Growth SMEs

Growth SMEs

 

Introduction

            Small- and medium-sized businesses are essential within the social and economic fabric of the modern society. This is so, these enterprises contributes greatly to the economic stability and employment on local, national, regional and international levels. As this business sector is undoubtedly globally important, it is an imperative to determine and support how small and medium enterprises (SMEs) will thrive to better operate their businesses. Compared to larger, multinational companies, SMEs struggle to obtain finance. The paradox is that financial resources are available but it is their incompetency when it comes to investment readiness is the main reason why they find difficulties accessing financial support. This is, however, vital for the further growth and development of SMEs as an independent business sector.

In this report, growth SMEs through investment readiness will be discussed. Likewise, the factors affecting that readiness will be also explored and the changes that it may lead to. It is the goal of this discussion to determine how investment readiness impacts growth of SMEs.

Growth SMEs

            SMEs is increasingly becoming integrated in the Australian economy; a source of employment to almost 50% of the total population and with the same proportion to GDP. The growth of SMEs passes through stages including start-up, survival, development, growth and high-growth, indicating that growth is processual in nature and to some extent linear. Nonetheless, there is no single formula that SMEs could adhere into instead growth of SMEs must be understood on individual context. For one, innovation is crucial for every SME as it defines the competitiveness of the enterprise. Innovation manifests itself in new product and service development processes. This is in part of responding to the ever-changing customer needs, requirements and expectations.

            Growing SMEs also invests on and for market and technology linkages hence can be strongly considered as market-oriented. With connection to innovation, SMEs nurtures a strategy of differentiation which depends heavily on close client relations like that with other firms. Such a strategy goes beyond product customization. Growth SMEs, moreover, is more proactive in attempting to penetrate market niches thereby growing ahead of the competition and defending the status or position that it wishes to occupy or is already occupying.  

            When it comes to organization and management, growth SMEs are also defined by their effectiveness to employ organizational and managerial approaches. Perceived to be as important as the resources available for the SMEs, the organization structure must reflect definitive policy directions and efficient commitment to resources as well as the structures for using them organized. Oftentimes, growth SMEs have decentralized and participatory organization through which it can seek opportunities and gauge factors that threaten growth. Flexibility is another key as growth SMEs change organization depending on the several changes in the environment and how such changes will impact the operation.  Thus saying, a hybrid structure that combines functional and product management is a driver for the growth of SMEs.

            Next is team working which pulls together the involvement and motivation of the people working at the SMEs. Core roles are given to the entire organization members as executives and ordinary workers. Team quality is generally considered to ensure coherence through a shared philosophy of action. As such, tasks and functions are widely delegated while also communication is an important concern of the management. Growth SMEs also rely on the commercial and technical knowledge in the workforce thus better qualified management teams to cater to the demands of every function internally (Storey, 1999). An open attitude to welcome recruits from outside is also apparent and then, together with the incumbent, upgrade their abilities on a regular basis. With this, growth SMEs also tends to share benefits of growth to their teams such as incentive schemes.

            Either formal or informal, growth SMEs also depends on the role of alliances and partnerships. Interactions among customers, distributors, suppliers, service providers and competitors make possible a network that is outwardly-directed. Among these, however, customers play the most important role since SMEs directly interacts with them and on a continual level. A decisive factor in growth SMEs is the close customer relations that are associated with their market orientation and differentiation strategy.

            All of these growth factors inherent to SMEs require a financial support. For instance, research and development demands the involvement of experts, workforce needs to be upskilled through trainings and management involves employing new technologies. A better way for SMEs to obtain financial support is through equity finance from owners’ funds and other external investors. However, growth funds for their business activities are not readily provided for these SMEs (Storey, 1994). Investment readiness of SMEs prior to provisioning growth funds is scrutinized.

