7 Feb 2012
Strategies for SMEs to Deal with Financial Management
The vast majority of small and medium sized enterprises (SMEs) in Hong Kong and mainland China fail. The main reasons for this are not challenges posed by the external environment, but shortcomings in internal strategies, management and operations. One of the main internal challenges SMEs face relates to financing operations and financial management.
SMEs often have a difficult time obtaining financing for start-up, expansion and working capital. Moreover, many SMEs have primitive financial management that can cause problems.
The following are some practical steps that can be taken to improve financial management:
SMEs should develop good relationships with banks as they are the main source of finance, other than family funds and retained earnings. SMEs should maintain regular contact with banks and management could consider socialising with bankers as an opportunity to talk about company needs, future plans and get advice. Management could also consider contacting banks that they do not presently use to identify ways to work with those banks in the future and put in place contingency plans should the relationship with the present banks deteriorate.
SMEs should establish adequate credit lines. Even though there is an expense to establishing credit lines, establishing them in advance of a need is always better than waiting for the need to arise when terms may be more difficult. Management should also consider talking to a range of banks, which includes those currently used and at least one other reputable bank that they do not to put credit facilities in place. Management could also take the opportunity to explain future needs and plans to the banks and identify why the credit line might be needed. The main objective of this exercise is to negotiate with the banks for the best possible terms on establishing a credit facility.
SMEs should consider using asset-backed financing when necessary Selling account receivables, and borrowing against assets like property, plant and equipment are all sources of finance. However this type of financing should be carefully considered to ensure the interest payable, as well as other costs, are justified versus other financing options that are available.
SMEs should formulate strong cash management policies. Weak cash management is the most common reason that SMEs fail. Management should know their cash position on a daily basis by checking their cash and bank balance regularly. Management should ask accountants to prepare regular cash flow statements and monitor cash inflows and outflows. Cash forecasts should be prepared to identify future cash needs and management must ensure that proper authorisation is sought before cash commitments are made.
SMEs should ensure that they keep enough cash in the business. In most cases, the primary source of income for the SME owner is profit. Sufficient profit, however, needs to be retained in the company to see it though difficult times.