SME sector success is around money
DRASTIC times call for drastic decisions. The regional and local economy is in distress, and only radical actions can save us. Recently The Finance Minister of the Republic of South Africa, Malusi Gigaba, showed in his midterm budget speech a rather gloomy outlook of the economy of the republic.
He showed that the economy will continue to be hobbled, reaching 1.9 percent growth by 2020 far below the 5.4 percent required to achieve the goals of the National Development Plan. The sluggish growth of the Republic will impact a lot on the Kingdom of Lesotho economy.
Our Finance Minister, Moeketsi Majoro, stated that the Kingdom is expected to see a M1 billion drop in its customs union share from the SACU pool for the 2018/19 fiscal year, triggering fears of financial crisis.
Lesotho, like most of countries, depend on the success of private sector, in particular the SME sector for jobs. Dr Majoro recently stated categorically that the country needs to look at expanding the domestic taxes, and indeed this calls for expanding the SME sector. This does not come without its own inherent challenges of money.
The appropriate capitalisation
One of the critical challenges in the SME sector is capital, both the long-term and working capital. The manner in which most SMEs’ capital is structured is inherently risky. For many companies in this sector, the capital structure is heavily borrowed funds especially from money markets (commercial banks). The high debt-to-equity ratio (high capital gearing) leads to the companies paying high and fixed installments irrespective of performance (profitability) of the business. We accept that loans provide leverage to businesses in that they are able to achieve growth with cheaper capital, (debt interest rate is often lower than expected equity dividend rates, and debt interest is tax deductible). But once performance lowers, the high fixed installments must continue to be paid, and that could lead to the business’s failure. The second truth about debt obtained from commercial banks is that it is structured to be addressing primarily the working capital needs and once used for long-term capital financing, it becomes a mismatch as money market debt instruments come at high prices, and may be recalled earlier than the time it achieves the financial goals. This kind of financing is one of the factors that influence the statistic of at least 70 percent of businesses failing in the first three years.
The SMEs often have difficulty in raising capital from capital markets as the same markets have high requirements for listing and Initial Public Offering (IPO) opportunity. There are opportunities such as Private Equity in various forms such as Venture capital, Angel financing etc., however such are not available or accessible for Lesotho SMEs. As Dr Majoro has said, we need appropriate ecosystem including policy frameworks. The establishment of Maseru Stock Market is an introduction of capital market, however it will be mostly for bigger companies and it will take time for this market to mature. Lesotho also introduced leasing law to address mid-term capital needs, yet there are no or insufficient players in the market and there is insufficient promotion of this instrument.
In light of the challenges above, the SMEs should apply high financial discipline to grow the reserves and use such for ploughing back into their businesses. SMEs should look into merging and taking over other SMEs as a growth strategy. As stated earlier in my last month article on business matrimonies, there is a need to involve an Accountant to advice on business matrimonies and help develop shareholders’ agreement to manage conflicts. The SME owner should involve accountants before all capital decisions to lower weighted average cost of capital and to manage financial risks as relate to capital structure.
SMEs’ great financial challenge is financial discipline. SME owners use money without discretion and discipline. Most SMEs do not have cost management tools such as budgets, continuous improvement programmes, cost transformation frameworks etc. The tools mentioned empower the SME owner to direct his/her money, and without them the money will direct the owner. The entrepreneur needs to have business plan and translate the plan into financial language which is the budget, and continue to understand his /her costs and ensure that each cost adds to or creates value, and that on continuously basis processes are visited to ensure that there is eradication of wasteful processes to create efficiency. I admit that this may be achieved through expert advice, and if need be such advise should be sought.
A number of SME owners quickly spend their profits into consumption such as luxury cars etc. The owner should have discipline to fix his or her salary and with the salary or with dividends luxury consumption can be made. We however recommend that as much money as possible should be reinvested into the company so as to grow the company or keep the reserves against contingencies.
Financial discipline include compliance with laws such as taxation laws, labour laws, and other regulations within the sector of the SMEs. None compliance with the laws brings in negative reputation to the business, and with heavy penalties, the business may face failure. There are means and ways your Accountant can help you to legally pay as low tax as possible while remaining a good citizen.
In the light of the above the SME owner should seek advice from a good accountant and business advisor to put in place a system of financial discipline using contemporary tools. We have found that our virtual financial director services help bring in business focus and discipline to SME owners. The owner should ensure that there exists internal controls and policies to enforce the discipline and prevent fraud.
Financial director outsourcing
It is important that SME owners ensure that appropriate records are maintained to provide financial information and ensure that funds are appropriately sourced, appropriately invested and appropriate funds are retained for further growth in the business. Accountant or outsourced financial director is needed. The common problem amongst SME owners is to ignore financial management at own peril. Accountants are not only to prepare financial records for tax, bank needs and other third party users, however they are better used as internal advisors to the SME owner. Business is about money, as such you cannot take wise money decisions if you do not have money savvy professional such as your Chartered Management Accountant or Chartered Accountant.
The SME sector is about money, as such money management is critical if the sector is to grow. There are a number of challenges within the sector. As owner, you may be entrepreneurship savvy but get someone to help you make who is money (finance/accounting) savvy and be prepared to pay for it.
Mr Likhang FCIS, ACMA, CGMA, CA (L) is the founder and principal consultant at RL Consulting – Chartered Accountants & Business Consultants. (Contact: firstname.lastname@example.org)