The Determinants of Investment Readiness of Growth in SMEs - Coursework Example

Small Business Enterprise Customer Inserts His/her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 9/06/ 2011 Growth SME’s SME’s growth is a central focus area in strategy, entrepreneurship and organizational research. Firm growth in general refers to increase in size. It is normally closely associated with the firm overall success and survival. Growth is used as a simple measure of determining the success of a business as well as the most appropriate indicator of the surviving SME’s performance. Moreover, growth is an important prediction for the achievement of the other financial goals of business (Peacock, 2004). Different measures have been used to determine the growth of the firms. The most frequently used measure for growth is change in the firm’s turnover. From the interviews conducted by National Investment Council, it was found that most of the SME’s has no aspirations for significant growth. It is only about 10% of SME’s aspire to significant growth. The interviews conducted showed that some of the SME owners were either not willing to, or did not know how to meet the requirements of external investors (National Investment Council Report, 1995). Investment readiness Investment readiness refers to an aspect of growth preparation and quickening in small and medium sized enterprises (SMEs). Failure to evaluate investment readiness properly makes the SME unable to realise their prospects. Investment readiness is generally used in the context of raising external equity finance. Investment readiness may be defined using three dimensions. They include equity aversion, investability and presentational failings. Equity aversion is concerned with the entrepreneurs’ attitude towards equity finance. The second dimension is concerned with investability of those businesses that do seek external finance. The final dimension of investment readiness includes shortcomings in business plans and other written documents aimed at the investors (Beijerse 2000). The issue of finance is very significant to any business or firm regardless of how much readiness they may affirm. Moreover, the financial managers need to be able to make viable decisions that can lead to set goal accomplishment. The managers should understand the various aspects of the financial management that can help them in their daily operations. Financial management is an activity by which business organizations manage funds and financial activities in order to meet business demands (Beijerse 2000). The Determinants of Investment Readiness of Growth in SMEs There are several factors that determine the investment readiness of growth SME’s. The major factor is the business attitude to finance. In all the SME’s, the financial management concept is very vital and this means that the financial managers have to treat it with much caution. Financial managers are therefore required to change their attitudes towards financing issues and suitable accountability of financial activities should always be a priority to most SMEs so as to be successful in their investments ventures (Beijerse 2000). The complexity of taxation and accounting systems is another factor that affects most SMEs. This complexity does not encourage investment growth. In addition, such methods do not promote the enhancement of obtaining finance since the systems fail to deal with the risk inherent in most investment opportunities. This is always attributed to the shortage of proper financial information (Beijerse 2000). Investment readiness in SMEs is also influenced by the financial decisions made by the finance managers. These decisions include the financing decisions in which the financial manager is supposed to identify the best sources of funds that are suitable for a business. The other decision that influences investment readiness is dividend decision. These are decisions made by the financial managers regarding the best dividend policies that are used in the SMEs. There is also investment decision whereby the financial managers of SMEs identify the viable investment opportunities. Here, the financing manager identifies the most efficient portfolio frontiers to be invested in. Finally, there is the liquidity decision which is also a determinant of investment readiness (Lee and Carter 2005). Another factor that influences the investment readiness among SMEs is technology changes in their relevant industries. The failure to deal with new technological changes has greatly affected the SMEs resulting to decrease in their market share which leads to the reduction in the general performance. Due to globalization, technological changes have dominated the market and therefore the financial managers have to maximally utilize such technologies so as to gain the competitive advantage in the international market (Douglas and Shepard, 2002). Financial forecasting aspect of management in organizations is also a major determinant of investment readiness. This is where the managers predict the future profits of the organization using the already existing financial information. They make use of dependable forecasting methods so as to boost the investment opportunities of SMEs since they will be able to identify the amount of finances required in the future for the organization to smoothly run its activities of the organization (Sparrow 2000). Through suitable forecasting, financial managers can obtain funding from financial institutions since they can have a loan of debt finance and convince them that they can repay the principal as well as the interest on the principal without failure. The SMEs will thus have sufficient collaterals or securities to borrow their finances (Sparrow 2000). The general business planning of the SMEs is another determinant of investment readiness. In order to experience growth, the SMEs must carry out an assessment of business plan. This means that the strategies adopted in order to outline changes needed to maximise the opportunity of finding funds always influence the investment readiness of the SMEs. Thus, the financial managers should enhance this investment readiness by looking for advices and direction in establishing feasible presentation of business tactics adopted which are likely to promote business growth. Normally, the formulation of viable business plans depends on the management skills possessed by the financial managers and how they can apply such skills to their particular management practices (Lee and Carter 2005). Description and relevant of possible the changes to SMEs In order to attract adequate capital for investment the small and medium-size enterprise have to undergoes changes that place them in a better