Strategic Financial Management in Small and Medium Enterprises

Abstract

Small and Medium enterprises (SMEs) face various financing challenges that may lead to their failure in times of financial crises. This paper reviews these challenges and highlights strategies that would alleviate the challenges and prepare SMEs to survive such crises. Challenges for SMEs include limited access to external financing largely due to information asymmetry existing between the lenders and SMEs.  To counter such challenges, SMEs need to establish strong strategic-planning culture that guides their operations. Additionally, initiatives that help SMEs to control costs and prevent operational risks save funds thus alleviating the financing needs of these entities. To access higher amounts of credit, SMEs need to adopt financial practices that ensure the information asymmetry existing between them and lenders is reduced. This can be achieved by separating management from the ownership, since, unlike owners, managers would be required to account their performance to the owners.

Keywords. SMEs (Small and Medium Enterprises), Financial Planning, Economic Crises

Introduction

Establishing and sustaining appropriate levels of financing is critical to the survival of small and medium enterprises (SMEs). Entities require cash flows to not only run their operations but also make investments that make them more effective and efficient. Since regulations for issuing an entity’s stocks are, in most cases and countries, difficult for SMEs to attain (He, 2010), SMEs rely mainly on other sources of financing to sustain or expand their operations. However, in times of economic crises, such as the 2008 financial crisis, financial institutions also heighten their lending regulations thus locking out many SMEs from accessing credit. SMEs thus need to plan their financing options to avoid failure in times of adversity. This paper argues out the strategies through which SMEs can manage their financing needs to avoid failure and become better prepared for economic crises. Go to part 2 here.

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