We have explored the challenges small and micro businesses face from the banking sector. Many owners of such entities believe they have solid business ideas and cannot understand why lending institutions do not give them the time of day when they apply for financing. Many believe that it is a question of race, that one ethnic group is favored over another. Others believe it is the legacy of our colonial and slave past. However, I do not believe that these reasons hold much water. Business persons must learn the language of business, contained in the financial statements and the laws applicable to business.
Most micro and small business are created by individuals who may be skilled in a particular area, for example, persons who bake coconut bread, mechanics, electricians, plumbers and so forth. Unfortunately, many of these artisans though skilled in their areas, have less skills when dealing with costing a job for a bid in a construction project or estimating the cost of making a particular item they have for sale. These persons are even more intimidated if they have to prepare a proposal for financing from a financing institution.
Government has provided enabling legislation and has created institutions to assist small and micro businesses over the past several decades since independence. Government has also created bodies such as the Barbados Investment and Development Corporation, the Enterprise Growth Fund and Fund Access to provide financing and technical advice. Despite these efforts it is still a challenge. It is estimated that most small businesses fail within the first five years of operation. The top reasons for these business failures are:
a) Decisions based on insufficient management information (MI) . One must understand the financial drivers in your business, in particular your gross and net margins and your breakeven point.
b) Businesses without a plan B often fail. Make sure you have a risk register, with countermeasures to eliminate the main risk in your business.
c) Make sure your expansion can be supported by either long-term capital, working capital, or both.
d) Avoid concentration risk;
e) Losing sight of the core values of the business.
Individuals considering entering the arena of business should seek as much information about the market they intend to target. ‘Who is my customer, what are their habits, where do they shop, where do they eat, how much of their budget do they spend on entertainment and so forth’.
Persons considering entering business should determine what their cost drivers are; I am referring to the areas of their business which incur the cost (labour, materials utilities are examples) in providing goods and services. They should also consider which goods to services they provide, generates the highest profits, that is understand your value chain.
In developing your business plan provision must always be made for adverse business conditions. Failure in providing more than one scenario, especially where economic and market conditions may be quite challenging, should always be considered and included by those investing in small and or micro business. Those businesses which have prepared plans for adverse business conditions tend to access financing more easily, and adapt more quickly to changing circumstances and thrive.
One of the more important areas of the business is the generation of financial statements. Financial statements convey information on how the business is performing, whether the business is profitable. They also show whether the assets in the balance sheet are being used efficiently in generating profits and provide information on the cash flow from operations. Cash flow from operation is required to compensate investors, pay back debts, and fund investment activities. In addition, the financial statements provide information of whether the capital structure of the business is sound, and whether the level of debt is sustainable.
Financial institutions pay close attention to these statements. Small and micro business owners may lack the ability to generate such statements which are vital to creditors and the owners of these entities. The information technology revolution has made the availability of accounting software relatively inexpensive. Small business persons therefore should invest in such software and take advantage of training offered by entities such as the Barbados Community Colleges unit that deals with small enterprises, if they wish to improve their knowledge of the financial performance of their businesses.
I would also suggest that perhaps the most important aspect of small and micro business is the access of the owners of such entities to sound business advice. Accountants and other finance professionals can provide such information. However, owners of small and micro business also require mentors, older retired business persons, to provide additional guidance to such entities. Access to their accumulated experience and wisdom can be of tremendous assistance to owners managing their enterprises, particularly in periods of growth, dealing with employees and suppliers and expanding into new areas of business.
Edward Hunte is an Attorney-at-Law, the holder of an MBA with concentrations in Economics & Finance, and was also an economist with the Ministry of Finance and Economic Affairs.