Investment Readiness for SMEs and Changes to Curb the Challenges Facing Small and Medium Enterprises - Coursework Example

Title: Investment Readiness for SMEs and Changes to Curb the Challenges facing Small and Medium Enterprises Student’s Name: Instructor’s Name: Course Name and Code: University: Date of Submission: Investment Readiness for SMEs and Changes to Curb the Challenges facing Small and Medium Enterprises A business is investment ready when its business plan and forecasts instills potential investors with confidence in the proposition and understanding of the risks. In other words, investment readiness can be taken to mean a finance advisory tool that is designed for any business with an intention of maximizing their chances of success. Investment readiness process is tasked with the responsibility of giving objective assessment and feedback to the business, and its plans in order to show an optimum light to its potential funders (Hall, 1995). However, it should be noted that the process of investment readiness in itself is not designed to produce success in funding, but rather, to improve the chances of getting external investments for business. This process is, therefore, ideal for a business which requires funding to oversee its growth but lacks the expertise and experience, of raising this finance. In addition, investment readiness program aims at correcting the failures common in the equity market (Peacock, 2004). They are specifically designed to assist innovative entrepreneur of firms with potential growth to raise external finances (Curran, Stanworth & Watkins, 1986). The investment readiness program aims at raising equity finances for these businesses. In the program, a number of activities are carried out, for instance, training, mentoring, provision of guidance and advice, networking, and technical support. The program is also equipped with tools for explaining various finance sources, understanding what investors require, assessing a business strategy, explaining the advantages and disadvantages of raising equity finances, and coming up with a business plan that is attractive (Hall, 1995). Moreover, a business investment program aims to improve how they negotiate with financiers and manage the fundraising. It also ensures that a business maintains an appropriate corporate structure, and connects the small and medium enterprises with viable investors. In Small and Medium Sized Enterprises (SMEs), investment readiness is one factor that develops its operations and quickens its growth. Failure to evaluate investment readiness properly will, therefore, lead many Small and Medium Enterprises to fall short of success. It is common knowledge that, in any organization, finance informs its investment readiness and, therefore, financial managers ought to bear this in mind when making viable decisions that can lead to the realization of the company’s objectives. It is vital for the respective managers to grasp well what financial management entails in order to achieve success in the operations they carry out on a daily basis (Davis, 1999). In summary, financial management in any business organization involves effective managing of funds and other financial activities in order to meet what a business demands. However, most Small and Medium Enterprises face challenges which emanate from management practices that they engage in. These management practices have been established in most cases to be ineffective as well as inefficient, and thus reducing the chances of getting access to external working capital (Peacock, 2004). Having acquainted ourselves with the meaning of investment readiness in Small and Medium Enterprises, the paper will now seek to address the factors that determine the investment readiness of growth of Small and Medium Enterprises. To gain an insight into the discussion, it is paramount to highlight the lack of market information as well as lack of commitment by financial managers to access various sources of finance as the major challenges to Small and Medium enterprises investment readiness. There are a number of factors that determine the investment readiness in Small and Medium Enterprises. These factors include business attitude to finance, financial forecasting aspect of management in organization, financial decisions made by financial managers, opportunity for accessing different markets, technological changes, and last but not least the general business planning. In this section, I will give detailed explanations to each and every factor that determine investment readiness. Business attitude towards finance has always been a key factor in determining SMEs investment readiness. In every Small and Medium Enterprise, the concept of finance is a delicate issue and financial managers ought to treat it with the seriousness it deserves. In order for the realization of success of most SMEs, financial managers ought to change their attitude towards issues to do with finances. They should observe honesty and practice proper accountability when it comes to financial matters (Davis, 1999). This will oversee success of most business ventures. Secondly, financial forecasting aspect of management in an organization is another factor that determines investment readiness of a business venture. From the word forecasting, this practice involves prediction of future revenues of an organization by managers. The financial managers make use of the current financial information that is available in making these predictions. Forecasting using reliable techniques in the end boosts the investment opportunities for Small and Medium Enterprises, since the management will be able to know the funds needed in the future to run the operations of the organization. Moreover, proper forecasting will act as a tool for borrowing. This will be made possible, because forecasting will enable financial managers to convince possible financial institutions to lend them. In a nutshell, besides Small and Medium Enterprises sufficient collateral to borrow finances, financial forecasting also boosts this collateral. In addition, forecasting allows Small and Medium Enterprises to target revenues that will in the end foster investment readiness. Financial decisions made by finance managers are crucial in determining investment readiness not only in Small and Medium Enterprises but also