Financial management challenges for SMEs

SMALL and medium enterprises (SMEs) are a very large sector in our economy in terms of the number of entities that fit into the category. This is not unique to Malaysia. Consequently, a healthy SME sector would certainly be great for Malaysia in an increasingly challenging environment where product life-cycles are shorter and competition could come from any angle, domestically or abroad.

One of the key drivers in sustaining a business is the quality of the financial management practised in the economic entity. Cash is the blood for business and when cash flow is not managed properly, sooner or later, the entity will have to face its eventual demise.

In a 2003 report which looked into the management needs of SMEs in Canada, it was noted that SMEs would need to go through four stages of growth before reaching the stage when they could compete globally. The stages are:

1. Start-up stage where the business model applied is validated;
2. Fast-growth stage where the business is growing for survival; revenue starts to grow as products or services receive market acceptance;
3. Sustainable stage where profitability can be sustained and the entity reaches a maturity level with proven business model and leadership;
4. Global enterprise where the entity continues looking for other opportunities to sustain growth.

The funding needs of entities at the different growth stages differ as well. Entities at the start-up stage hunger for seed financing as what drives most of the entrepreneurs at that stage is purely their vision of being successful.

The financing risk at this stage is very high as the entities have yet to prove the validity of the business model adopted. While passion and energy are appreciated, they could not mitigate the risks of selling products with no market or demand for them or with manufacturing outfits that could not produce products at the right quality.

The fast-growth stage, as the name suggests, is when funding is required to support a growing business. This is a critical stage as failure in managing finance could turn an optimistic outlook into an ugly nightmare.

A growing business would require additional funding to support the growth of inventories, receivables as well as to bring in new production capacity. This stage could also inject the false sense of success into the business owners. Some may end up allocating the limited funds to worldly rewards to themselves such as new cars or even life partners.

Once an enterprise reaches the sustainable stage, the financial management capabilities are expected to reach certain maturity in ensuring earnings are retained and returns to the entrepreneurs are maximised. However, if the entrepreneur is not careful, cost could outpace profitability and the risk of declining business remains real.

At the global enterprise stage, the issues are about growing and competing with competitors in different markets. This could be through acquisitions which may require external financing. Establishing cross-border presence could also create new financing challenge as access to finance in the new market abroad may not be as straight forward as it is domestically.

The issue of whether adequate financing is made available to the SME sector is a never-ending one. The reasons are very simple.

First, the number of entities in the sector will continue to grow, and any amount of financing will not be enough. 

Second, chances are the group that may have difficulties in accessing funding from banks and other institutions would be those in the start-up stage or even at the fast-growth stage as these are the stages where the risks are the highest.

Banks and financial institutions are there to make profit, and taking risks unnecessarily may not be a great corporate governance practice either. In Malaysia, the government has and continues to address this gap through guarantee schemes and other incentives. We have to remember, whenever this sort of initiatives are made, we the taxpayers are the taking the risks.

There is no single solution to improve the financing gap apart from efforts by all stakeholders in this delicate issue.

The SMEs themselves should shoulder the highest responsibility by ensuring efforts are made to improve financial management in their enterprises. It is not uncommon for SMEs not to keep proper accounting records. How do they demonstrate to the bankers that they deserve financing when they are not sure of the financial position of their businesses?

As mentioned earlier, a growing business requires additional financial management capabilities. Costing, for example, is very critical as a business should not be selling products below their production cost. But don’t be surprised if this is happening in many enterprises simply because they do not operate with the correct information.

SMEs must be willing to invest in people and system in building capacity in financial management. Funding is meant only for deserving entrepreneurs with good business model and responsible management. The challenge is how do entrepreneurs prove this to the potential funders? Answering the question is part of entrepreneurship.

This article is also published at the Edge Malaysia website here:

http://www.theedgemalaysia.com/commentary/161095-financial-management-challenges-for-smes.html

Age Was Not the Hindrance

It was certainly a classic ending at the Maybank Malaysian Open golf tournament held at the Kuala Lumpur Golf and Country Club today.

Watching the eighteen year old Noh Seung-Yul birdied the 18th hold to seal the tournament was certainly exciting considering the challenges that he had to go though after his ball went flying towards the 10th hold. Worse was the noise of the crowd cheering K.J. Choi, a 39 year old Korean champion, when Choi birdied his final hold to tie the score with Noh. Keeping his cool, Noh hit his second shot which landed on the buggy track near the green.

