In my previous article, I have detailed the discussion of the careful practice of capital management among the SMEs industry of Africa towards its sustainable growth. Such focus area of Africa development has been my study for almost a decade to scientifically understand its operational dynamics and identify factors that obstruct its expected role as the engine of economic growth of the continent of Africa and search for ways to be resolved. I believe it may be my life long study area in the context of investment economics to promote and contribute to a customized indigenous system for the socioeconomic development of Africa. The content of this article will again discuss another sectorial challenge that distracts the potential of SMEs’ development and innovation for quality investment support.
At least the SME industry of Africa is slightly at ease now in terms of innovative boutique investment support compared to two-to-three decades ago. A very good observation, explain the category of modern investment funding easily accessible to SMEs businesses located on the continent of Africa, which are more of Seed funding and Angel financing. And to some extent, a small proportional rate of the SME sector is estimated to be 10% meeting the credit assessment requirements to qualify for Venture capital funding, which is the apex of boutique investment dealings of the capital market. We then quiz, why is it difficult for SMEs on the continent of Africa to access credit facilities from corporate agencies of international repute beyond the current Commercial Bank’s loans, with the very lowest interest rate comparable to boutique investment offers, which to some extent hold very high-interest rate packages? These concerns, as a challenge to the SME industry of Africa, will be addressed by the content of this article.
- [DATABASE AND INVESTMENT]
I must state emphatically that the engine of investment attraction and growth to any environment depends on a quality and reliable database. When an industrial performance dynamic of any region lacks the clarity of data for interpretation and quantification to easily forecast in probable proximity. Not even a sound legislature could create an avenue to attract investment to such a region. In fact, quality investment is repellent to an opaque and unpredictable business environment and casts questions to the credibility of its credit insurance firms to guarantee or collateralize for well-deserving private ventures to qualify for external funding. These challenges associated with a bad economic environment never conclude with logic implication that there are lack of sincere visionary ventures or non-existence of competent skills for producing successful business growth in such an environment. However, you will realize the same business performance, rated under the same visionary drive, but this time in different environmental conditions, like that of America, Europe or Asia market, and subjected to performance study for a period of 5-10 years. Empirical evidences justify the higher degree of success to such businesses in transitioning into a corporation as an entity, and possibly advance in its professional engagement in multinational transactions. Yet enterprises in Africa under a similar period of study will still be struggling in the business growth cycle, as defunct companies, because they lack the capacity to compete on the global level for the mere reason of access to quality and affordable credit. It is also easy to appreciate the fact that despite this complex herald of challenges that daunt the growth of SMEs in Africa, some of the entrepreneurs have strived to break through such a fog that obstructs the full potential of the SMEs industry in Africa to make a difference in the global business trade. What did they do differently? The next sub-topic will address the question.
- [MASTER YOUR BUSINESS GROWTH OPERATIONAL CYCLE]
Those few Entrepreneurs who started small as SMEs and are currently breaking through the boundaries of the business market of Africa to become internationally competitive may have been doing something different from the others to gain international attention and favour. Whether their cause of action is theoretically guided or has progressed through external assisted efforts, which you may not have the opportunity to tap into a similar network, these routine articles published on this wall, meticulously seek to consciously guide your operational skill for successful development of your venture in other to access quality investment.
The submission of this article does acknowledge and makes vital reference to the content of the previous article, which emphasizes the importance of working capital management as SMEs owners, and thereby argue that in other to distinguish your business for investment opportunities in an economic environment mostly downgraded by international rating agencies, requires a special skill in the management of your business finances to empower the business performance for a breakthrough. This implies you either have to empower yourself as the business promoter for that task or employ a competent person to undertake those responsibilities in mastering the authority towards your business capital structure decisions, capital budgeting decisions, and capital management decisions to pitch it accurately in favour of your company in any investment forums. Therefore, with a qualified officer holding a detailed and quality understanding of ‘profitability’ and ‘liquidity’ trade-off of the business in every stage of its growth cycle, as it is carefully presented in the works of (Karger and Bluementhat, 1994: Eljelly, 2004: Filbeck and Krueger, 2005) assures the sustainable guaranteed growth of the Business.
Any business recognized with a good credit management capacity, does depends on the quality of skill employed in controlling the business’ current assets against its current liabilities at any particular point in time. It is a popular notion that without sufficient capital, no business could run smoothly. Therefore, a good understanding of the capital operating cycle of a business and the time gap involved from liquidity to profitability becomes a strong anchor to draw investors’ interest and confidence in such an enterprise.
The capital operating cycle of a business is defined according to (Ross, Westerfield & Jaffe, 2005) as a period of inventory arrival, until the cash receipts are derived from the receivables. (Moss and Stine, 1993) further explained the operating cycle as the total average number of days required to purchase on credit, sell a product and collect sales, as well as taken into consideration all the ‘cash gabs’ in the cycle. When the capital operation cycle of the business, is perfectly mastered by the business promoters, it grants them the ability to accurately design a working capital policy in favour of the business management in the inventory of stock as a trading enterprise, debtors, cash, and short-term investments for the business to rely upon. With a quality understanding of the business operational cycle, it aids the business promoters to develop a qualified structured working capital policy to respond to the decisions on the level of investment needed in the business current assets and how it should be financed along with a defined credit policy. When the applied knowledge of the interaction between current assets and liabilities of the business is mastered by the finance officer, it strengthens the probability of attracting a well-tailored investment package favourable to the business towards its growth. It also helps to avoid any situation of overcapitalization or undercapitalization at any point in time, which carries within it a consequential effect.
I, thereby conclude under a careful industrial observation study of Africa, for an SME to transition to a corporate entity against all odds, yet uphold an international repute not losing its competitive edge, then the promoters of the enterprise must develop an exceptional interest in building a quality finance team to master the business operational cycle, which is prerequisite in designing appropriate working capital management policy to lead the firm to a sound financial footing. For instance, a quality capital policy guides the business to know whether to adopt the path of working capital investment policy at any particular moment or rely on a working capital financing policy for sustainable growth as argued by (Afza and Nazir, 2007). Both policy approaches come with its own benefit and investment opportunities. Yet it has its own consequential effect when the policy approach is poorly applied due to a lack of understanding of the business operational cycle.
Emmanuel Tweneboah Senzu Ph.D., is a professor of Economics & Finance, School of Social Sciences & Law, Njala University. A fellow to the technical research division of Sierra Leone Central Bank. Elected President of Frederic Bastiat Institute, Africa. † [email protected]