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Evaluate the factors that determine ‘investment readiness’ of SMEs for growth. (2500 words).

  • Category:
    Business
  • Document type:
    Essay
  • Level:
    Undergraduate
  • Page:
    4
  • Words:
    2901

Introduction

While governments have constantly endeavoured to contribute and support the growth of Small and Medium Enterprises (SMEs), they have most often concentrated on the financial of the early phase of the SMEs than on its later stages. This is because they presuppose that SMEs need much focus on the early stages of its development, knowledge generation, and early stage financing. It is no doubt that the existence of SMEs in the economic framework of the contemporary world is of great importance. This is because SMEs plays very imperative roles in the economic stability of any given nation such as job creation at both local and international platforms. The investment in private equity also contributes to the benefits of market knowledge and management expertise.

Economic boost can also be achieved by harmonising the early stage entrepreneurs and private equity. This correlation can, however, be achieved by the SMEs if they seek to grow together with other external financiers. In this regard, governments have a critical role to play regarding supporting the SMEs so as to help them thrive by offering friendly business operation environment. As a matter of fact, it is obvious that large multinational corporations find it easier to attain financial resources as compared to SMEs that basically struggles to achieve the same. Despite of this challenge, it is ironical that the funds are indeed available for these SMEs to access but the limitations to acquire the resources is as a result that the SMEs are not competent enough in regard to their investment readiness. Either way, the situation is, however, critical for the growth and development of the small and medium business industry.

These concerns make the basis for the evaluation of the growth of SMEs via the investment readiness in this report. This study will also attempt to investigate the factors that influence the SMEs investment readiness and how it impacts on the growth of SMEs.

The growth of Small and Medium Enterprises (SMEs)

It has been noted with much enthusiasm that the Australia economy has increasingly incorporated and supported the existence and growth of SMEs; a fact that has boosted the country’s GDP growth and enhanced employment growth by more than 40 percent of the country’s total population.

The growth of SMEs is evaluated through the phases that they go through. These phases comprise of the start-up, its development, survival, growth, and finally high-growth. The process signifies that the growth of SMEs is somehow linear and even processual in nature. It is therefore presupposed that the growth of SMEs can be understood depending on the comprehension of an individual since there is no fixed formula defining SMEs (Dallago, Guglielmetti & Rondinelli 2012). As a matter of fact, businesses, SMEs included, struggle to respond and adapt to the constant changes to consumer expectations, requirements and needs, and this is where innovation comes in. In response to these developments, innovation presents itself in the development processes of the given organisations’ products and services. This phenomenon continuously prompts SMEs to invest in market technology connections so as to assist in their business growths (Tang 2014). OECD (2010a) therefore suggests that SMEs should, therefore, cultivate strategy of differentiation that would rely on the customer relations similar with other organisations when it connects with innovation. With such kinds of strategies, the SMEs will be in a more proactive situation in endeavouring to infiltrate market alcoves that eventually assists them to grow and flourish ahead of the market competition and in the long run maintains the status quo of market dominance it already commands (Mason & Kwok 2010).

The kind of organisation management present in business also determines its effectiveness. The kind of efficient commitments and definitive policy directions exhibited to the resources alongside the structures employed in business are considered to be critical resources for SMEs. The growth of SMEs is also enhanced by flexibility because it enables the business to adapt to business environment fluctuations and how it impacts on its operations (Tang 2014). Besides, various SMEs also possess participatory and decentralised organisations via which they scan for prospects that might be capable of posing business growth threats. A hybrid structure of governance is therefore touted as a viable SMEs growth driver because it encompasses both the product and functional management. The SMEs working environment also needs the motivation of employees, an aspect that can as well be achieved through teamwork. This is because teamwork is capable of inculcating consistency through the mutual philosophy of action with the help of team quality and good communication among employees (OECD 2010b). In an organisation where there is a good working environment, each one of the employees is assigned their core roles, task and functions depending on their knowledge and skills. This is because the growth of SMEs traditionally depends on the technical and business knowledge present in the workforce (Lester & Leigh 2007). And for this reason, the SMEs will have to source for more competent management workforce to provide for the modern dynamic business demands. SMEs should also consider allocating business growth benefits with teams that comprise of inceptive schemes, as well as indoctrinate an open attitude that accommodates new recruits to the company (Lars, Bjorn & Fatima 2010).

It should also be noted that customer involvement is also critical because they directly interact with organisations on a daily basis. Hence, SMEs should have a close relationship with their customers so as to help them in determining their differentiation strategies and market orientations. This is also majorly because SMEs are not a stand-alone establishment. Hence, they also depend on the roles of partnerships and alliances whether they formal or informal (Tang 2014). However, whichever kind of growth strategies for SMEs, they will eventually depend on the availability of monetary support. Research and development (R&D) is a good example of these business strategies. OECD (2003) clarifies that this is because aspects such as management will need more contemporary technology, there will be a need for training for new or even existing workforce, and there will also be an involvement of business consultants and stakeholders. The SMEs will then have to provide the needed growth funds after scrutinising the invest readiness of the SMEs.

