Importance of Finance in the Different Stages of SMEs - Coursework Example

IMPORTANCE OF FINANCE IN THE DIFFERENT STAGES OF SME’S Student’s Name Course Professor’s Name University City (State) Date Importance of Finance in the Different Stages of SME’s Introduction Small and medium size enterprises have five development stages as they seek to become multinational, national operations with global operations. The first stage is existence which entails winning the customers and supplying them with the suitable vacuum cleaners. Second is the survival stage that entails the firm breaking even and staying in business through ensuring stable finance flow. Third is the success stage that entails the decision of the business owners of whether to expand it or stabilize and keep enjoying the profits thus opening up for other activities. Fourth stage is the take-off that focuses on how to ensure a rapid growth of the firm and how to finance the same. Lastly, the resource maturity stage that is characterized by the company having managerial talent, financial resources, advantage of size, and formidable force in the market at its advantage thus sustainable. The five management factors critical to each of the stages are: involvement of the owners, the main strategic goals, formal systems in play, organisational structure, and managerial style (Drucker 2011). One of the critical factors that determine the success or failure of the firms is the financial power. Importance of Finance in Different Stages of SMEs The finance function in the small and medium size enterprises can be categorised into three distinct groups. These are: financial controls and agency problems; monitoring and standardisation; and accounting for development and growth (The Association of Chartered Certified Accountants (ACCA) 2012). Finances help in the addressing of problems within the agency and ensuring the financial controls. At this stage, the business has less than ten members and its turnover is less than £ 100,000 (ACCA 2012). In explanation, when the business starts to stabilise their revenue generation, its control becomes unbearable thus the need of additional experts. Furthermore, the third parties are involved thus need for advanced accountability measures. The finances are, therefore, critical in the earliest adoption of the use of trained staff, formal business plans and management reporting. All these efforts are put in place to ensure that the employees are monitored and their incentive aligned to the objectives of the business. In addition, finances are used to address the agency costs that help in the integration of management accounting practices in the early stages of the business. As a result, the performance of the firm is enhanced. Business plan is, therefore, critical since it determines the efficient use of financial resources. In addition, it is important that it is constantly reviewed so as to keep up with the changes in the business goals and environment. Some of the micro-enterprises also use the business plan to approach financial providers (Levine 2005). Finance helps in the monitoring and standardisation of business with a turnover of approximately £ 100,000 to £ 1 million and a staff of no more than 50 members. Such businesses use financial data to optimise their internal activities. In return, they provide standardised information that is appropriate in feeding the formal plans. Finances are also used to hire financial experts who manage the credit and monitor the cash flow. The experts also report on the effects of improving business activities and its progress. In other words, financial resources help in the transition of the business from informal to formal standardisation and monitoring of the processes. As a result, the changes catalyses the growth of the business and demonstrate the connection between rapid growth, financial controls and equity finance (Davila et al. 2010). At this point, the firm is able to aggressively invest with ease so as to produce goods and services at a relatively low cost widely. At this stage, the finance functions in the small business can be strengthened through online activity. In explanation, there is a synergy between marketing and accounting in electronic commerce. Under electronic commerce, the small enterprises uses the intangible assets like user links and intellectual property to reach its customers. The process is cheaper and quicker in generating the business information. However, it is difficult to understand what drives sales under such arrangement. It is also difficult to control and locate costs in such scenario despite the fact that it can reach a greater mass. Finance help the business account for growth. The business that have a turnover of about £ 1 million and above 50 members of staff is still deamed small by the financial and government entities (ACCA 2012). However, its resources are internally stretched to the limit. At this level, the steady growth needs more planning in the business compared to the explosive growths. Some of the causes for need for comprehensive planning can be due to the periods of reflection and consolidation or introvertedness of the bsuiness as it starts to exhaust its growth potential in the market. However, when there is an economic boom, firms can substantially grow without focusing on the finance function (Bush et al. 2014). Financial experts are, therefore, not a must to hire in the business during the moments of economic boom. The small and medium scale entreprises in the countries with strong economic background may find the finance staff too expensive. But the ignoring of the financial experts during the economic downturn can be disastrous. Brown and Lee (2015) indicate that small and medium enterprises that are rapidly growing are more likely to apply for external finances compared to those that are slowly developing. The small and medium enterprises that have developed integrate the external and internal funds. Positive and Negative Features of Globalisation Globalisation is the process to which people living in the world are brought together to form a single society. Globalisation is real and has impacted businesses greatly. It can be defined as the internationalisation of the markets thus allowing for the purchasing and sales despite of the territorial boundaries. Such practices have influenced all the businesses in the market; for instance, new competitors have entered in the domestic market thus changing the preferences or behaviours