There are views on the relevance of modern finance that are generally adapted or formulated taking into account the vision of large organizations, thus ignoring small companies (McMahon et al, 1993). It is understood that this neglect of financial management in SMEs is the result of neglecting SMEs in the development of economic theory. However, the situation is changing due to globalization. Therefore, there is a view that small business financial management has not been developed with small business in mind. New empirical evidence raises the possibility that size may affect financial relationships in important ways. These findings could in themselves justify a greater emphasis on research on the effect of firm size on financial policy. Sahlman (1983, 1990) refers to what he calls “primitive rules” in modern finance. Indeed, this attitude explains the inefficiency of small businesses in financial management.
Ghanaian SMEs, like other SMEs, are missing out on modern financial theories. For example, CAPM is based on the following:
o The principle of risk aversion, that is, investors seeking higher yields and lower risks under equal conditions.
o The principle of diversification, that is, investors do not place all their wealth in an investment portfolio, and
o The principle of balance between risk and return, that is, the willingness to face greater risk in exchange for greater return. (Emery et al, 1991).
This may be related to the behavior of the owner who is not risk averse, seeking to make a lot of profit by importing from other countries with an unstable political situation.
These uses of CAPM for SMEs are truly unmatched in the studio. Most owner-managers in Ghana are risk averse but seek higher returns on their investments.
Working capital policy is somewhat related to SMEs in terms of their operations. In relation to the reasons why an owner-manager operates a business, there is no obligation to account for his actions. Thus, working capital management is influenced by this small business management style.
Working capital management seeks to meet two objectives:
i.minimize the time between the initial input of materials and other materials in the operational process, and the eventual payment of goods and services by customers; Y
ii. finance those assets in the most efficient way possible to obtain an optimal return on the capital employed.
It was found that the operations of SMEs in Ghana are related to the working capital policy in their quest to be efficient and timely.
For all intents and purposes, the control and management of debtors are difficult tasks. To effectively manage debtors, the following issues must be carefully considered, well planned, and controlled:
Credit period – The credit period granted to each customer must be considered in terms of the customer’s credit rating; whether the costs of the credit increase match the profits to be made from the sales generated by the terms of the credit; and the general credit period offered in the industry.
Credit standards must be established. For example, customers must go through credit evaluation scores to weigh the risk they represent. Generally, when granting credit to clients, the appropriate standard rule is to check the maximum period of credit granted; the maximum amount of credit; and payment terms, including prepayment discounts and interest charges on overdue accounts.
Based on my work experience in Ghana, one of the effective means was to accept postdated checks in addition to debtors. These must be distributed throughout the duration to make the payment as agreed with the client. However, default is inevitable in all circumstances. Despite any shortcomings, the techniques used above can enhance a company’s ability to control working capital effectively. For most small businesses whose total investments are represented in greater proportion by current assets, the techniques discussed above prove to be just as useful for their management as the importance of their financial management.
This is very important here because it clearly shows that most of the SMEs could stay in business for a long time if they could apply financial management techniques effectively.
There is much published research, including that of Olsen et al. (1992); Higgins (1977 pp. 7); and Babcock (1970), who strongly believe that growth should be viewed in a strategic financial management context. They emphasize a concept, which has been variously referred to as sustainable, affordable, or achievable growth. This sustainable growth is defined by Higgins (1977) as “the annual percentage increase in sales that is consistent with the financial policies established by the company”.
According to this definition in this context; suffice it to say that it makes sense to relate a company’s growth to its financial policies. By adapting one’s financial management policies to the annual percentage increase in sales (which could be controlled), there is the possibility of achieving sustainable growth and the ability to finance its permanent current assets, as well as non-current assets due to rapid growth. growth expansion.
However, it can be argued that the rate of sales growth can be influenced. For a company that intends to realize its full long-term growth potential despite problems securing external capital financing, the only viable growth strategy is profitability from the company’s operating activities and careful policy. profit distribution. It could also be argued that those SMEs that “don’t want to grow” can also apply financial management techniques effectively and survive in the market.
It is believed that the financial management of small businesses is different from that of large companies. In an article titled ‘The Uniqueness of Small Firms and Financial Management Theory’ Ang (1991), and ‘On the Theory of Finance for Private Firms’ Ang (1992), Ang considers firms to be small if they have certain characteristics and are small. business to share common circumstances, respectively. He later concluded: “Small businesses do not share the same financial management problems as large companies… the differences could be attributed to several characteristics unique to small businesses. This uniqueness, in turn, creates an entirely new set of problems.” of financial management… .. There are ‘sufficient differences between the financial management practices and theories of large and small companies to justify the research effort to study the latter’.
Another significant difference between SME financial management and modern financial management theories is the Capital Asset Pricing Model (CAPM) theory. It is a financial model that captures the relationship between profitability and risk; specifying how it affects the valuation of financial and physical assets.
CAPM is a simple, objective, market-based means of estimating required rates of return on investments that reflect the collective preferences of all investors in the capital market. However, for a small company, it is difficult to estimate the systemic risk (the risk of the entire system failing, for example, the stock market) because small commercial companies are not listed on the stock market or the investment is in a physical asset without right. informed market because the parameter is more effective if the investment is listed on the stock exchange. (McMahon et al. 1993). Then the question arises. So what does this have to do with a small business?
In a real-life situation, when there is some degree of uncertainty, the financial manager (just like the owner-manager) decides the course of action to determine the level of financing required and, indeed, the long-term financial strategy. .
Because owner-managers have so many duties to perform, the study found they often don’t have enough time to devote to long-term business planning. Instead, most of their time is spent on day-to-day operational activities and solving the current day crisis. Also due to the cyclical or seasonal nature of many small businesses, the amount of working capital required can vary greatly. The greater the seasonality, the less permanent capital a company has relative to its total requirements in peak periods. SMEs are in fact vulnerable to working capital management fiasco which can degenerate into financial mismanagement.