Despite needing two free drops, Noh managed to make a wonderful chip, passing a lamp post and landed the ball around two and a-half feet from the hole. He later held a rather comfortable put.

When interviewed after his winning, Noh acknowledged that K.J. Choi had told him that it is about time for him to win tournaments.

Age certainly was not an issue in deciding who would be champion. Certainly in an international tournament like this, quota - something that some Malaysians like - will not apply as well. If we observe how Koreans fly to Malaysia in drove to practice their golf, having Koreans winning even the US Masters should not be a surprise. On the other hand, Malaysians like to declare higher handicaps, with the hope of an easier pathway to win, just like how much we love subsidy.

We should reflect on Noh's winning and ask ourselves why aren't Malaysian even in the top 10 when the tournament is played on our home ground? After all, golf is a competition between the player and the course, it is not a physical contest.

BNM Moves OPR to 2.25 Percent

Following up on it's earlier statement to normalise monetary conditions, the Monetory Policy Committee of Bank Negara Malaysia (BNM) today decided to increase the bank's Overnight Policy Rate to 2.25%. Such move would result in the increase in the interest rates on bank borrowings in Malaysia.

In a statement today, BNM also predicts that the general price level will be on the upwards trend in line with higher economic growth resulting in moderate inflation. Such move indicates BNM's confident of the recovering economy. 

While higher interest rates may increase cost of capital, higher economic activities would provide more opportunities for enterprises to experience growth. However, better understanding of the landscape and effective implementation of strategic plans would be among the critical ingredients towards business sustainability.

Decision-making perspectives

JUST imagine we are 20,000 feet above the ground and trying to figure out how to reach a certain destination. Chances are we will find it impossible to get the route mapped out, as things will appear very small to the naked eye.

However, we may be able to observe larger areas of land and space, which provide us with better understanding of the overall landscape.

When we are on the ground, everything would be clearer but our vision is limited though it is not blocked by anything in front of us. We may not be able to know that a car is coming from around a sharp corner or a crocodile is waiting to snatch our legs in a beautiful river.

Sometimes, even when things are sharp and clear, we may not be able to see clearly because we have problems with our eyes, being short-sighted or otherwise. This is where visiual aids will be handy.

The situations highlighted above may be similarly applicable in decision making. While not necessarily true all the time, the quality of decisions would be influenced by how the decision makers view facts or information in arriving at the decisions.

Boards, for example, are supposed to chart the strategy for the organisations under their care in ensuring the missions and objectives of the organisations are achieved. This is akin to having a 20,000ft perspective of the landscape.

Management, on the other hand, are operating closer to the ground and should have a clearer view of the realities and what is going on, provided their views are not blocked.

It is the combination of the different perspectives which help the board and management to make strategic and operational decisions. It is important for the management to appreciate the wider perspectives of the board and for the board to be fed with information from the ground to validate their understanding of the landscape. 

What are the possible circumstances where things could go wrong?

First is when boards and management teams are looking at two different directions. While this may sound funny and impossible, it could happen when there is a breakdown in communication between the board and the management.

The risk here is that a board would be fed with information which is out of line from its perspective. This is where it is important for the board members to have the acumen to understand and evaluate the facts and challenge management when they have concerns.

Second, the management could be feeding the board with information which only supports the views of the board while suppressing alternate facts or viewpoints.

This would certainly make the board happy and proceed with whatever decisions which they are pursuing but such happiness would not last when realities start to reveal their true colours. Such situation would normally happen in organisations where rewards and performance are taken lightly. 

Third is where both the board and management fail to appreciate that there are blind spots in their perspectives and fail to detect the changing landscape. Given the dynamic environment in which we are living, the awareness about how much things have changed and would continue to change is really important.

Given that the directors are looking at the bigger picture, their perspectives on issues are wider. They may decide to embark on horse trading in ensuring the best interests of the organisation are served. Failure to understand the perspectives of the board may also result in the decisions being understood differently by other parties, and this could result in implementation failure.

Sometimes decisions need to be made based on certain timelines and all relevant facts and information may not be available. In such circumstances, framing the right questions to be addressed is very critical so that the process of gathering data and information would be more focused and the process could be shortened. Wrong questions would lead to wrong facts being gathered and wrong decisions formulated.

The larger an organisation, the more challenging the decision-making process as more stakeholders would be affected or become involved in the process.