Investment readiness of the Small and Medium Enterprises (SMEs)

Investment readiness, according to Mason & Kwok (2010) refers to the accumulation of external equity finance regarding the three investment readiness proportions. These three dimensions involve equity aversion, inevitability and presentation skills. High levels of equity aversions in SMEs exists in most businesses establishment owners who are not ready to capitulate control or even ownership for fear of giving part or even entirety of their business (Lester & Leigh 2007). However, this situation should not be the case since entrepreneurs consider seeking equity finance after getting proper training to understand financial sources for the betterment of business finance development. The financial awareness will also help both the aspiring and experienced entrepreneurs to avoid approaching inappropriate investors who most often is the cause of the disparities between the presented business prospect and the investors’ parameters (Dameri, Garelli & Resta 2015). Another unfortunate event is that an entrepreneur might be having a sound investment idea but then fall short of finances because of the business plan shortcomings among other poorly structured documents.

Financial capital is certainly needed in the conception and growth of businesses. Family and friends’ contributions might be needed to spearhead the start-up of business in its early stages of development, but then additional equity funding will be required from external sources to eventually grow the business in its advance stages of growth and development (Lars, Björn & Fatima 2010). The capital will play a major role in positively impacting on the business by cushioning it from future business challenges and helping its growth (Dameri, Garelli & Resta 2015). And for this reason, it is essential for entrepreneurs to accurately comprehend the needs and requirement of the investors and how the venture shall be perceived along those dimensions. This is because numerous entrepreneurs seeking to initiate SMEs have for a long time presented business plans that are not ‘investor ready’; a fact that has resulted in the collapse of ventures simply because the aspiring entrepreneurs failed to put together business plans that recognises the occurrences of such kinds of risks. Hence, it is critical for both the entrepreneur and the investor to equip themselves with the necessary information on the risks that are most likely to face their new business ventures so as to better predict the business survival probabilities and take advantage of the sustainable competitive advantages (Vasilescu & Giurca 2009).

As much as entrepreneurs struggle to instigate and help grow their SMEs businesses, they also face some challenges along the way. For example, among the issues that hinder the growth of SMEs for the entrepreneurs who possess the potentials of amplifying their scale and potentials in their future business ventures is undercapitalisation. This situation calls for the SMEs to respond by showing the capacity of raising capital by way of becoming ‘investment ready’. Alternatively, if the SMEs have enough resources at their disposal, then there is no need for the sourcing for external resources for driving their businesses. Mason and Kwok (2010) cautions that SMEs can either benefit or even attract risks as a result of sourcing for external capital financial resources. Other than incurring unforeseen risks by sourcing for external funds, some of these risks might as well depend on the costs of capital, business, market, product, financial, and industry, as well as political and economic instability of a given country. However, SMEs also have the capability of accessing themselves if at all they have the capacity of spawning enough returns that they can eventually utilise to service their external financial gains. These aspects in return can then mitigate the risks associated with external financial acquisitions (Dameri, Garelli & Resta 2015). This exercise is what now calls for the question as to whether SMEs are ‘investment ready’.

For an SME to become business ready, it needs to adopt a viable and less complex business structure. This approach will assist the business in avoiding common business barriers and helping the business to easily access equity investments and enhance future business flexibility. The entire assets within the SME as well as those that are available for the business are reflected by the effectiveness of the business structure (Davenport 2003). But then, it will not be easy for the SME to grow if at all the business flexibility is hindered by the current corporate structure because internal changes will be required upon the approval of such equity investment. Additionally, the objectives of investment readiness are to expound on the success potentials in the SMEs. Effective management systems and capacities are what make an SME to be investment or business ready (Cox & Rigby 2013). Hence, the growth of SME businesses requires the consistency of experience and skills on the lifecycle of the SME business. This is because not all of these SMEs are adequately furnished with sufficient manpower to further their economic goals at their time of equity investment acquisition. Investment readiness can, therefore, be pursued by sourcing highly skilled manpower for the business as well as sourcing for consultancy from business experts.

A section of the business might also be sold to potential investors or sponsor as part of the investment readiness prior to the evaluation of the business by the same investor(s). The investor might also estimate the worth of the said business so as to determine the SME equity. The SME evaluation will then helps in determining the potential, the health of the SME in question and reduce the chances of the business being compromised because its capacity of generating returns will determine its equity (OECD 2002). The value of the business negotiations will also be possible because its business appraisal will be carried out with honesty. A steadfast management that is faithful to itself should therefore back such exercise because SMEs only grow when handled a the committed and hardworking workforce. This situation is also partly because potential investors are constantly seeking for selfless management, constant and collaborative contribution to the SMEs growth as an assurance before they decide to invest. The success of SMEs needs committed investors even at the time of business crisis and other associated risks (Davenport 2003).

