What Are the Financial Management Capabilities For the Growth and Sustenance of Small Businesses?

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Current asset management was found to be one of the main ingredients for growth and sustenance of small businesses in Ghana. It was found out that an effective working capital policy influences a small company’s expected future returns and associated risks. The purpose of current asset management is to have an effective working capital policy. An effective working capital policy, must exhibit the following features in its code: Effective stock and credit policies, control over working capital, maintaining current assets that can easily be turned into cash, efficient working capital management, level of liquidity risk that management are prepared to accept, the industry within which the firm operate, the type of products sold and how to finance working capital? The ability to manage and control current assets-cash, stock (finished goods and work in progress), receivables (debtors)-was very vital.

Stock or inventory is the least liquid of current assets. If stock is managed effectively, it can be turned into cash very easily. Stock was being wasted due to the fact that most businesses could not or do not know how to manage their stock by applying even the traditional “FIFO-LIFO” method, and paid huge sums of money because they have too much stock; some of them becoming obsolete with the consequence of loss of cash.

It must also be said that debt collection is a very difficult task to embark on in Ghana due to any one or all of the following:

i. The fact that the address system had not developed to include citizens in a database to make debt collection easier,
ii. The practice of “teeming and lading” where traders with little or no capital decide to “turnaround” the funds from the trade credits into other businesses and sometimes the end result is losing the whole money to the detriment of the creditor thereby causing the business to go bust.

In offering trade credit, firms get exposed to the risk of default thus tying financial resources leading to ultimate loss in cash and consequently cashflow.Effective management of debtors is thus an antidote to sound current asset management practice. SMEs in Ghana usually apply trade credit policy as a tactic in their strategies to woo customers. The reasons for offering trade credit include increase sales and marketing . A whopping 85% of all the data analysed (including individuals) showed that the respondents were and still are practicing financial management.

In many cases, too, because stock control policies were non-existent, cash was locked up and affected the cash flow of the firm. Basic needs to run the company day to day suffered-for example in some instances wages of staffs became difficult to pay with its attendant problems.

Effective regular banking practice is another financial capability identified through case study by observation. For example a firm was operating with an overdraft facility and managed to negotiate with the bank concerned making sure that the bank had some one on the premises to collect the daily cash sales. This improved the cash flow and helped to reduce the interest paid to the bank. In the event where a firm cannot do the same, the cash sales must be paid in first thing the following day .

Relevant source of financing was found through the case study to play important role in the financial capabilities of the small and medium firms in Ghana. A firm’s ability to identify the relevant or right source of funding needed like overdraft facility, short-, medium- or long-term loans in terms of its circumstances or type of business operations, it stands in a very good stead to grow its earnings, pay less interest to the bank, and can look forward to sustain the growth and for that matter the firm in the long time to come. The research found that those firms which honour their obligations to the banks were always able to raise money from the bank to expand their business or meet unexpected issues.

It was also found that effective control and monitoring of financial plans is a financial capability. It is one thing to manage finances and another to monitor and control finances. For finances to be managed effectively, there should be regular controls (restrictions as some described it) and monitoring (check or observe closely) the financial plans by which the finance (and accounting) is being run in the company. Changes and deviations could then be made in some instances to streamline the plans. For example if in monitoring and control it comes out that the reaction of the market will affect the ordering of more goods, this could be delayed or stopped altogether to save cash for the business which in the long run can save the firm.

Thus, topping up their implicit strategy and knowledge, owner-managed business can be a force to reckon with in the business environment.

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