Factors That Determine the Investment Readiness for Growth of Small Medium Enterprises - Coursework Example

MAN 15 -ISSUES IN SMALL BUSINESS MANAGEMENT University of South Australia (Open Universities SP3, 2012) Major Assignment(Assignment 3) Troy Selwood Student Number: 110108228 Date of Submission: Small and Medium Enterprises According to the Australia Bureau of Statistics (ABS 2010), Small and Medium Enterprises (SME’s) are businesses with a capacity of employees of between 1 and100. These businesses are independently owned and operated by a single individual or a collective group of individuals. The owners or management of these businesses control 90%-100% of the entire operations as they are the main contributors to part or all of the operating capital. Critical decision-making relating to any aspects of the businesses are made by the management as they control the highest stake of the business. Small medium enterprises comprise 29.2% (622,832) with an annual growth rate of 3.5% of the entire business service providers in the Australian market (ABS, 2010). These figures show that the enterprises play a key role in the Australian economic sector as they control a relatively huge stake. These enterprises are mostly found in the service industry, and they provide services ranging from: construction, retail trade, manufacturing to personal services, health and community services, accommodation and restaurants among others. According to Peacock (2004 p.8-15), SME’s contribute to most of the regional development estimated at 39% as most of the enterprises operate in regional Australia. These industries enhance the economy through creating more opportunities for women with one-thirds of the businesses being operated and managed by women. As much as SME’s have been recognized for contributing largely to the growth and sustainability of the economy, these enterprises are constantly faced with difficulties as compared to large companies when sourcing for increased funds to either start or develop their businesses further. This situation has been experienced due to the growth of several bottlenecks that limit their financing. This study therefore seeks to identify and examine the factors that determine the investment readiness of growth of small medium enterprises through integration of changes that could be undertaken by the Australian government and the finance sector to overcome problems faced by the enterprises in acquiring investment capital for growth. Factors that determine the investment readiness for growth of Small Medium Enterprises Investment readiness is a term used when raising external equity finance. An enterprise is therefore said to be ‘investment ready’ when it possesses the required attributes in terms of equity aversion, invest-ability and presentation which make it a potential investment venture for the prospective investor for the financing that the enterprise is seeking (Clark 2008, p.258). It is therefore an enterprise’s presented business plan with its future profit projections which encourages potential investors to invest into the enterprise for not only the short-term but also the long-term gains and profits. This process therefore, provides a firm with the opportunity to not only gain capital for business start-up, but rather for continued growth and development of the business. Investment readiness has led to the development of several investment programs. These programs aim to rectify common failures in the equity market by raising the quality of investment opportunities (Mason and Kwok, 2001p.269). These programs will achieve this by providing the necessary information on equity finance to entrepreneurs and helping them meet potential investor standards through use of seminars and workshops to provide training. Investment programs therefore assist enterprises, which show potential for further growth and development, by assisting them to gain more funding through raising external finances from potential investors or venture capital firms. Investment readiness is therefore a pertinent aspect in the growth and development of SME’s and should therefore be a major consideration for any such enterprise. In order for an enterprise to effectively determine its investment readiness, it has to ensure that it meets several factors, which are of high consideration to any potential investor. Business attitude towards equity finance Most entrepreneurs willing to grow their businesses are hesitant to access equity finance as they view it as a way of seceding ownership and control of their businesses to the investors. This is a misconception which has been developed due to lack of the relevant knowledge and information with regards to characteristics and alternatives to various sources of finance leading to many projects with potential for investment funding remaining undiscovered (Van Auken 2001, p.282-291). Therefore, this factor seeks to create understanding of the roles and alternatives to the different sources of finance among entrepreneurs so as to encourage more people to consider accessing equity finance as it is readily available and accessible. Financial forecasting aspect of management in organizations In the process of setting up and managing an enterprise, each business projects its short-term and long-term expected gains in relation to profits and growth. Financial forecasting therefore involves projections of future expected revenues by the organizations. This is in relation to the organization’s past and current financial information - providing an analysis of the businesses operations and realized profits that will then help project future financial expectations. Forecasting of expected revenue by small medium enterprises enhances their access to investor funding. These forecasts enable the enterprises to determine any future opportunities which may require further funding which will also present an opportunity to investors for further development. Enhanced forecasting will also boost the enterprise’s borrowing capacity, as the forecasts will help project the expected revenues, which will