Financial Literacy For SMEs
Small & Medium-Sized
Enterprises (SMEs) operate in a world where knowledge is more important than
ever. Banks and investors are much more regulated and therefore have to be more
discriminating. There are many more
opportunities out there for lending or investing than before IF
lenders'investors' criteria are met.
What this means for the smaller
business owner is that he/she needs a degree of financial savviness to make
sure that he/she gets noticed. The
so-called "Small Business Units" of many commercial banks won't help
you (despite their rhetoric and glossy adverts) unless they're making (lots of)
money out of you. SMEs are seen as labour-intensive, higher risk, and therefore
subject to higher costs and charges. Equally, they don't have the bargaining
power that the "blue chip companies" do.
A small business owner pays a
comparatively higher price to borrow $100,000 from his bank than a
multinational wanting to borrow $10,000,000. If the loan goes bad, the lender
to the SME stands to lose "only" $100,000 compared to the $10,000,000
he/she will lose if the multinational goes bankrupt. however, the banks
consider that the SME is more likely to have problems than the multinational.
Small business owners need to
be able to talk to their banks, investors/lenders, accountants and other
suppliers of credit with authority about how their business is structured and
how it performs. To do this, you need to
understand:
·
What a balance sheet is
and how it works;
·
What a Profit & Loss
Statement is and how it works;
·
What a budget is;
·
What
"Cashflow" is and "Cashflow Statements" are;
·
Your monthly "burn
rate";
·
The implications of
"Gross Profit Margin" and "Net Profit Margin";
·
What key ratios you must
use to see what's going on in your company and where you may be having
problems.
·
What
"liquidity" is.
This doesn't take long to
learn, and with modern accounting software (or even Microsoft EXCEL), you can
easily put together a set of tools that will keep you informed. You need to
review these regularly (I suggest at least once a quarter). As you become more
familiar with them, you'll find yourself more confident when it comes to
dealing with bankers, accountants and investors alike.
As a lender to SMEs, I often
found that my clients were surprised when, based on knowledge of the above
items, I was able to ask why their buyers seemed to be slower to pay, or who
had increased their pricing. It was simple - their accounts told me what had
happened, it was just a matter of finding out how/why it had happened. Imagine
how much more confident and in control you'd feel if you already had the
answers to the "hows" and/or "whys"and a plan to either
exploit the good news or deal with the bad when your lender asked.
A knowledge of:
·
Sales growth and trends;
·
Profitability;
·
Balance Sheet structure;
·
Capital structure;
·
Debt structure;
·
Liquidity.
are the main areas with which
you need to become familiar.
It takes little time, and with
modern technology keeping track of things is easy. I know one business owner who spends a lot of
time outside the country of his business, but a daily set of figures tells him
all he needs to know about the direction in which the business is going. He has a trusted team “on the ground” and so
can concentrate on building more business.
Labels: Financial, Productivity, Strategy
posted by William Martin @ 14:28
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