While researching the causes for Small Medium Enterprises (SMEs) failures, Australian editor Cara Waters found that financial mismanagement is the biggest single cause. Until SMEs get their financial houses in order they are in great danger of failing or facing bankruptcy.
Government has acknowledged that SMEs are major contributors to employment growth in South Africa. It is for this reason that the national development plan (NDP) has been designed to deal effectively with extreme poverty, extreme inequality and unemployment among other societal ills and to support the role of SMEs. A company’s financial health needs to be planned and directed. Procurement plays a big part in this as it is considered to be one of the most essential, and in most cases costly, business operations, says Rudeve Ruvengo, Financial Mentor at The Hope Factory in this month’s SmartProcurement.
For an SME to achieve financial excellence it will need to be able to survive financially, especially in the early stages of its existence. The owner’s capability to make crucial financial decisions is key.
Being smart about procurement means that a company needs to have a well-defined ‘scientific’ approach to the procurement decision making process, aligned with its ultimate goals. These goals must be aligned with the company’s main objectives, for example, maximising the owner(s)’ wealth, social and environment objectives. This is normally referred to as the ‘triple bottom-line’ and ideally procurement should happen within the auspices of keeping this triple balance intact and in place.
Procurement entails making a financial decision that is informed by the company’s historical financial information and SMEs are not an exception. Thus, it is important that the company clearly outlines its procurement strategy and complements it with relevant internal controls that will guarantee the intended outcomes.
SMEs have thin margins compared with large corporates. This means that all the factors that lower the SME’s bargaining power directly and negatively affect its pricing strategy. One wrong move in procurement will see the anticipated profits of the SME being wiped out and the company’s existence immediately compromised and left in a financial mess. This further strengthens the case for financial excellence in SMEs – decisions should primarily be based on financial factors, and then on all the other qualitative factors. This will help reduce the risk to an SME and should be considered as part and parcel of risk management.
Effective risk management requires the identification, measure and transfer of risks. Financial analysis flags all the risk areas in a company and, therefore, assists in management decision making, including the procurement process, which contains risks because business is a ‘zero-sum’ game, for example, one’s profit or loss is directly correlated to a competitor’s loss or profit.
Large corporates can recover from one or many bad procurement decisions because they have larger incomes, however, SMEs do not have that luxury – in most cases a SME’s fortunes are inter-linked with the owner’s. Uninformed decisions in procurement may cause financial recklessness; therefore it is important that SMEs prioritise financial excellence as this can mean the difference between success and failure.
For more information on supporting or developing SMEs please contact The Hope Factory.