of the customers. Technological progress has been the main contributor to the globalisation of enterprises. In explanation, technology has enhanced progress in the distribution and logistical issues almost in all the businesses that cooperate; sell and buy at the global level (Levitt 1983). Courtesy of globalisation, the customers, have been given the opportunity to compare the prices at the global level with the search of the best offer. Consequently, the small and medium enterprises have been forced to engage in the global level even when they do not intend to engage in the importation and exportation of goods and services. One of the major advantages of the small and medium enterprises has been their close contact with their customers. Globalisation ensures that there is an expansion on the sales made by the small and medium enterprises thus enhancing their development. It also expands the customer base of the business thus reducing the overdependence on few main customers. Globalisation also gives the small and medium business the opportunity to even the demand fluctuations associated with the regional businesses. Furthermore, it gives the business an additional opportunity to which more products can be introduced into the market. Global financial crisis can also affect the nature of distinct sources of finance for small and medium enterprises (Durkin et al. 2013; Berger & Black 2011). Globalisation, therefore, has advantages and disadvantages to the small and medium enterprises. First, globalisation can enhance the development opportunities in the society. In explanation, as globalisation happens the small and medium scale businesses are encouraged to hire more workers thus increasing their capacity. People on the respective countries are, therefore, given additional job opportunities. Second, globalisation enhances the availability of goods that can also be used as raw materials by the small and medium scale businesses (Martell, 2007). Some of the goods are only available in given countries thus limiting the growth of the small and medium scale business in the outside countries. Globalisation, therefore, enhances the growth of such businesses through enhancing access to such goods and services. In globalisation, the goods can be distributed from a particular country to another thus ensuring equal access to all the businesses in the world. Third, the businesses are given the opportunity to access larger markets that they could not have accessed if they were to work only in their home countries. In explanation, globalisation gives the small and medium scale enterprises the chance to spread to distinct countries around the world thus becoming multinational companies. The higher the number of countries that a business operates the greater is the market. Globalisation, therefore, enhances the growth and development of small and medium scale businesses (Straw & Glennie 2012). However, there are a number of challenges that globalisation can cause the small and medium scale enterprises. First, globalisation might be in the favour of the enterprises on the larger countries at the expense of the ones in the smaller countries. Inequality in trade can be realised as the developed nations reduce tax thus benefiting the stronger economies at the expense of the weaker ones. Second, globalisation also enhances outsourcing of services thus increasing competitiveness. Some of the countries that benefit most due to outsourcing include China since they provide low cost of wages and goods (Pan & Ming 2011). Outsourcing of services has seen many of the employees lose their jobs. The main losers have been accountants, scientists, programmers, and editors. Conclusion There is a link between the growth of small and medium enterprises and early development of the finance function. However, the relationship is complex, and one cannot argue that financial management is simply pegged on the growth of the firms. Furthermore, growth might be unsustainable in some of the firms despite financial management. In explanation, the proxy of sustainable growth should include taking consideration of the business’ ability to sustain high growth at the lowest credit risk. It is also important to compare the growth record of the enterprise to its distinct levels of financial capability. Small and medium enterprises that regularly plan their activities have higher chances of achieving a high turnover growth. In addition, businesses that practices regular reporting of management will experience low-risk rates. On the other hand, the business with highest level of development of financial function is more likely to experience sustainable rapid growth. Finances are so critical for any kind of business. It can help the business address their agency issues and ensure financial controls in the business. Finances can also help in the monitoring and standardisation of the businesses. It can also enable the businesses to account for growth through bringing in additional assets. In addition, finances can make the business to harness the benefits of globalisation. Globalisation is the process to which people living in the world are brought together to form a single society. It can be defined as the internationalisation of the markets thus allowing for the purchasing and sales despite of the territorial boundaries. Such practices have influenced all the businesses in the market; for instance, new competitors have entered in the domestic market thus changing the preferences or behaviours of the customers. Technological progress has been the main contributor to the globalisation of enterprises. Globalisation has been critical to the business to the extent to which all the businesses are affected by it in one way or another. One of the major advantages of the small and medium enterprises has been their close contact with their customers. Globalisation ensures that there is an expansion on the sales. It also expands the customer base of the business. Globalisation also gives the small and medium business the opportunity to even the demand fluctuations. Furthermore, it gives the firms the opportunity to introduce new products in the market. Global financial crisis can also affect the nature of distinct sources of finance for small and medium enterprises. However, globalisation has its share of challenges that include increased competition in the market that can be risky to the development of a small and medium enterprise. 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