enable the enterprise to effectively repay the lending institutions thus increasing its equity capacity. In addition to increased borrowing capacity, the enterprise will also enhance its collateral capacity through the increased revenue projections. These projections will increase the firm’s net worth thus enhancing increased access to equity services by the various financial institutions. Financial Decisions Financial decisions made by the financial managers and management are paramount to small and medium enterprises. They enable a firm determine its current financial position and possible investment avenues which will aid the firm in raising more capital to enhance further growth and development of the enterprise. Financial decisions are made through a four-stage process (Van Auken 2001, p.298-300), involving: (1) identifying the most suitable, accessible and affordable sources of finance suitable to the firm’s operations and that the firm can access. (2) Identification of profitable investment opportunities that the firm can invest in so as to acquire more revenue for development of the enterprise. (3) Assessment of the available opportunities in relation to the availability of the various sources of finance and determination of the risk involved. (4) Finally, incorporation of the best decision based on the efficiency and effectiveness of the investment made in relation to achievement of increased equity for enterprise growth. Financial decisions are therefore an important factor in determining the investment readiness of an enterprise as it helps assess and determine the most profitable investment options that will increase the expected revenue. Technology Changes Technological changes are an increasingly important factor to be considered during the determination of the investment readiness of an enterprise. Due to increased use of technology in manufacturing and service industries, small and medium enterprises are expected to incorporate the use of the technology in the production and delivery of goods and services so as to be at par with the competition and technological changes. Adoption of technology enables a firm to produce and deliver high quality goods and services more effectively and efficiently. This enhances profits realized due to an increase in the market share in relation to sales volumes realized. Therefore, incorporation of technology will not only increase the firm’s revenue but will also create a competitive advantage. As with the incorporation of technology in their production activities, more investors will be willing to invest and the firm will remain highly competitive in the market. General Business Planning Business planning involves the process of a firm coming up with a flexible and efficient business plan. The plan will not only produce a flawless plan for the present business activities, but also provide an avenue for the identification of potential business opportunities that will enhance growth in the long-term. Proper business planning ensures that the organization develops clear strategies. These strategies outline sufficient and factual information regarding the organizations’ objectives in relation to increased funding and new opportunities and how to access them (Clark, 2008, 265).The financial managers can therefore boost the business planning process though development of credible revenue models by identifying the firm’s unique selling points, route to market and potential customer figures, which will attract investors. The finance managers could also receive further training on how to deliver a great sales pitch through proper construction of the business plan, which will attract potential investors. Dividend Decisions In an effort to ensure that the enterprise is investment ready, the financial managers should determine the available dividend policies, which are relevant to the small medium enterprises in terms of, their: affordability, accessibility, risk manageability and revenue projections. Policies adapted will lead to increased shareholder figures, as they will be entitled to both preference and ordinary shares thus increasing financing through shareholders input. It will also increase potential investor confidence through the increased shareholder portfolio leading to increased funding from potential investors thus enhancing the firm’s growth, which will lead to increased revenues. Changes by the Australian Government to enhance acquisition of investment capital by SME’s Free Trade Association Establishment of the free trade agreement between Australia and New Zealand of 1994 enhanced development of small and medium enterprises through decreased tax rates and increased lending. The government can further enhance acquisition of more investment capital by these enterprises by creating more agreements with more countries and economic blocks. This will attract investors to the enterprises as they will discover the projected opportunities and returns thus enhancing capital acquisition from other countries. Trade Barriers Small and medium enterprises seeking to expand their markets through increased exportation are faced with various issues with regard to financing. Some of the issues include: (1) increased exportation tax through export licenses which decreases the amounts of revenue realized and (2) Increased trade tariffs which block potential investors thus restricting sources of investment capital to the enterprises. The government can rectify this situation by reducing trade tariffs which will encourage potential investors into the economy thus enhancing the growth and development of the enterprises (Peacock, 2004, 165-180). Reduction of exportation tax which will al lead to realization of more revenues for the enterprises thus enhancing their growth. Membership to economic blocs With the increase in the development of economic blocs, the government should have increased membership in more blocs. The government should also enhance its position in the current one’s such as the Asia-Pacific Economic Cooperation (APEC) as this will increase the potential investor pool for the