in most organizations. In making financial decisions, there are four stages involved. One of them is financing decision whereby a financial manager ought to determine the sources of funds deemed suitable for a business. In this case, managers are expected to identify the cheapest resources that are not beyond the company’s capability to repay. The other level of investment decision involves identification of viable investment opportunities by financial managers of Small and Medium Enterprises. This will entail the coming up with efficient frontiers to invest in. Financial managers, therefore, should assess the returns of a selected investment vis a vis it’s the risks involved. Dividend decision is another decision that determines investment readiness. Dividend decision involves financial managers identifying dividend policies that are applicable in the Small and Medium Enterprises. The policies used determine the success of Small and Medium Enterprises in a number of ways. For instance, the policies see to it that shareholders are entitled to preference as well as ordinary shares. This will subsequently lead to investor confidence and thereby realization of success of the organization. Liquidity decision is another financial decision that that lays a crucial role in determining the investment readiness for Small and Medium Enterprises. Financial institutions and other stakeholder are keen on how firms manage their funds in assessing credit worthiness. Small and Medium Enterprises ought to avoid the risks of insolvency which may affect confidence of investors. Collapse of investor’s confidence will mean that SMEs will be denied loans and, therefore, might lead to bankruptcy. Financial managers of Small and Medium Enterprises should also consider access to finance. This is vital in Small and Medium Enterprises because these funds are required in the running of the business. Financial managers ought to ensure security of these funds from a wide range of financial bodies. However, financial managers have failed in their duty to create an environment that can assist them in securing funds from financial institutions (Dollinger, 1999). They have not only failed to enhance security foundations but also lack clear policies and effective methods of enforcing the laws that exist and other procedures of securing capital. Complex taxation and accounting systems is another factor that do not favor the investment growth and success of Small and Medium Enterprises. Such complex systems fail to facilitate access to finances, because they fail to address the risks which are inherent in investment opportunities. These risks are often attributed to the lack of or provision of inadequate financial information. The other factor that informs investment readiness among the Small and Medium Enterprises is technological changes in various industries. Globalization has enabled changes in technology to flood the market, and organizations ought to embrace technology in order to remain competitive and gain international status. Failure or inability to embrace innovations significantly reduces the firm’s market share and thus cuts down their overall performance. Technology will lead to an increase in profits and Small and Medium Enterprises can use it to raise sustainable equity and provide an opportunity of obtaining finances from other financial institutions. General business planning is another factor used to determine investment readiness for Small and Medium Enterprises. Thorough assessment of business plan can ensure the growth of Small and Medium Enterprises (Dollinger, 1999). In this case, strategies that give a clear outline of changes or alterations which are required to seize opportunities of securing funding, always determine investment readiness of the Small and Medium Enterprises. Financial managers, therefore, ought to boost investment readiness through seeking advices and guidance in formulating viable presentations of business plans that propel business growth when adopted. It is worth noting that management skills of financial managers shapes to a great extent the formulation of viable business plans. These are some of the factors that determine the investment readiness of Small and Medium Enterprises, and if these factors are observed, then growth and success of these enterprises will be realized. However, in other cases, the Small and Medium Enterprises fall short of these readiness and changes ought to be instituted in order to ensure the realization of their objectives. Investment in the early stages of Small and Medium Enterprises lack because of low returns registered compared to the high risks involved. The presentations which are poor in quality magnify how investors perceive risks. In this case, such investment deems unattractive and unprofitable in the eyes of investors. Most investment decisions are largely based on appraisals prospects made by entrepreneurs in an objective manner. It is, therefore, demands an entrepreneur to understand the needs of an investor and provide information that is relevant in making is or her business proposal more attractive. A Small and Medium Enterprise that does not exhibit investment readiness is as good as dead. Such enterprises, however, are common in today’s business world. These enterprises need changes in order tread the path of success. In this section, I am going to look into some of the changes that need to be instituted to Small and Medium Enterprises, in order to overcome the challenges it faces in acquiring investment capital that enhance growth. The first change that ought to be instituted is addressing the investment readiness gap. This challenge is usually caused by insufficient knowledge about finances that entrepreneurs posses. This is done through three main steps. First and foremost, with the knowledge that most entrepreneurs lack financial knowledge, they ought to be made aware of the benefits a strong capital structure present to the survival of the business. They are not only unaware of other suitable and available options that would finance their enterprises, but also look at only bank loans as preferred sources of external funding. Small and Medium Entrepreneurs should be informed of the relevance of business structure. Secondly, Small and Medium Entrepreneurs in other places fear seeking venture capital funding, because