Financial Management Analysis - Case Study Example

Financial Management Essay Introduction: SMEs or small-to-medium-sized enterprises are getting smarter in cash management with deeper financial expertise and experience. Current situation in the Asian business market conforms to the fact that small businesses in the region are not that easy now. The article of De Ramos (2001) addresses the financial issue of SMEs faced in the Asian region along with an in-depth introspection on other related aspects. The article mainly includes the discussion of the following points. 1.1 The expanded horizon of SMEs in the region: The business scenario in the SMEs sector of Asia is witnessing a noticeable change. Statistical data from the Asia Pacific Economic Cooperation reports that SMEs capture a sizeable 95% of business enterprises in the Asian region (De Ramos 2001). The report further states that small business enterprises employ 80% of its total workforce while contributing 60% of its economic output. However, this has not made things easier for small business enterprises. Instead, SMEs are now facing more challenges. Due to their ambiguity of financial transparency unlike the bigger companies, bankers do not seem to trust the SMEs easily. Bankers demand a number of financial requisites from SMEs before allocating their finance, which include an up-to-date financial report with clear profit history, a detailed business plan and a credible management team. Besides, finance companies are also adopting various credit scoring mechanisms replacing human judgment in loan approvals to the small businesses. 1.2 Cash management - a powerful tool for SMEs: Bank borrowing is still a significant issue for SMEs. Most of them find it difficult to get it in the Asian region. Therefore, cash management is very important for the SMEs. Small business enterprises are now practising to accomplish bigger profits with smaller investments. Cash is king for small businesses. A business can get successful when there is a considerable amount of investment made in the business at a very low payout. Isabelita Sy-Palanca, president of the Mother Company, Philippines suggests on the mantra of small business philosophy, “Manage your cash well, because if you run out of it, then you have to borrow, and to borrow is no joke…Think big profits but small expense. Cash is power.” 1.3 Clustering: Cooperation or clustering is a serious concern and a new concept among the SMEs. Different groups of SMEs under similar ventures working together is a common practice now in the financial market of Asia. The main purpose of this collaboration is to combine their expertise and bargaining power. Thus clustering helps small companies with both technology and financial gain. Besides, the concept of competition now involves overseas counterparts rather than the business partners in the region. This further results in achieving bigger business opportunities across the region and internationally as well. Clustering is economic in the sense that it is aimed at gaining business support, which would allow small companies to get materials cheaper as well as borrow funds at lower cost. 1.4 A few alternatives: SMEs can get financial help even without approaching the bankers. Most of the countries in Asia have their stock exchange for SMEs in terms of government funding. Grant funds have their own specific requirements and grant rates under different government funding. For instance, the Small and Medium Industries Development Corp of Malaysia offers grants up to US$66,000 for SMEs. The Singapore Productivity and Standards Board offers enterprise loans as well as loans for skills development up to US$8.7 million. However, getting access to grants fund is not an easy task. It requires SMEs to do a lot of homework correctly before applying for it. 2. Management review: 2.1 Cash management and faster economy: The article of De Ramos provides significant insight on fast growing economy and healthy outlook of Asian SMEs. What sounds most appropriate in the article is the issue of cash management which is most important for small businesses. The most relevant step in developing an effective cash management solution for SMEs is to identify an appropriate bank account structure. This is recommended for allowing optimum management of fund flows. Chung (2008) provides the example of Stanley Hsu, a Taiwanese businessman who is encouraged by Hong Kong’s fast-growing economy and determined to go further on fast expansion of his spa and health club ventures. The optimism of Asian SMEs is strongly emerging despite the negative impact of the US slowdown, opines Margaret Leung, global co-head of commercial banking at HSBC, “In the face of growing economic uncertainty in the US, emerging markets still see great opportunity for growth, as intra-Asian trade grows and the small business sector is learning to adapt quickly to changing global conditions.” (Chung 2008) 2.2 Optimism in SMEs: According to a recent HSBC commercial banking survey, the SMEs in Vietnam are the most optimistic in Asia followed by their counterparts in India and China. Faster economic growth is the topmost priority of these SMEs, paving way for the much appraised optimism in the small business sector. This optimism of SMEs is supported strongly by the growing economy of the Asian countries as well ass substantial amount of government fund. De Ramos’ article provides sufficient amount of understanding how the optimism of SMEs work effectively and efficiently while making cash management a relevant requirement and grants fund a useful alternative. Government fund also helps small businesses in exploring the overseas for new markets. Moreover, the clustering factor of SMEs also contributes largely to the growing interest of the small business sector into the overseas ventures. De Ramos is precise in his article while favouring the clustering concept of small businesses that is designed not just for technology advancement but also for capturing new markets in the international business. 