Having specialised committees of the board or management could be one approach to mitigate the risks in making decisions as discussed above. This will enable members with more in-depth knowledge to look at details and review different views. Audit committees and nomination committees are examples of such specialised committees.

We have to remember that life revolves around many decisions that we make every day. The clothes that we wear, the food that we eat, the route that we choose and the movie that we watch are examples of decisions that we make daily in making our lives meaningful.

In any decision that we make, please pause and consider the perspectives from which answers to our problems are being formulated. Hopefully, this step will provide us more insights before the final position is decided.

This article is also published on the Edge Malaysia website here:

http://www.theedgemalaysia.com/commentary/160578-decision-making-perspectives.html

KL’s taxi service and the New Economic Model

WHAT has Kuala Lumpur taxi service got to do with the New Economic Model? If we consider a number of issues relating to taxi services, we could see its relevance to the economic model, which would be made public next month. Among the issues are:

•    It is a component of the service sector;

•    There are issues relating to the business model applied by the industry;

•    Subsidies and the green economy;

•    Effectiveness of policy implementation; and 

•    People's attitude towards change

Taxi service is definitely a component of the services sector, the sector that is supposed to propel Malaysia into a higher income economy. While the key word here is service, the state of affairs of the industry, particularly in Kuala Lumpur, is less than satisfactory.

If we observe the behaviour of taxis around the Kuala Lumpur City Centre (KLCC), the icon of the city and the country, we could see something that would not make us, as a country, proud. Taxis waiting by the roadside where they are not supposed to, travelling slowly at the side roads around KLCC with the hope of being hailed by shoppers (perhaps this is the only place where they do not speed) and picking up passengers in places where they are not supposed to.

The problem of overcharging is something which we hear frequently, especially involving visitors from other countries. Ask any expatriate friends, and they will share with you how many times they were charged exorbitantly whenever they use taxi services in the city.

If service is the sector that will boost our economy, why is it that basic services like taxis cannot achieve an acceptable standard? Could it be that the business model applied by the industry is a reason for the taxi service being in its present state?

Taxi permits are mostly issued to companies, which in turn lease them out to drivers for daily rental. Although the reason behind such practice is to ensure high quality service, the practice inherently transfers the risks substantially to the drivers. 

Each driver has to earn a minimum income just to enable them to pay the daily rental before he starts to earn his "salary". The more permits owned by a company, the higher the income it would earn. Such arrangement do not work; otherwise, we would not have been hearing complaints about taxi services.

Is it not time to re-invent the business model so that risks and rewards are equally shared by the companies and the drivers?

To ensure taxi service is offered at an affordable rate, the price is controlled by the government. At the same time, the price of gas is also subsidised to reduce operating cost. Could this be a factor why the service level is not satisfactory?

Does the approved rate enable taxi drivers to earn the level of income that allows them to have a reasonably comfortable life in the city? If the rate is too low, we should not be surprised if the drivers start to apply all the tricks in the book to earn extra revenue.

Who ultimately pays the price of the subsidised gas? Although directly the subsidy is borne by Petronas, the oil company that is ultimately owned by the rakyat. The last thing that we want is a system that subsidises service providers who earn sub-optimum income and provide sub-standard service. Looks like it's a lose-lose arrangement!

A less then desirable taxi service would force people to use private transport, thus increasing our carbon footprint. This is something which will be more important going forward.

The prime minister had made a pledge in Copenhagen that we will reduce our carbon emissions. Could we achieve the target if our public transport is not efficient and private transportation remains at the level it is now, if not growing further in the future?

The issue regarding taxi service in Kuala Lumpur is not new. The question here is who is responsible and what happens to the people in the department which is supposed to solve this problem? Are they, at the minimum, not embarrassed as the quality taxi service deteriorates over time?

The situation around KLCC should be a clear indicator of the worsening situation and the failure of the relevant agencies in doing their work. Just imagine the consequences of failure if they were to work in the private sector.

While Kuala Lumpur citizens have accepted their fate and have to live with the existing taxi system, any attempt to shape our economy would require people to change. If change could not be instituted at a small component of the service sector, such as the Kuala Lumpur taxi services, the risks of resistance in larger and difficult components should not be underestimated.

This should be the concern of our economic planners in rolling out the new economic model.

I look forward to hopping into any taxi anywhere in Kuala Lumpur and being driven to any destination and charged the exact price as shown by the meter.

This article is also published on the Edge Malaysia website here:

http://www.theedgemalaysia.com/commentary/160126-kls-taxi-service-and-the-new-economic-model.html