effectively as possible for an optimal return on capital employed.
Operations of SMEs in Ghana had been found to relate to the operating capital policy in their quest to be efficient and timely.
With all intents and purposes, debtors’ control and management are challenging tasks. To effectively-handle debtors, the following troubles ought to be cautiously regarded as, well-planned and controlled:
Credit period- The credit period offered to every buyer must be regarded in terms of the customer’s credit rating whether or not the costs of improved credit matches the profit to be produced on the sales created by the credit terms and the general credit period becoming provided in the industry.
Credit requirements must be set- For instance customers ought to be taken through credit assessment ratings to weigh the risk they pose. Generally in giving credit to buyers, the proper regular rule is to check the optimum period of credit granted the optimum amount of credit and the payment terms such as any discounts for early payment and the interest charges on overdue accounts.
From my working encounter in Ghana, one of the productive signifies was to take post-dated checks in addition from debtors. These should be spread across the duration to make the payment as agreed with the client. Default, even so, is inevitable in all situations.In spite of any shortfalls, the tactics utilised above can improve a firm’s potential to control working capital efficiently. For most tiny company enterprises whose total investments are represented in greater proportion by current assets, the strategies discussed above prove to be as beneficial for their management as the significance of their financial management.
This is extremely considerable right here because it clearly shows that most SMEs could stay in organization for a really long time to come if they could apply financial management techniques successfully.
There are several published investigation including those of Olsen et al. (1992) Higgins (1977 pp7) and Babcock (1970) who are strongly of the view that development ought to be viewed in a strategic context of financial management. They emphasise on a idea, which has variously been referred to as sustainable or affordable or attainable development. This sustainable development is defined by Higgins (1977) as “the annual percentage of increases in sales that is constant with the firm’s established financial policies”.
Agreeing with this definition in this context suffice it to say that it tends to make sense to relate a firm’s growth to its financial policies. By tailoring one’s economic management policies to the annual percentage enhance in sales(which may well be controlled),there is the possibility of reaching the sustainable growth and the potential to finance its permanent recent assets as effectively as the non-present assets due to the fast expansion in growth.
One particular can, nonetheless, argue that the rate of growth in sales can be influenced. For an enterprise which is intended to realise its full growth possible in the long-run in spite of the problems in securing an external equity funding, the only viable growth method is the profitability of the firm’s operating activities and the cautious profit distribution policy. It could also be argued that these SMEs which “do not want to grow” can also apply the monetary management methods efficiently and survive in the marketplace.
Economic Management of little enterprises is believed to be diverse from that of large enterprises. In a paper entitled ‘Small company uniqueness and the theory of monetary management’ Ang (1991), and ‘On the theory of finance for privately held firms’ Ang (1992), Ang considers firms to be tiny if they have specific features and little company to share frequent circumstances, respectively. He later on concluded, “Small organizations do not share the identical financial management problems with big companies…the differences could be traced to many characteristics distinctive to modest firms. This uniqueness in turn produces a entire new set of monetary management problems…. There are ‘enough differences amongst large and small firms’ financial management practices and theory that justify the study effort to study the latter”.
Another important difference in between SME economic management and contemporary theories on financial management is Capital Assets Pricing Model theory (CAPM). It is a finance model which captures the partnership in between return and risk specifying how it affects the valuation of monetary and physical assets.
CAPM is basic, industry-based and an objective means of estimating required prices of return for investments which reflect the collective preferences of all investors in the capital marketplace. To a little enterprise, nonetheless, there is difficulty in estimating systemic danger-the danger that the complete technique will fail, for example the stock exchange- because tiny company enterprises are not publicly traded or the investment is in a physical asset with no nicely-informed market due to the reality that the parameter is far more efficient if the investment is publicly traded. (McMahon et al.1993). The query then arises. What has this got to do with a small organization enterprise then?
In actual-life situation when there is a degree of uncertainty, the financial manager(just as the owner-manager) decides on the program of action to figure out the level of finance essential and for that matter the lengthy-term financial approach.
Due to the fact Owner-Managers have a lot of duties to carry out,it was discovered out in the study that they usually do not have adequate time to devote to long-phrase preparing of the business. As an alternative, most of their time is spent on day-to-day operational activities and in solving the recent day’s crisis.Also due to cyclical or seasonal nature of several modest organizations the quantity of operating capital necessary can vary enormously. The better the seasonality the much less permanent capital a firm has in relation to its total requirements in peak periods. SMEs are for that matter vulnerable to operating capital management fiasco which can degenerate into poor economic management.