Which is More Important for a Small Firm: Network or Finance - Report Example

Which is More Important for a Small Firm: Network or Finance? Introduction Small firms are organizations that are generally composed of less than 50 employees. (Wickham, 2004, Ch. 2 – The Economic Function of the Entrepreneur) Between a large- and small-scale firms, small firms are mostly facing a lot of disadvantages in terms of being able to satisfy the specific needs and wants of the consumers as compared to large-scale companies (Gomes-Casseres, 1997). Considering the tight global market competition, the modern entrepreneurs are facing serious challenges on how they can effectively operate a small firm without the need to publicly declare a bankruptcy. In order to create a new business opportunity, entrepreneurs must be able to combine and align the small firm’s available resources, business opportunity that comes along the way, and the people who are working for the business organization towards a specific organizational goal (Wickham, 2004, Ch. 18 – Seeing the Window: Scanning for Opportunity). In other words, each entrepreneur must have their own way of developing a business strategy so as to increase the competitiveness of a small firm. As part of designing a business strategy, the future entrepreneurs are being challenged in terms of effectively distinguish whether or not a small firm’s network is more important than finance and vice versa. For the purpose of this study, the definition of network and finance will first be provided followed by discussing the significance of each factor over the success of a small firm. Importance of Network in the Success of a Small Firm Business networking is a special skill that each entrepreneurs should learn to master. In general, networking is actually referring to the process of developing and using a wide-range of business contacts and establishing a mutually beneficial business relationship with other businessmen as a way to enhance the operation and profitability of a small business organization (Ward, 2009). By improving the business network of a small firm, entrepreneurs can easily increase the profitability and competitiveness of the business organization. Kelley Robertson is the president of Robertson Training Group which aids businesses on how to increaset the company’s sales and profitsbility via busienss networking. According to Robertson (2009), “sales are frequently developed through the relationships we have created with other people”. For instance: A business networking related to marketing could open up new sales opportunities between two business people who has a common interest in doing business. By gathering a wide-range of business network, a small firm will be able to deliver its product and services using tie-ups with other related businesses. Eventually, a small firm can significantly increase its expected monthly sales as compared to relying less on business network. Aside from increasing the profitability of small firms, a small firm can benefit from developing a strong business network since this type of business activity is often less costly and more effective as compared heavily relying on expensive advertisements and/or public relations alone. It is also possible for a small firm to easily have the competitive edge to bargain from its qualified suppliers which is essential in lowering down the cost of production. By developing a large network of highly qualified suppliers, a small firm can easily allocate raw materials and other resources that are not available from other equally qualified suppliers (Ghazali, 2005). For this reason, the flow of different types of resources which could enhance the business performance of a small firm is readily within the reach of the managers. In general, developing an effective business network is a special skill that each entrepreneur should gradually improve. Basically, not all business network can produce a positive effect on the part of the small firm. Some entrepreneurs may focus on gathering a lot of business contacts rather than staying focus on establishing a good business relationship with good quality contacts. For this reason, entreprenuers should always focus on developing quality rather than quantity business contacts in order to maximize the benefits a business organization can obtain out of strengthening the business network (Robertson, 2009). Importance of Finance in the Success of a Small Firm Finance is basically referring to the act of properly allocating and managing the small firm’s available capital or funds. Just like the business networking, having a strong finance can also significantly affect the business profitability of a small firm. In the absence of a maintaining a good money management, a small firm may end up experiencing shortage on the company’s working capital. Finance is an integral part of every business. When we talk about finance, we are actually not only talking about the different ways of acquiring additional investment or cash which is necessary in financing the daily business operations and expansion plan but also investment opportunities and budgeting to ensure that the business will receive the maximum return on investment (ROI). Likewise, finance enables the entrepreneurs to be able to understand the proper way of controlling the cash flow which is crucial to the business’ ongoing operational transactions. For instance: A small firm can develop a good business relationship with the bank and other potential creditors to enable the business owners to have their loans granted within the