position in the eye of financing institution. To boost investment readiness small and medium-size enterprise must treat finance issue with significant it deserves. Stakeholders and financial institution who can offer loan or grand from the government are interested in the investment readiness. The management of the small and medium-size enterprise are call to articulate to the expectation of the fanciers (Paul, 1997). Overall change in the management is what the SMEs are expected to make it a priority. Financial managers are expected to be equipped with necessary skills to coordinate various business activities in the enterprise. The finance manager must have a better understanding and know-how couple with technical skills, human skills and ability to work together successfully with entire human resource within the organization. The manager also must have adequate conceptual skills that entails coming up with concrete ideas that should be put in practice in collaboration with entire management of SMEs. Such a strategy will enhance the management functions and the ability of managers to multitask hence the success of the enterprise which in turn attracts capital from various sources (Golis, 2002). To meet the set objective managers of SMEs are required to integrate the management activities in such a manner that increase the efficiency that yield sustainable revenue for growth. Increase in revenue is the best way SMEs can raise equity or capital through debt financing that are require for their operation. Like any other organization small and medium-size enterprise is operating in dynamic global economy that is characterise by technology advancement. Small and medium-size enterprise therefore should be in forefront in incorporating technologies changes to their overall production systems. For example the use of e-commerce can boost their revenues and thus they can borrow more capital from financial institutions and they can repay with ease and without intense pressure from this financial institutions (Paul, 1997). Advanced technologies can also be used in financial forecasting techniques and hence boost their capability of borrowing funds (Paul, 1997). Generally technological innovations alter the primary structure of SMEs and calls for new organizational approaches as well as superior management skills (Golis, 2002). The managers of SMEs should also consider the sources of finance that are cheap if they are considering debt financing. For example they need to evaluate the various sources of finance and the institutions that offer the services and choose the best. The management should also consider investing in less risky businesses that offers good returns. The managers need to do these by using appropriate techniques of identifying efficient frontier (Paul, 1997). The efficient frontier chosen should entails less risky investment with good returns and can be sustained for long-term. However, managers should consider diversification so that they can be able to raise good revenue that they can use to be bargaining power especially when they are seeking debt finance. Although diversification of business is considered challenging and requires a lot of commitment from the entire management it will be advisable for SMEs to embark on it in order to increase the chances of survival and growth of these enterprises (Pittwood and Elaine 2002). Small and Medium-Sized enterprises should have an efficient regulatory and reliable legal framework that will ensure the achievement of organizations goals and objectives (Paul, 1997). SMEs should embark on reforming this framework for the purpose of creating a supporting business environment that is based on the existing rule of law and intended to reduce government interventions on the private sector while providing the essential safety of public businesses (Paul, 1997). With such an environment SMEs will prosper in their business activities and thus there will be an increase in likelihood of accessing capital from various financial institutions (Paul, 1997). The Small and Medium-Sized enterprises should come up with a policy of working together which will foster their competitiveness especially in the local and international markets (Peacock, 2004). They should cope with the competition of large companies through pulling resources together that will boost their competitiveness. With such an advantage SMEs can get funding from various sources, for example grants and donations or through loans from financial institutions (Paul, 1997). So the SMEs have to change their style of competition in such a way that they cannot cause damage to their industry in order to enhance their competitiveness with large business organization (Paul, 1997). Comprehensive discussion The lack of investment readiness is what makes most Small and Medium-Sized enterprises not to obtain finance. There are a wide variety of sources of finance but SMEs through their financial managers fails to access such sources because of their incompetence as a result of poor managerial activities. It is therefore, advisable that financial managers of these enterprises should be well equipped with managerial decisions of financing, investing, dividend, and liquidity decisions (Peacock, 2004). Most SMEs face stagnation in terms of growth because of lack of viable investment opportunities that they are involved in (Paul, 1997). Such Investment opportunities do not generate enough revenue to sustain their businesses and hence they lack bargaining power in terms of collateral required when they seek for loans (Paul, 1997). Due to globalization which has turned business activities to be dynamic, most SMEs face stiff competition from large companies (Paul, 1997). As Deakins and Freel (1998) observes, the larger companies are always given priority in terms funding, for example, they may have an upper hand than SMEs when seeking funds through debt financing because they have enough collaterals to secure their loans (Paul,1997). References: Beijerse, P 2000, Knowledge management in small and medium-sized companies. Knowledge management for entrepreneurs: Journal of Knowledge Management Vol. 4 Candida, G Lars K and Oystein, W 2010, The Life Cycle of New Ventures: Emergence, Newness and Growth. Edward Elgar Publishing. Deakins, D and Freel, M 1998, Entrepreneurial learning and the growth process in SMEs. The Learning Organization, Vol. 5 Debra, J and Colin T 2000, European business: policy challenges for the new commercial environment. Rutledge. Douglas, E and Shepard, D 2002, ‘Exploring investor readiness: assessments by entrepreneurs and investors in Australia’. Venture Capital, Vol 4, no 3, pages 219-236. 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