Tuesday, November 2, 2010

Modern theories Financial Management & Small Enterprises

Here are some examples of modern theories of financial management formulated) on al.1991 principles apply as "a series of basic lessons, make that the basis for economic theory and decision making in finance" (Emery et al. An attempt could be made of financial management principles to apply these terms to small businesses. "

Agency theory
The agency theory with the people that their companies a business and all those who haveInterest in it, for managers, such as banks, creditors, employees and family members. The agency theory posits that the daily activities of a company's shareholders must be carried out by operators as agents known as the power by the business owners whose primary. The theory is based on the principle of the operations "both sides" that any financial transaction involving two parties, both in its own best way to keepInterests, but with different expectations.

Problems in general with the theory of agency can be identified:

i. information asymmetry, a situation in which agents have information on the financial condition and prospects of the company, which is not on the principles (Emery et al.1991) are known. For example, "The Business Roundtable said that the planning of communication with shareholders and investors, companies should never be considered for false or misleading reports to shareholderson company operations or financial position. Despite this principle, there was a lack of transparency in the management of Enron will lead to a rupture;

ii. moral danger in which the intentional use of the wealth of information asymmetry, so invisible that is ultimately borne by the customer for distribution. One example is the failure of Enron's Board of Directors Compensation Committee to ask any questionsthe allocation of salaries, allowances, pensions, life insurance and bonuses for the executive members at a critical point in the life of Enron, has come up with an executive at a record share of ownership of a corporate jet as a reward and a loan of $ 77 million to the CEO, even if the Sarbanes-Oxley in the United States prohibits loans by companies and their executives

iii. The adverse selection, it is wrong for a situation in which the funds bring the skills or ability of a society.As a result, the main source of wealth is not maximized (Emery et al.1991).

In response to the inherent risk of agents Quest 'done to make the most of their interests at the expense of principles (ie all stakeholders), each player tries to reward in return for participation in society will increase. Creditors may raise interest rates they receive from society. Other responses are reliable, improve customer loyalty and access controlInformation and the development of tools for finding common ground for agents and managers, respectively.

from theory to address emerging risks in the financial agency for small business management, says the researchers found that many small businesses the agency relationship between owners and managers may be absent as owners, managers, and that nature primarily by SMEs make the usual solutions agency issues such as monitoring and bonding expensive hereIncrease transaction costs between different interest groups (Emery et al.1991).

However, the theory of knowledge useful in many things SMEs in financial management and demonstrates significant ways in which SMEs should financial management practices and perceived. It also allows professionals and academic strategies that could help trace the growth of SMEs.

Signaling Theory
Signaling theory is based on the transmission and interpretation of informationdeliver a company's capital markets and the resulting seizure of the insights in terms of funding is made available at the company. In other words, the flows of money between a company and the capital market depends on the flow of information between them. (Emery et al, 1991). For example, the management decision to make a purchase or sale, repurchase of shares in circulation, and decisions as an outsiderinstitutional investor to decide to fund maintain a degree of equity or debt. The new findings on the relevance of signaling theory for small business financial management is mixed. Until recently, there are substantial and reliable empirical evidence that the theory is exactly signal a special situation in the financial management of SMEs, or adding insights that are not provided by the modern theory (Emery et al.1991).

Keasey et al (1992)writes that the ability of small firms to signal to investors the value of only the signal of the disclosure of earnings forecasts showing a positive and significant value possible for companies from the following: the investor will receive a percentage of net proceeds raised from the increase capital, the choice of financial advisor is a problem (assuming that it can be a serious accountant, banker or auditor result in more confidence can be placed inProspectus for the float) and the price level is a problem. signaling theory is now to be as instructive to some aspects of financial management of small firms in other (Emery et al 1991).

The theory of the hierarchy or framework (POF)
This is another financial theory, that should be considered in the context of the financial management of SMEs. There is a theory that suggests to maintain the funding that the administration prefers the firstProfit then with debt, loans, followed by hybrid forms of financing such as convertible bonds, and finally issued outside help with equity, with bankruptcy costs, agency costs and information asymmetries play a role in the capital structure have little effect on policy. Trial) Norton (1991b found that 75% of small businesses looked set to establish the capital structure decisions in a hierarchy or hierarchy. Holmes et al. (1991)admitted that the areas POF is consistent with small businesses because they are owner-managed and do not want to dilute their ownership. Owner-managed companies generally prefer to keep the profits, because the processes that the companies maintain control over assets e.