Once again, another concern for the SME on how it will generate income is how much it is ‘investment ready’. Dameri, Garelli & Resta (2015) argues that this situation will, however, be determined depending on the SMEs business operations and business model to generate its revenues. There is so much debate by researchers on which business model is fit, and for what kind of organisation. However, business models vary from one organisation to the other. Moreover, the future of SMEs is also reliant on the kind of business model adopted, as well as how it responds to the micro and macro environment dynamics imposed on them. Unlike larger corporations, SMEs are prone to premature closure in case it fell short of product market competition. In that case, an evaluation should be conducted to establish the structured investment in the SMEs as well as how investors will recognise their investments. This information should be revealed
in terms of ironing out issues on how much capital is needed, how much equity is on offer, when will it be needed, how will it be utilised, and where will it be channelled (Harrison & Mason 2001). A balance of benefits should also be realised between the investors and the SMEs so as to further business growth. Additionally, the two entities should also harmoniously agree on how to share the business risks and loses.

Dallago, Guglielmetti and Rondinelli (2012) also echo that much attention should also be given to the credibility and quality of the business plan because it acts as the economic path of the SMEs business blueprint. The business plan stipulates the business roadmap and opportunities and how they could be realised and implemented. The business investment constraints depend on the SMEs internal capacities and how the SME applies the same capacities to realise the projected growth potentials (Dallago, Guglielmetti & Rondinelli 2012). The business plans should also be presented in a more professional manner so as to satisfy the fiscal and non-fiscal considerations and finally make the SME realise financial readiness.

Conclusions

From the perspective of this study, investment readiness can, therefore, be summed up as a continuous process that can be achieved at the initial progressive stages of SMEs and with a possibility of supplementing it on the later stages. In that case, investment readiness relies on the realistic business appraisals, concrete and comprehensive business plan, market accessibility, the management of business systems and capacity, business model, and business investment structures and commitments. The success of investment readiness will also be achieved if the SMEs self-evaluation, changes in the business cycle and openness are followed to the latter. It is also crucial that the existing and potential entrepreneurs create a rapport with their sponsors on their daily business operations and progress so as to ease and foster better access to viable markets.

References

Mason, CM & Kwok, J 2010, ‘Investment readiness programmes and access to finance: a critical review of design issues’ Local Economy, vol 25, no. 4, pp. 269-292.

Tang, X 2014, ‘The Research on Financing Predicament and Effectiveness of Small and Medium-sized Enterprises in China’ 2nd International Conference on Education, Management and Social Science (ICEMSS 2014), pp. 86-88.

OECD 2010a, OECD Studies on SMEs and Entrepreneurship High-Growth Enterprises: What governments can do to make a difference, OECD Studies on SMEs and Entrepreneurship, OECD Publishing.

OECD 2010b, Investment Reform Index 2010 Monitoring Policies and Institutions for Direct investment in south-east Europe, OECD Studies on SMEs and Entrepreneurship, OECD Publishing.

OECD 2003, Local Economic and Employment Development Private Finance and Economic Development: City and Regional Development, OECD Studies on SMEs and Entrepreneurship, OECD Publishing.

Dameri, RP, Garelli, R and Resta, M (eds) 2015, Proceedings of the 10th European Conference on Innovation and Entrepreneurship: ECIE 2015, Academic Conference and Publishing Limited, UK.

Dallago, B, Guglielmetti, C & Rondinelli, M (eds) 2012, The Consequences of the International Crisis for European SMEs vulnerability and resilience, Routledge, London.

Davenport, M, (eds) 2003, Investment Incentives in Commonwealth Developed Countries and the WTO Investment Negotiations, Commonwealth Secretariat, United Kingdom.

Cox, D, and Rigby, J, (eds) 2013, Innovation Policy Challenges for the 21st Century, Routledge, London.

OECD 2002, OECD Small and Medium Enterprise Outlook 2002, OECD Publications Service, France.

Harrison, RT, & Mason, CM 2001, ‘“Investment Readiness’: A Critique of Government Proposals to Increase the Demand for Venture Capital’, Regional Studies. Vol. 35 Issue 7, pp. 663-668. doi: 10.1080/00343400120075939.

Lars, S, Björn, B, and Fatima, V, 2010, ‘The Impact of Investment Readiness on Investor Commitment and Market Accessibility in SMEs’. Journal of Small Business & Entrepreneurship. Vol. 23, no. 1, pp. 81-95.

Vasilescu & Giurca, L 2009, ‘»Investment Readiness» — correlation of the capital demand and supply for SMEs’, Annals of the University of Petrosani Economics, Vol. 9, no. 3, pp. 311-314.

Lars, S, Bjorn, B, & Fatima, V 2010, ‘The impact of investment readiness on investor commitment and market accessibility in SMEs’, Journal of Small Business and Entrepreneurship, 23, no. 1, pp. 83.

Lester, L, & Leigh, S (eds), 2007, Trading places-SMEs in the global economy: a critical research handbook, Edward Edgar, UK.