CONTRIBUTIVE FACTOR OF AFRICA-SMEs DISINCENTIVE TO VENTURE CAPITALIST FUNDING

Photo Credit To E. T. Senzu

A.            SMEs Definition & Modus Operandi

The desire to present this article is the collective beliefs, which is empirically supported that the continent of Africa with more of developing and underdeveloped economies, has a single option as the most effective and innovative way to minimize the rate of unemployment escalation and promote an income generation environment, which will stimulate positive socio-economic welfare progression, highly depends on Micro, Small and Medium Scale Enterprise (SMEs) empowerment as private-sector engine and quality government regulation in policy-wise.

The most common criteria used to define SMEs venture are based on the number of employees, total investment, and Sales turnover (Burns & Dewhust, 1996; Bushong 1995; Holmes et.al, 2003).  The Republic of Ghana’s definition of SMEs is Enterprises engaging employees from 1 up to 99 with the minimum start-up capital of Gh₵100,000 approximately within the range of $16,000-18,000 depending on the Cedi to dollar exchange rate ratio (Ministry of Trade & Industry, 1999). The Venture Capital Fund Act, 2004 (act, 680) in Ghana defines the SMEs industry to be made-up of institutions undertaking economic activities whose working capital never exceeds $ 1 million.

In 2004 when the legislative body in Ghana called National Board for Small Scale Industry undertook a study on the habit of ‘Records Keeping’ of membership, it turns out that out of over 450 SMEs firms it engaged in Ghana, there was an observation that less than 145 of SME firms approximately 32% were having some kind of business operational records, even with the 145 SME firms, an estimated of 80% has a poor records documentation relying on Cashbook and Sales day book as the business records such that the standard quality of the records to provide sufficient financial information of the business for a reasonable forecast and decision making, becomes disastrous.

This poses a simple question, how was the daily decisions and management of such type of SME firms with no book records or with poor records keeping handles issues relating to the future growth and impact performance of the business taken into consideration their investment capital and the expected rate of return on investment. (Busman, 2007) posit management of any venture needs both financial and non-financial information to make effective decisions in achieving objectives of the organization. Finally, a noted sad situation of the SME industry is the recent supervised research paper of students at Cape Coast University, Ghana. They reported from their field study that 52% of the SMEs –managed owners have no separate account of their managed business with their personal account, only 48% did have such separate accounts (Mensah et.al, 2020).

B.            Venture Capitalist entrenched perception of SMEs

The following are the three general ways that venture financiers understand and analyzed SMEs in a geographical context

  • SMEs has a relatively small share of the market and unable to influence price or quantity of goods unless proven otherwise
  • SMEs firms are managed by their owners or part-owners in a personalized way without a medium of formal management structure unless proven otherwise
  • SMEs firms are independent, affording the owner-managers free from outside control in making a principal decision unless proven otherwise

Hence when a venture capitalist approaches any SME firm to fund its operations, it will first seek for it ‘Golden document’ which is the historic accounting information. Then extract four key ingredients out of it for risk analysis projection and forecast, which are as follows;

  • The net worth of the firm
  • The Sales revenue
  • The turn over ratios
  • The employees and management structure

Summing it all as a basic investor requirement is the ability for the financier to hear that still voice from the business upholding the Golden Rule of Accounting (Do not go to bed until the debits equal the credits).

It is observed within the West Africa region that 5 out of every 10 SMEs as ventures in the ECOWAS region best fall within the category of informal sector definition criteria. And the 3 out of the remaining 5 SMEs uphold a record-keeping, which is a disincentive to venture capital funding such that any attempt to assist such firms to attract venture funding will lead to unethical creative accounting information.

Hence, the very essence of this article is to instruct a high sense of basic accounting responsibilities to the SMEs who have a future desire to outsource external working capital for business growth and expansion.

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Emmanuel Tweneboah Senzu is a professor of Economics and Investment Banking. The article is extracted from the field engagement and observational reports in his dealings with investment for SME firms in West Africa. † tsenzu706@gmail.com

Post source : Library of Frederic Bastiat Institute

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