Working Capital Management among Small and Medium Scale Enterprise

Introduction

Some say, great things comes into small packages. If this idea can be applied to the business sectors and industries, therefore, there is a significant effect in the growth of the economy. In the competing arena of small and medium scale enterprises, the idea of financial cycle can be emphasized. In the natural a small or medium type of business doesn’t need to purchase or structure additional building or plantation or invest in the major companies. Most of the proprietors have the idea of making their financial assets and liabilities to adopt in the changing world and at the same time foster the growth of the business.

Working Capital

According to the professionals, the working capital is the idea where there is collaboration between the current assets and the current liabilities. Both are working together to achieve the essential needs of the business. If the business manages to pay all the liabilities in a relevant short period of time, obviously, the proprietor/s have a feeling of relief. In their engagement in the microfinance institutions, loans or financial supports are subjected in different rates. If the business had a tight grip on the control of the financial, there is no doubt that the business can gain advantage against the other competitors because the revenues are solely belongs to the business. On the other hand, the business did not pay much attention on their financial situation; the business might find itself in the middles of the consequences. If the business is engaged in three or more financial or microfinance institutions, definitely the business will sooner experience the drastic situation such as total loss otherwise, their business venture is really effective in the market.

Microfinance Institutions that lent soft loans are focus on the recovery of the livelihood program and there is a significant increase of these institutions and operating to accommodate the spread of the small-scale and medium sized businesses. However there are offered different financial supports that can help in the coordination of the working capital. Soft loans are the common types of financial sources that the small and medium enterprises took for the financial supports. The soft loan provides capital and aiming to strengthen the institutional capabilities of the enterprises. They are also charging low-interest credit lines which are ideal because there are controls from the government (ADB, 2007).

The majority of the financial framework of SMEs came from the financial institutions. The interest rate they set on the SMEs that are lower/higher than the prevailing market rates is an issue. If the interests rate is extremely high, the SME that lacks of mentorship and skills, having communication gaps, and lack of awareness in the existing information in the market can also lead to total losses. Sometimes, due to different financial problems inside the small proprietorship, the businesses pushed to turn to other financial services. The only purpose of the financial institutions is to support the business in this venture as long as it has the capability to ensure the existence of its operation. This is the great challenge of the SMEs in surviving the competition in the market (IISD, 2004). The burden of high interest rates and it places the risk in lending to SMEs (SEAF, 2004; Le and Nguyen, 2009).

Therefore, the SMEs must have to demonstrate the competency and capability of the business in establishing the risk management, its systems, processes, and procedures in the compliance of the financial requirements (ADB, 2007). In addition, in seek for the support of the SME may also come in the form of acquisitions of the technology. The procedures may be vary depending on the company who will rent the machineries to the small scale businesses and then being paid according to the cost of the machinery which is also under the subjected of depreciation. Machineries and technologies are considered as an asset but can be also liabilities because it was lent to the business.

Conclusion

However, there are significant financial reforms that are focused on the interest rate deregulation, restructuring the financial sources, inviting the private financial institution, and easing the restrictions that lead to a diversified financial system. In this sense, the SMEs are more enthusiastic in another opportunity. SMEs have their chances in creating or giving value on their working capital. Only, they have to ensure that the business is working for the revenue and not for losses. Meaning, the business leaders should learn on how to bring their business inside the competition and make a difference against the others.

References:

ADB, 2007. Proposed Loan Democratic Socialist Republic of Sri Lanka: Small and Medium Enterprise Regional Development Project. Report and Recommendation of the President to the Board of Directions of Asian Development Bank. [Online] Available at: http://www.adb.org/Documents/RRPs/SRI/36117-SRI-RRP.pdf. [Accessed 09 Feb 2010].

Gnyawali, D., & Byung-Jin, R., 2009. Co-opetition and Technological Innovation in Small and Medium-Sized Enterprises: A Multilevel Conceptual Model. Journal of Small Business Management, Vol. 47, No. 3.

IISD, 2004. The ISO and Corporate Social Responsibility Issue Briefing Note: Small and Medium-Sized Enterprises. International Institute for Sustainable Development. [Online] Available at: http://www.iisd.org/pdf/2004/standards_sme.pdf. [Accessed 09 Feb 2010].

Le, N., & Nguyen, T., 2009. The Impact of Networking on Bank Financing: The Case of Small and Medium-Sized Enterprises in Vietnam. Theory and Practice, Vol. 33, No. 4.

SEAF, 2004. The Development Impact of Small and Medium Enterprises: Lessons Learned from SEAF Investments. Small Enterprise Assistance Funds. [Online] Available at: http://www.seaf.com/main_report.pdf. [Accessed 09 Feb 2010].