January 10th, 2018
Strategies to Reduce SMEs Susceptibility to Financial Crises
Strategies that would help mitigate SMEs’ vulnerability to economic crises involve the establishment and pursuit of a strong strategic-planning culture and development of stringent systems to manage financial costs and prevent operational risks.
Developing a Strategic-planning Culture
For SMEs to develop their business to withstand financial crises, they need to have clearly defined financial goals that are core to the development of a sound firm strategy. Financial goals help the firm assess its financial decisions thus highlight whether such decisions are prudent (Liu, 2010). When appropriate, financial goals guide the firm towards establishing plans that control financing, investment and income-generation activities. Through such goals, SMEs can develop a firm strategy that is cognizant of the resources available to the entity. When developed, such firm strategy is vital in synchronizing activities in different sections of the entity towards achieving the overall corporate goals (Liu, 2010). For instance, with a financial goal to cut labor costs by a particular margin, SMEs can assess operational areas where costs may be reduced for instance by adopting technology that reduces labor requirements.
A critical part of achieving financial goals is developing a sound budgetary process that guides the entity’s operations. Budgets help move the entity from the envisaged goals to specific plans that are required for the entity to achieve such goals (Liu, 2010). Comprehensive budgets do not only plan for expenditures on the operating activities but also those on capital investments. Additionally, such budgets highlight expected cash flows from operating activities. Accordingly, budgets highlight the need for additional financing with envisaged operating level thus help in planning for the additional financing required.
Apart from the internal environment, strategic planning takes cognizance of the external environment. In terms of financing, external-environment analysis helps an entity in the choice of financing mode that bears the minimal risk on its operating activities in future. Such analysis, for instance, could serve to alert an entity of economic crises thus develop preventative measures in its operations and avoid entering into high-interest debts (Liu, 2010). Establishing effective strategic planning systems in SMEs thus, in addition to helping the entity meet its goals, may serve as a preventative mechanism against effects of adverse economic environment on the business operations.
Managing Financial Costs and Preventing Operational Risks
Once established, SMEs need to manage their costs in order to sustain growth. Such can be achieved by following procedures previously established to guide aspects such as raw material acquisition, staff recruitment, technology adoption, marketing activities, equipment purchases and other capital investments. In human resource management, for instance, entities should make cost-benefit evaluations to guide expenditures on HR development and utilization (Yu & Wang, 2010). Making such analysis helps the entity to employ its limited resources prudently, by assigning more resources to areas where there is critical need. Accordingly, the entity is able to avoid a scenario where some sections are understaffed whereas others are overstaffed.
In material purchases, cost management can also alleviate the need for additional financing for SMEs greatly. Since adequacy of raw materials is essential for effective running of business, SMEs need to assess factors such as economic ordering quantity, discounts from suppliers and credit terms that allow them to run at optimal level with minimal costs (Yu & Wang, 2010). Related to raw material management is production management that, for instance, would ensure efficient use of materials thus reducing wastage and obsolesce that may occur following extended periods of storage (Yu & Wang, 2010). Cost management in investing activities would also help to mitigate the depletion of cash flows required to sustain operating activities (He, 2010). By instituting cost management initiatives, SMEs can thus build up their reserves for use during periods of adversity.
SMEs can also boost their survival chances by instituting measures that avert operational risks. Among these measures is embarking on research and development activities that lead to development of new products or product lines (Yu & Wang, 2010). By diversifying their product offerings, SMEs become less susceptible to sales declines when the demand for one product is low. A second measure is to strengthen the management of profit distribution. Without appropriate systems that highlight how profits should be distributed, SMEs, especially those managed by owners, may risk distributing too much of the profits to the owners thus leaving the entity with minimal reserves (Yu & Wang, 2010). Once such reserves are depleted, the entity may be forced to scale down its operations in times of financial crises, due to inadequacy of operating funds, thus affect its growth. Measures that help to control costs and avert susceptibility to economic crises thus helps SMEs sustain their growth.
Corporate Management, Alternative sources of financing and Preparation of Accounts
Some of the challenges of SMEs result from the owners, who act as managers of the business, having minimal qualifications and skills on managing an entity (He, 2010). In such cases, where possible, separation of ownership from management may help an entity establish appropriate systems that guarantee its survival. Owners can thus appoint qualified persons to run the business on their behalf, thus establish the urgency to ensure performance throughout the entity. This is because appointed managers will be answerable to such owners thus will have the incentive to implement initiatives that better the organization’s performance, unlike owners who do not have to account to other individuals.
Other aspects of financing that would enhance survival of SMEs include evaluating alternative sources of financing. In this respect, alternatives to bank loans include venture capital and issuing stock to employees as a part of employee stock-ownership plan. Another initiative that may offer leverage to SMEs is acquiring existing enterprises rather than making greenfield investments. Through such a strategy, the SMEs can benefit from such aspects as existing distributor channels of the acquired entity (He, 2010). However, to increase their credit rating, hence their access to credit facilities from financial institution, SMEs need to institute financial accounting practices that provide information of their performance to the external lenders. Such may be made easier by separating management from ownership in cases where the owners lack the skills to institute appropriate financial recording and reporting processes. Go to conclusion here.