Investment readiness of SMEs

            As we all now know, undercapitalization is one factor that hinders the growth of SMEs more unfortunate on those who have the potential to widen scale and scope in the future. As such, there is a need for SMEs to enhance the ability to raise capital; by becoming investment ready, but this is not without difficulties. Notably, if there are enough resources within the SME, there is no need for that SME to acquire financial sources externally. Capital-raising processes particularly from external resources may hinder or benefit business and commercial objectives of the SMEs. There are also risks associated depending on the cost of capital including political and economic as well as industry, market, business, financial and product (Howart, 2000, p. 36; Peacock, 2004). In mitigating these risks, the main consideration is assessing whether the SME has the ability to generate sufficient returns to service external financial acquisition. This is where investment readiness is in question.

            To maximize the potential of success among SMEs is the objective of being investment ready. This is crucial since this is the basic barrier in accessing equity investment. Becoming business ready requires the SME of an effective management capacity and systems. The business lifecycle of SMEs require the consistency and spontaneity of skills and experience that are needed for the growth of the business itself. Not all SMEs, at the time of equity investment acquisition, are equipped with the suitable manpower adequate enough to support its economic endeavors (Department of State and Regional Development, 2007). Investment readiness would be therefore furthered by recruitment of highly skilled workers even in the board or purchasing an expert advice.

            A suitable business structure is also a must to become investment ready. Complicated business structures usually hinder accessing equity investments since it does not allow for future flexibility (New Zealand Trade and Enterprise, 2004). If the current corporate structure does not guarantee flexibility, it would be difficult for SME to grow the business especially since changes will be required internally upon approval of such equity investment. The effectiveness of the structure also partly reflects all the assets available for the SME and all assets that reside within the SME.

            Realistically, business valuation is required by the investors which mean that a part of the SME as a business will be sold to a suitable sponsor (Department of State and Regional Development, 2007). How much the business is worth would be likely to be asked prior to determining the equity available for that SME. In this way also, the health of the SME will not be compromised since equity will be based on its capability to provide returns. Noteworthy is the fact that since valuation could be considered an honest estimate of the market value of the business negotiation is plausible.

            Such a situation should be backed by a committed management that is also able to devote itself to it. SMEs could only grow through hard work and commitment of the people (Department of State and Regional Development, 2007; Douglas and Shepherd, 2002). An assurance that the management has a relevant personal, collaborative and on-going contribution to the growth of the SME is what investors are looking for. To wit, there are sweat equities or the non-financial inputs to the business and this is equally important as financial equities. Commitment is the key word and not just involvement that lapses over time especially when times get tougher than usual.

            How the SME will make money is yet another consideration of being investment ready. Evidently, this is manifested in the business model or how the business operates and generates revenues and profits (New Zealand Trade and Enterprise, 2004). Business model varies from organization to organization, and it is in this sense that this is one of the most scrutinized aspects of SMEs. A business model also defines the future of the SME and how it responds to the changes that the macro and micro environments are imposing on them. SMEs, needless to mention, are more prone to closure because of its lessened competitiveness compared to larger companies. This situation points to the next investment readiness requirement which is the investment structure.

            There is the need to know how the investments in SME will be structured and how investors will realize their investments. This should be reflected in term sheets, encompassing issues of how much capital is required, what it will be used for, when it will be needed and how much equity is on offer (New Zealand Trade and Enterprise, 2004; Department of State and Regional Development, 2007). In wanting to grow the business, there must be balance in terms of benefits for the SMEs and the investors. Through benefit sharing, risks could be also shared and divided between the two entities.

            Business plan is also critical especially since it is the blueprint of the economic trajectories of SMEs. Opportunities and how and why these could be realized are stipulated in this plan. As such, investment parameters could rely heavily on internal capabilities and how SMEs make sense of these capabilities to achieve identified growth potential for an SME. As part of investment readiness, SMEs has to ensure that it can professionally present business plan that can satisfy financial and non-financial considerations (Ernst and Young, 1997; Nicholas, 1999).   