shortest period of time (Scott, 2009). In the absence of bank credits and financial loans, small-scale businesses may have difficult time generating sufficient cash in order to improve and increase the compeitiveness of the company. Discussion Even though business network and finance has its respective significance over the success of a small firm, there are a lot of evidences suggesting that developing a strong business network is more important than finance for several reasons. Although finance is considered as an integral part of a business, managing the financial resources of a small firm is only one factor that can contribute to the small firm’s success. Strengthening the business network has a positive impact over the small firm’s marketing, HR, strategy and vision, finance, and target consumers. With regards to the marketing side, the presence of a strong business network enables a small firm to increase its sales and profitability despite the limited working capital the company owns. Through a strong business network, the small firm will not only be capable of increasing its sales and profit by widening its existing customer-base but also increase the firm’s bargaining power from its existing suppliers. Likewise, increasing the small firm’s network can be useful in spreading the products and services of a company through words-of-mouth. It is also a fact that constantly increasing the sales and profitability of a small firm is much better than getting a credit loan from the banks and/or other creditors since the small firms can avoid having the need to pay high interest rates in exchange of borrowing money from the creditors. As a negative consequences of borrowing money from the creditors, there are several small- and medium-scale businesses that were forced to declare bankruptcy because of the management’s inablity to payback its debt on time. Even though a strong financial network could increase the small firm’s ability to have its loan granted by the local and international banks aside from other creditors, solely depending on finance alone will not increase the small firms revenue. For this reason, getting a loan from the bank and other creditors could only put the small firm at risk of not being able to payback the interest of their loan together with the principal amount within the time frame as agreed upon between the lender and the borrower. As a result, there is a higher chance that the small firm could face serious business problems associated with possible bankruptcy and losing its collateral within the long-run. Considering the global financial crisis that we are experiencing today, over expanding the business can endanger the profitability and stability of the small firms. In times of fianncial crisis, it is expected that many people would hold onto their savings rather than purchasing a new product and/or services. Since the demand for products and services are low as compared to when the economy is good, it is not advisable for entrepreneurs to expand the size of the business. In relation to the gradual or a sudden decline in the company’s sales and profit, expanding the business could only increase the operational fixed expenses without increasing the small firm’s revenue. Thus, creating a serious business financial problems on the part of the small firms. A business networking is a continuous business process. It simply means that a single referrals can lead to another one. For this reason, a wide-range of business network can be easily achieved by small firms over a certain period of time without adding too much cost on the part of the business organization. Upon improving the small firm’s customer service and quality of its product-line, there is a stronger possibility for entrepreneurs to increase the loyalty of its existing customer-base. Eventually, maintaining a good business relationship with the buyers will enable the small firm to maintain a constantly increasing annual sales and profit. Conclusion Strengthening the small firm’s networking is better as opposed to finance. Basically, developing a good business network enables the entrepreneurs to effectively handle not only the marketing side of the business but also the HR management such as locating for competitive employees, gathering of highly qualified suppliers, development of a long-term client-base, and increasing the social connection of the company concerning finance among others. Basically, developing a strong business connections does not only address a specific areas that is crucial to the success of a small firm. Instead of just focusing on one part of the business aspects, strengthening the small firm’s networks enables the entrepreneurs to easily address the different busienss areas that contributes to the success of a small firm. References: Ghazali, A. (2005). Small firm owner-managers networks in tourism and hospitality. International Journal of Business and Society , 6(2):37 - 54. Gomes-Casseres, B. (1997). Alliance strategies of small firms. Small Business Economics , 9:33 - 44. Robertson, K. (2009). Retrieved March 11, 2009, from How to Profit From Networking: http://entrepreneurs.about.com/cs/networking/a/uc071703.htm Scott, A. (2009). Retrieved March 11, 2009, from Scotts entrepreneurs blog: http://entrepreneurs.about.com/b/2003/10/20/how-to-finance-your-business-without-a-business-plan.htm Ward, S. (2009). Retrieved March 11, 2009, from Business Networking: http://sbinfocanada.about.com/cs/marketing/g/busnetworking.htm Wickham, P. A. (2004). Strategic Entrepreneurship. 3rd Edition. Harlow: Prentice Hall. Read More