3. Strengths and weaknesses: 3.1 Strength: The management article of De Ramos provides adequate value to the practice of cash management solution in the small business sector. The significance of the fast growing Asian market for small businesses can be realized with the abundance of examples and small case studies observed by De Ramos. The article contains a brief yet precise knowledge of some of the important concepts in SME sector including cash management, credit scoring mechanism, clustering and bank borrowing. De Ramos also briefly discusses the risk factors involving investment by SMEs. SMEs are still cautious about bank borrowing, as bankers and finance institutions also tend to behave in somewhat resilient manner before granting loans to small enterprises. This happens due to the absence and ambiguity of financial transparency shown by the SMEs. The issue of bank borrowing is relevant as the entire investment strategy of the SMEs is largely determined by how much the bankers are going to trust these small businesses. 3.2 Weakness: However, there should have been more discussion on the risk factors involving cash management solutions of the SMEs. Particularly, the aspects of bank borrowing and credit scoring require more insight and considerable amount of research. In order to earn more on credit scores from finance companies, transparency is a significant requisite for small business enterprises. The higher the credit scoring is, the lower the risk. The mechanism of credit scoring is designed as a substitute for human judgment in loan approvals. But how far the mechanism is acceptable in terms of efficiency and effectiveness, requires more in-depth research. The article lacks such intensity level while discussing the issue. 4. Recommendations: Smaller business enterprises are growing in number as well as size in the Asian region. However, this does not ensure that SMEs are more trustable and effective economic sources. It is important for SMEs to produce clean and clear financial reports before getting any loan approval from the bankers. Small businesses are still facing hurdles. Mr. Robertson from HSBC speaks, “When you look at financial reports you often see a mix between company and personal finances, a mix between company assets and personal assets. SMEs think it’s not worth paying the money to have a reasonable firm of auditors do the accounts. Possibly, but unfortunately we’d like to see things audited by reputable firms in a timely manner.” (De Ramos 2001) The SME sector is characterized with several features including the following - a) small scale business with less bargaining power, b) entrepreneur versus management skill, and c) inadequate information indicating the ambiguity of its financial transparency. These three features often tend to pose various challenges for SME operators. This further approves of certain financial management practices for SMEs as recommendations in order to achieve economic advantage. Following are some of the recommendations that SMEs require to consider seriously. The benefits are mentioned later respectively. 4.1 Recommendations for SMEs: SMEs should adopt clear-cut business strategies with adequate planning process and guideline for risk management. SMEs should maintain an organized business structure while considering accounting, legal and tax perspectives. There should be well-organized integration between front and back office operations. As businesses are driven by technology innovation, IT implementation is an essential step for SMEs. SMEs should focus on implementing an effective marketing strategy with strategic distribution process. Their bargaining power can be enhanced through strategic investors and reputed bankers. SMEs managers should have adequate knowledge of accounting, legal and tax principles. 4.2 Benefits: Strategic business planning means the business will run systematically. With identifying possible risk factors, it will be easy for the management to act more efficiently and effectively. Organized business will reduce tax burden and ensure effective communication across various departments. This will certainly improve decision making process of the SME. IT implementation will eventually result in efficient skill development indicating improved productivity and product quality. Effective marketing strategy results in easy access to target group as well as higher revenue gain. Proper understanding of accounting, legal and tax issues helps the management prepare an effective financial statement before submitting to the bankers. 5. Conclusion: The fast growing economy of the Asian region is largely contributed by the growth of SMEs sector. Increase of SMEs in number and size also indicates that there is more competition and innovation, which is a positive aspect for economic enhancement. While the competition is getting tougher, it is important for small business enterprises to come up with the clearest financial reports before getting access to higher loan approvals from financial institutes. As technology is an ongoing phenomenon, it is recommended for SMEs to keep track of updated mechanisms and stay ahead of competition. References: Chung, Olivia 2008, Asia’s SMEs see healthy outlook, Asia Times, viewed 12 February 2008, http://www.atimes.com/atimes/China_Business/JB12Cb02.html. De Ramos, Abe 2001, Special Report: SME Finance, CFO Asia, Hong Kong. Read More