they regard it as an act of giving up control of their businesses to investors have negatively impacted these businesses a great deal. They should be informed that besides providing funds, these ventures also provide advice and knowledge and, therefore, becoming business partners. Small and Medium Entrepreneurs, in most cases, conceal information about the firm to equity investors. Moreover, they opt to keeping their businesses small rather than taking the equity path of giving out some of its shares. These entrepreneurs ought to be advised to shed this mean idea, and prepare to share to share their wealth with investors. By doing so, they will create wealth and add value to their businesses. Consequently, entrepreneurs ought to be educated on the results of giving up an equity stake in order to motivate them to structure in viable investment projects. Curran, Stanworth, and Watkins (1986), assert that the stakeholders involved, more so in the private and public sectors ought to collaborate in the provision of expert advice to entrepreneurs about the benefits of risking capital for growth. Subsequently, those in charge of formulating policies should be aware of the culture of equity and its economic contribution to the society. Many Small and Medium Enterprises, which have the potential for growth, fail to succeed in raising the funds needed because they lack quality presentations (Dollinger, 1999). The entrepreneurs have inadequate knowledge when it comes to giving the information that the investors require. This is due to the fact that they are not aware of the key factors that drive decisions on investment of equity investors. This in business terms can be referred to as information asymmetry. This information asymmetry may lead to wastage of time and, as a result, negative results are registered. It is, therefore, necessary for business plans and management teams to develop sufficient and appropriate structures that provide assurances required by equity investors. These structures should seek to reflect grasp in finance and business as well. This in the eyes of equity investors will instill confidence and assurance that the business is of potential growth. The Small and Medium Enterprises should not only risk taking bank loans but also equity finance to enhance growth of their enterprises. Despite the vital roles bank loans play in the growth of these enterprises, equity finance will be necessary at a particular time of growth. Small and Medium Entrepreneurs should stop blaming the inaccessibility and unsuitability of equity finance because of their limited income flow and use assets as collateral to secure it. Furthermore, Small and Medium Enterprises ought to bridge information asymmetry, and the skills needed to evaluate technologies that exist between the entrepreneurs, bank, and other financial institutions. It is also worth noting that Small and Medium Enterprises that have potential for growth and balances their finances well, strengthen their probability of accessing bank loans, as well as equity financing. In summary, the steps that can be taken to help the Small and Medium Enterprises get ready for investment is through assisting them acquaint themselves with the criteria used by informal investors. The criteria contain two most central tenets that ought to be addressed. These tenets include quality management and the market potential the opportunity carries. If these two tenets are put into consideration, then the rejection rates by financial institutions could be significantly cut down (Peacock, 2004). On the other hand, entrepreneurs should bear in mind that informal investors keenly study the abilities of management to achieve results before opening its wings to embrace any Small and Medium Enterprise. We can argue that quality management act as strong collateral for informal investors. A strong management put together by Small and Medium Enterprises is, therefore, of utmost importance in that it acts as a tool for winning investors confidence (Peacock, 2004). Besides stock options, it is also one way of attracting professionals of high caliber when the immediate need for substantial amounts of cash arise. This seems to be an attractive option of seeking funds from financial institutions, be it banks or equity finances, more so with the tax changes that have hit the market recently. It is, therefore, recommended that Small and Medium Enterprises come up with such strategies in order to access funds and readiness for the market. As we have established above, Small and Medium Business Enterprises seem to straddle between a number of factors such as time management, cash flow, and quality administration. However, the biggest problem that Small and Medium Enterprises seem to face is the ability to convince funders about their credit worthiness. Those who have borrowed huge amounts of loans are also in a constant struggle to offset the loans. More often than not, such Small and Medium Enterprises find themselves unable to release their debt burdens and, therefore, find themselves on a shut down path. In conclusion, this paper sought to discuss in detail the factors that render it hard for Small and Medium Enterprises to obtain finance either equity capital, or debt. It has established that it is not a case of lack of sufficient capital but rather most of Small and Medium Enterprises are not investment ready to access the various available financial options. It, therefore, sought to dig deep into the factors that determine investment readiness of most growing Small and Medium Enterprises. The paper has also presented the changes that ought to be taken in an effort to overcome challenges the Small and Medium Enterprise sector faces in acquiring investment capital for growth. References Curran, J., Stanworth, J. & Watkins, D. (eds) (1986). The Survival of the Small Firm, The Economics of Survival and Entrepreneurship, 1, 53-71. Davis, D. (1999). Business research for decision making, 5th edition. Pacific Grove: Duxbury Thomson Learning. Dollinger, M. J. (1999). Entrepreneurship: Strategies and resources, 2nd edition. New Jersey: Prentice Hall. Hall, G. (1995). Surviving and Prospering in the small firm sector. London: Routledge. Peacock, R. W. (2004). Understanding small business: practice, theory and research, 2nd edition. Adelaide: Scarman Publishing. Read More