SME’s Can Accelerate Recovery with an Improved Level of Financial Literacy

Few can doubt the importance of the Small and Medium-sized Enterprise (SME) sector to economic recovery in the US. I believe that enabling the SME sector to play its full role in accelerating the return to sustained economic growth is critical. The economic future of the US, and the return to economic growth on which we all depend, will depend on the contribution that SMEs are enabled and encouraged to make.

In the aftermath of the recession, America will need to overcome the constraints of sluggish demand, lack of financing and slow growth in business and consumer credit. A great deal has been said about access to finance for SMEs. Now is the time to accept that restoring pre-crisis levels may not be possible. Going forward, a more intelligent use of external finance will be a necessity for the success of SMEs. SMEs need to make the most of different types of finance and also seek appropriate support and advice.

The recent financial crisis led to a tightening of the supply of and demands for external finance that is still evident in the SME sector today. This is a reflection of the state of both the banking sector and the real economy. Both are currently fragile, and because they are recovering in tandem they will both take time to revert to pre-crisis levels. I should stress that the recovery, especially in terms of employment, will depend on new or growing businesses and their access to finance.

The start-ups and fledgling businesses that will help sustain the recovery tomorrow are right now trying to find their feet in an unfamiliar economic environment. In fact, the recession has exposed a gap in business skills and know-how that could be damaging the economic prospects.  Small business owners need to acknowledge business skills as distinct from managerial or sector-specific competencies, and harness the power of business training, specifically financial literacy.

The recession has dramatically highlighted existing gaps in the skills and knowledge of entrepreneurs and owner-managers of small businesses. Many of these are now having to re-learn the way they deal with customers, manage cash flow, finance and the marketplace, and the way they do business in general. A survey found that barely a quarter of SMEs had any managers with financial qualifications and 73% of owner-managers were unaware of programs to develop their understanding of finance.

I wrote a post on business acumen many months ago and I feel that without “financial” business acumen, SME’s will have difficulty in accelerating recovery. Business owners and managers must understand key business drivers for performance and the use of sound business practices. In order to remain viable, businesses must grow, make a profit and stay ahead of the competition.

I feel that it is time for all SME business leaders to bone up on financial intelligence. We all must understand financial concepts and analysis for the purpose of achieving the operating goals of the organization. Concepts such as cost of capital, working capital management, and free cash flow in relationship to analysis, strategic decision-making, and goal achievement.

It is important for companies to understand the real benefits of investing in the development of financial literacy not only of their executives and managers, but also of their entire workforce. In this way, every person in the company can build a sense of commitment to the vision, mission, and critical change initiatives of the organization. And in the same way, everyone in the company can contribute to the overall strategic success and financial health of the enterprise. Some learning objectives for financial literacy are:

  • Understanding basic financial statements and their management uses – Income Statement (P&L) and Balance Sheet
  • To learn market conditions and how they dominate business decisions
  • Understanding the difference between cash and profit, and the need to manage separately
  • Reviewing fixed and variable costs; Cost structure and capacity utilization
  • Budgets and cash flow forecasts and their value
  • The impact of inventory build-up and the need to control working capital
  • Ratios as metrics for management (e.g. ROA, ROI)
  • The specific financial metrics used to gauge performance, and why they are used
  • Variations in strategic direction, and their impact across the company

A major barrier to the growth of sustainable Small and Medium Enterprises is an inadequate level of financial literacy. This gap in financial education and practice is, largely due to a lack of comprehensive management training. This lack of financial literacy will make it very difficult to survive in a business, both in good and bad times.

Poor planning, underestimating market volatility and inadequate accounting can all result directly in financial losses for many sustainable SMEs. The return of SME growth is an important pre-requisite for recovery. Past recessions have seen SMEs lead many of the world’s major economies back into growth. With an improved level of financial literacy among SMEs, long-term growth and acceleration to recovery can be assured.

 

Jamie Wood, Avatel EVP

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1 Comment

  1. Dominic Osei Kofi

    I would like to commend you, Jamie, for your extensive study on the growth and sustainability of SMEs. It is indeed of a great necessity to invest in the financial capabilities of the executive and the entire workforce of the business as stated in your study. However, the entrepreneur must also not be financially blinded. Most entrepreneurs leave the financial aspect of their businesses in the hands of hired professionals. When such peoples are not guided by honesty and faithfulness as their guiding principles will end up defrauding the business but when the entrepreneur is him/ herself financially literate, he/she may have a questioning mind and demand detailed explanations on certain items rather than just admitting whatever is being presented by the handlers of the financial aspect of the business. Once again, bravo!

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