small and medium enterprises. This is because various potential investors will want to invest in the upcoming enterprises, which have great potential for growth thus enhancing their equity capital through increased funding from such investors. Technology and Globalisation Increased advancements in technology constantly require the enterprises to update their technology from time to time. As much as this is a costly endeavor, the enterprises have to follow suit to ensure that they deliver goods and services that satisfy international standards. This is because the business arena is equally affected by globalization and hence for a firm to be competitive, they have to adopt the new technology. Adherence to this also enables the enterprise to attract more investors as it seen to be technology conscious, thus, competitive and profitable. The government can enhance accessibility of funds to the enterprises by providing subsidies to the firm’s in acquisition of the technology thus enabling them to acquire the best technology. This will in turn attract potential investors and increase funding due to the projected revenue figures. Export market development grants The government has enhanced the growth of small and medium enterprises involved in exportation through the provision of the exportation grants. However, the government can enhance exportation by reducing the period required of two years and money spent on export procedures amounting to $15,000. This is because these two conditions could prevent an enterprise from accessing funding from potential investors at the moment (Carter & Jones 2000, 283). Thus, with reduction of the conditions and an increase in grants provision, the government will enhance access to capital by various small and medium enterprises. Changes by the Finance Sector to enhance acquisition of investment capital by SME’s E-banking and Lending Internet use among small and medium enterprises has increased over time with the usage percentage rising to 80%. Adoption of this ensures that the enterprises adopt the technology in the market thus enhancing their efficiency through use of the technology. Financial institutions should therefore educate the enterprises on the advantages of e-banking as it provides better services at lowered fees of 32% (Reynolds 2002, 198-220). This will therefore enhance their funding as they will receive more funding online while saving on the expenses to be realized otherwise thus increasing the revenue realized. Trade Credit Trade credit is one of the most efficient methods of enhancing acquirement of capital by the small and medium institutions. This is due to the fact that with trade credit, an enterprise can acquire goods to use in the running of the business and pay them back after a grace period of 31,60 or 90 days. It therefore provides an avenue for the enterprises to acquire immediate or urgent funding for the business. Commercial Bills Issuance of commercial bills involves issuing of a bill for a certain amount to cover a certain period and later receiving a lesser amount as payment for the bill. The difference realized is the payment for the interest charged on the bill, which is paid at the time of issue. Commercial bills enhance the acquiring of investment capital for growth as their interests rates are fixed during the buying of the bill hence the entrepreneur is able to accurately compute the amount spent on financing the transaction. Financial Leases Financial leases involve a leasing company, which purchases plant or equipment on behalf of an enterprise and leasing the plant or equipment to the enterprise at an agreed rental price and for a specific period of time. Leasing company remains the owner to the plants and equipment while the enterprise assumes possession while making regular payments (Mason 2010, p.269). Leasing therefore enhances the acquiring of business capital by enterprises as it provides the necessary machinery while enabling the firm to save up the scarce funds available within the enterprise. It also provides fixed interest rates and ensures there are no unforeseen charges. Conclusion Small and medium enterprises play a big role in the growth and development of the Australian economy. This is because it provides increased revenues to the economy through increased profits, reduces unemployment rates by creating new job opportunities, enhances revenues received due to increased exports, and attracts investor spending which enhances cash flow into the economy. Small and medium enterprises display high potential for growth but are unable to realise this potential due to lack of their ability to meet the investment readiness requirements. In order for an enterprise to be considered investment ready, it has to adhere to the following investment ready factors: business attitude towards equity finance, financial forecasting aspect of management in organizations, financial decisions, opportunity for accessing different markets, technology changes, general business planning and dividend decisions. These aspects help an enterprise to be investment ready so as to be able to acquire more investor funding so as to enhance growth. In light of this, the government has identified and implemented several changes, which help enhance enterprises access investment capital for growth. These changes include introduction of enhancement of free trade associations, eradication of trade barriers, increasing membership and activity in economic blocs, enhancing affordable access to technology and developing export market through increased grants allocation. The finance sector has also enhanced enterprise access to investment capital by providing favorable financial leases, issuance of commercial bills, enhanced trade credit facilities, and enhancing e-banking and lending facilities. Increased growth of small medium enterprises provides immense opportunities for both the enterprises and economy at large and hence should be encouraged and developed through increased training on the available financing options available. 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