Capital access and financial management for sustainable MSMEs
How to manage finances and where to access capital, which are critical for sustainability, are questions often asked by business owners and leaders. In an earlier article featured in a MAP column, entitled “The Journey of MSMEs: Are we there yet?,” I cited limited financing and accessibility to affordable and reasonable sources of funds as one of the challenges faced by micro, small, and medium enterprises (MSMEs). This was the topic I spoke about on Oct. 29 at the Management Association of the Philippines (MAP) – Philippine Trade Training Center (PTTC) MSME Business Clinic with the theme, “Stronger MSMEs for a Sustainable Future Building Collaborative Ecosystems,” organized by the Department of Trade and Industry-PTTC and the MAP.
FINANCIAL MANAGEMENT FOR MSMESFinancial management is basically about controlling the flow of money in and out of an organization. Some key components of financial management that MSMEs as well as larger businesses should focus on are:
• Budgeting. This includes allocating resources efficiently and monitoring financial performance against set targets. Given that funding sources are limited, it is important that you use these with good judgment and common sense.
• Cash flow management. Understanding and tracking cash inflows and outflows is essential to avoid a liquidity crisis; thus, you need to maintain a reasonable amount of “working capital” to meet the day-to-day operating requirements of your business.
• Record keeping. Maintaining accurate and systematic financial records, which can be facilitated by digital tools, is fundamental for decision-making and compliance with tax regulations.
• Financial analysis. Regularly interpreting, analyzing, summarizing, and reporting data in financial statements can help you identify trends, measure profitability, and assess the financial health of the business.
SOURCES OF CAPITAL FOR MSMESFund requirements of MSMEs, whether for loans and capital/equity, can be provided by various sources:
• Personal savings. The easiest and most accessible source, especially when starting a business; using your own money also makes leaving a business easier if things do not work out.
• Friends and relatives. A common source for aspiring entrepreneurs of startup businesses as they are frequently more ready to invest than formal lenders. While these can work well, often these arrangements are informal and based purely on trust and verbal assurances.
• Partnership. Where two or more individuals, yourself and friends and/or relatives, share ownership, with each partner contributing money, property, labor, or skill and in return, each partner shares in the profits and losses of the business. The documentation of the terms of the partnership in a legal document is recommended.
• Venture capital. Venture capital funds, which generally come from investors, investment banks, and financial institutions, are aimed at startups and early-stage companies with high growth potential and a proven track record. These sources provide substantial funding in exchange for equity and often take an active role in guiding and scaling the business.
• Private equity. Private equity, typically sourced from large institutional investors, pension funds, sovereign funds, endowment funds, and high net worth individuals, are invested in more mature private companies, for expansion, restructuring and transformation.
• Government grants and subsidies. Government financial institutions, such as the Small Business Corp. (SB Corp.) and the Development Bank of the Philippines (DBP) offer financial assistance to promote entrepreneurship and business growth, to support SMEs and startups usually through debt financing and, in some instances, equity. Other government agencies offer grants and subsidies to promote specific industries, for innovation, and development.
PRACTICAL TIPS FOR SUSTAINABILITYRegardless of the stage of development of the business, there are basic financial management practices which are critical for sustainability:
• Create a budget to plan and control your finances as this helps you track income and expenses, ensuring that the business operates within its means. Further, regular review of the budget can help identify where costs can be reduced and investments made to support growth.
• Manage your cash flows. With the budget as your guide, you should track incoming revenues and outgoing expenses. It is good business practice to maintain a certain amount of cash or working capital at all times to cover for the lag in the timing of collections and disbursements. You may also maintain an emergency fund in the case of unforeseen financial challenges, such as an economic downturn.
• Separate personal and business funds. Open separate bank accounts and credit cards for business operations. Segregation simplifies accounting and helps track business performance separately. Don’t use business funds to support your personal and non-business activities. You may consider giving yourself a fair salary as an officer/manager of the business to support your personal expenses.
• Maintain a good business credit score, which means paying your bills on time, managing debt responsibly, and avoiding over-extending credit. Having a track record of being a responsible borrower will be an advantage when seeking external sources of funds.
• Invest in growth. Set aside funds for growth opportunities to invest in technology, expansion of product and service lines, and entering into new markets.
• Keep your accounting books and records up to date to help track the income and expenses of the business, minimize errors, and support decision-making.
• Review, monitor and analyze your financial performance so you can get insights on how to make better business decisions, detect any anomalies, and adapt your business plans to the ever-changing environment.
Sound financial management, supported by the right funding sources, is key to ensuring the sustainability and growth of MSMEs. While challenges persist, government and non-government initiatives can pave the way for a stronger MSME sector. By understanding and committing to sound financial practices, MSMEs will continue to thrive and contribute to economic development.
May we all aspire for businesses that are resilient against market challenges and adept at seizing opportunities; thereby ensuring a meaningful contribution to sustainable economic growth.
Ma. Aurora “Boots” D. Geotina-Garcia is a member of the MAP Diversity, Equity, and Inclusion Committee. She is the founding chair of the Philippine Women’s Economic Network (PhilWEN) and chair of the Governing Council of the Philippine Business Coalition for Women Empowerment (PBCWE). She is the first female chair of the Bases Conversion and Development Authority (BCDA). She is president of Mageo Consulting, Inc., a company providing corporate finance advisory services.
