Dear SME owner, your business needs an effective finance function, not funding
The writer

Dear SME owner, your business needs an effective finance function, not funding

I have come across many SMEs from diverse industries and experienced first-hand, as a consultant, financial analyst and advisor, some of the challenges they face. I was privileged to engage these businesses because they were looking for financing. 

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After a decade of working with and observing these companies, and upon much reflection, I have come to one conclusion about what impedes the growth of SMEs. 

It is not a lack of credit or funding but rather the need for a robust finance function. I will share three business cases that demonstrate my view.

The first is my engagement with the owner of a small business. The founder believed that the company was doing well. I asked him to explain how he accounts for the value generated in the business. 

I realised he needed to account appropriately for the business's total cost. I knew after our conversation that my friend's company was bankrupt and dying a slow death. That is what eventually happened. This experience is similar to several small businesses I have encountered.

The second is a relatively large business with an impressive list of clients in a vibrant industry. The founder and CEO is very hard-working and actively involved in the business. He also believed all was well. He had a finance professional who kept the accounts. 

He has been working hard to overcome the difficulties he has experienced financing his business with a high-interest loan. He mentioned to me recently that the company is reorganising and looking for potential investors. 

He was also working on constituting the board. I received this message from him a couple of weeks later, "I just received the Q1 income statement, and it appears the business is insolvent". I was not surprised.

The third business is a regulated financial services business. I have encountered many cases and will pick one as my representative case. It's very elementary to paint all the challenges these companies experience with the broad brush of ineffective corporate governance. 

In this case, the management team had been struggling to determine the value of their business even though they had executives in the team with a finance background and professional qualifications in Accounting. 

If they could not estimate the value of the book they were managing, then it's not surprising that the business is in trouble.

Innovative solution 

In all the above cases, the businesses did not fail because of an innovative solution by a competitor, new technology, change in client preferences, or lack of demand. 

The managers of these businesses had not invested in a finance function that produces relevant and timely financial information on the business operations for effective decision-making. 

They could not also analyse and make informed financial decisions regarding the business.

My view is that the biggest challenge stifling business growth and expansion is the underinvestment in the finance function. It is difficult for any enterprise to scale sustainably without a significant investment in the finance function. This challenge has become a hurdle for many SMEs in Ghana.

When a patient visits the hospital, depending on the situation, the doctor may conduct a physical examination and then request an x-ray or some tests to confirm a prognosis. The X-ray provides critical information on the internal state of affairs that may not be apparent when a doctor conducts a physical examination. 

It's crucial that the machine is functional and the X-ray is performed correctly. The radiographer is bound to make mistakes and treat the process lightly if the radiographer does not fully appreciate the critical role of the X-ray in the care process. 

When the X-ray is ready, the medical professional needs to have the capacity to interpret the X-ray before determining the next steps. 

The same is true of enterprises. Beyond the plush offices, giant billboards and the ringing of cash registers, the financial statement is the x-ray for any business. The financial statements present the state of affairs of the business. Several SMEs underinvest in this process.

Inappropriate orientation 

Inappropriate orientation regarding the preparation and use of financial accounts has hampered the development of the enterprise. Several SMEs perceive financial statements as only necessary when the company seeks bank financing. 

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This perception needs to change. The Banks also know that the financial statements are not a true reflection of the business and hence do not rely on them for funding decisions. 

Business owners need to view the process as a means through which business managers understand their business and assess the effectiveness of their decisions. Professionals involved in the function need to do better for their companies.

As noted by Steven Paladino, CFO of Henry Schein, "The first role (of finance managers) is to produce financial information that is accurate and timely and to make sure there is a solid system of internal controls. 

We can't do anything else until we get that right". It's public knowledge that several local corporations prepare their financial statements several quarters after the end of the financial year. In the same jurisdiction, multinationals of the same size competing in the same industry prepare audited accounts on time.

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Correcting the underinvestment in the finance function facilitates enterprise growth as the challenge is not lack of credit but rather the underinvestment in the finance function. This idea holds at the national level. Businesses must follow basic financial management practices in an orderly fashion. 

First, SMEs must invest in analysing and planning for the future performance of the business before considering the financing needs of the business. Business financing will always follow an effective finance function, if needed.

…..be of good cheer!

The writer is a Leadership Development Facilitator, Executive Coach and Strategy Consultant, Founder of the CEO Accelerator Program, and Chief Learning Strategist at TEMPLE Advisory. The mission of The Leadership Project is to harvest highly effective leadership practices and share them in a manner that other leaders can easily incorporate into their leadership practice. If you have an idea or leadership practice to share, kindly write to [email protected]. Until you read from us again, keep leading…..from leader to leader, one practice at a time.

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