Changes for the SMEs

            Investment readiness therefore is a process that could be realized mostly in the early stages of the SME’s development, that is, start-up and early development although it could be also supplemented on the latter stages. As investments enforced SMEs to change, perhaps its business core, one of the critical issues to consider is its business attributes and how these attributes will be aligned to achieve growth. Business attributes are not only about the financial and economic aspect of the business but also the empowerment of the people to grow with the organization. It is in this sense that sweat equities are more important. Investment readiness therefore not only puts in context the operation but also the people who will back the growth. This is important considering that the inability of SMEs to respond to the growth requirements indicates a lack of investment readiness (Ernst and Young, 1997).   

            Risk and return parameters from the side of the investors also changes the perspectives on present and future marketability of the SME. These means that in investment readiness scheme various factors such as market, financial and organizational factors should be measured and controlled. Potential market growth, sustainable competitive advantage and high barriers to sustainability are some of the market decisions that SMEs must take. Sustainable profitability and business valuation are the financial decisions and business model and strategic plans are the organizational decisions. These decisions are important to become more proactive in reducing the investment readiness barriers (Peacock, 2004).

            Yet another change that is critical for investment readiness of SMEs is its openness to outside interventions, for instance, Grow Your Business programs. There are specific authorities in Australia that devotes itself on providing services for SMEs intending to grow their business. Amongst these services are business development plan and business strategic reviews (Business Victoria online, 2009). Apparently, these two processes focuses on knowledge creation, and this is where Department of Innovation, Industry, Science and Research is most capable of since it deals with sustainability of Australian industries such as SMEs as well as competitiveness and greater productivity. The Department is also effective in developing and considering small business policy issues and ensuring the effective delivery of small business programs for which it has policy responsibility (Department of Innovation, Industry, Science and Research, 2009).  

            Prior to sourcing externally in terms of technical support, investment readiness also requires the SMEs to accurately assess the financial, commercial and economic situation and opportunities available for them. Capital raising requires that SMEs must first assessed its own financial capabilities (bootstrapping) rather than relying on external financial sources which may not be profitable in the end (NSW Government, 2009). The goal of investment readiness not only concerns the present of the SME but more likely its future. As such, business growth is not limited on information on how to raise capital instead on how the raised capital will be strategic for the SME.   

Conclusion

            In sum, investment readiness depends on the management capacity and systems, effective business structure, realistic business valuation, commitment, business model, investment structure and business plan. However, it requires and depends on the changes on the business lifecycle, investors parameters, openness and accurate self-assessment.

References

Department of Innovation, Industry, Science and Research (2009). Small Business. Retrieved on 2 December 2009, from www.innovation.gov.au.

Douglas, E. J. & Shepherd, D. (2002). Exploring investor readiness: assessments by entrepreneurs and investors in Australia. Venture Capital, volume 4, number 3, pages 219-236.

Ernst & Young and Centre for Innovation and Enterprise (1997). Investment readiness study. Canberra: AGPS.

Howarth, B. (2005). A keen eye for risk, and for a hot prospect. Business Review Weekly, 5 November, p. 36.

New Zealand Trade and Enterprise (2004). Factors making an investment opportunity attractive. In Investment + Readiness Guide.

Nicholas, K. (1999). Putting ideas to work is not easy. Sydney Morning Herald, 14 December, p. 28.

NSW Government (2007). Funding Business Growth – a guide to raising capital. Department of State and Regional Development. Retrieved on 2 December 2009, from www.business.nsw.gov.au/region/capitalraising/.

NSW Government (2009). Capital raising. Department of State and Regional Development. Retrieved on 2 December 2009, from http://www.business.nsw.gov.au/region/capitalraising/.

Peacock, R W (2004). Understanding small business: practice, theory and research. 2nd edition. Adelaide: Scarman Publishing.

Storey D. (1994), Understanding the Small Business Sector, Routledge, London.

 

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