This is not surprising given the fact that in Ghana, based on empirical evidence, the SME financing consists of approximately 86% of its shares and bonds of family and friends (see Table1). Losing that money is like losing one's reputation, which is usually very difficult in Ghana.

Access to capital
Bolton's 1971 report on small business issues Outlined concept of the "funding gap" (this knowledge two components – debt limit gap is the lack of awareness of appropriate sources, advantages and disadvantages to fund the account, and supply problems , non-availability of funds or cost of debt for small firms thanthe cost of debt service for larger companies.) that a number of difficulties faced by small business tax is small they are. companies are more affected by higher costs for loans of control are usually well informed sources of funding and are less able to borrow. requirements of small businesses not then have limited access to capital markets and money and suffer from chronic under-capitalization. As a result, they are probably highThe use of expensive funds, which act as a brake on economic development.

This is the term used for the reverse transmission, describe the fund's share of total assets to equity ratio and equity can be. The surveys in this section, to leverage the total debt as a percentage of total assets in equity or concentrate. However, there are some studies on the relative proportions of the various types of debt held by small and largeCompanies.

Equity Funds
Equity is also known as equity, capital or assets.
Costand et al (1990) suggests that "the larger companies, the companies use a far higher external financing than small ones. This means that large enterprises, companies will rely relatively less on equity than smaller ones." After the framework of power relations, small businesses, the two issues when it comes to al-equity financing [McMahon et al. (1993,pp153)]:

1) Small businesses typically do not have the ability to issue additional shares to the public.
2) owner-managers are strongly opposed any dilution of their holdings and control. In this way they are, in contrast with the managers of large firms, usually limited to only a limited degree of control and, where appropriate, actions and are therefore unwilling to recognize a broader range of financing options.

Financial management in SMEs
At high tidefinancial problems contribute to the high rate of failures in small and medium enterprises, that the literature on small firms say the financial management of the failures of small businesses to fight it?
Osteryoung et al (1997) writes that "while financial management is a key element in the management of a company as a whole, in this function, the management of their assets is perhaps the most important. The long-term purchaseactivity directs the course of business activities during the term of this, but the business is never long term, can not plan an appropriate policy to effectively manage its working capital. "In fact, the financial mismanagement of the building managers or a lack of financial management as a whole is the main cause of financial management problems of SMEs.

Hall and Young (1991) in a study in the UK for 3 samples of 100 childrenCompanies that have been found compulsory liquidation 1973.1978 and 1983, that the reasons for the failure, 49.8% were of a financial nature. The official perception of the recipient companies interviewed for the same small% of the 247 reasons given were financial 86.6. The positive correlation between poor or no financial management (including accounting records) and business failure was also documented in Western countries after Peacock(1985a).

E 'contradict the fact that, despite the need to support every aspect of their small company with very little internal and external, is often the case that owner-managers only have experience or training in some areas of functioning.

There is a school of thought that believes that "well managed, unconsciously, and so should their finances as healthy healthy a person is breathing." It must be possible to take over the production,Marketing, sales and the like, without creating new, or, borrowing costs and pressures prevented. This does not mean, however, that the financial management of the owner-manager can be bypassed by a small company, or as often happens because the accountants take care of one. Whether it's overt or not the casual observer, the prosperous small business owner-managers themselves have a good overview of financial management principles and are activeinvolved in its application to your situation. "McMahon et al. (1993).

Some researchers have tried to predict small business failure of small businesses to mitigate its loss. McNamara et al (1988) developed a model to predict the failure of small businesses to provide the following four reasons:

– Allows management to react quickly to changing conditions
– For the provider, in recognition of the important factors in determining a company involved in trainProbability is that
– For organizations lending their best in marketing support through the identification of financial needs of their customers
– To act as a filter in the process of credit assessment.

They went on to claim that small businesses are very different rules of big business in lending to small businesses, the lack of term debt financing continues, and the differential tax.

For small private companies, these measures are not reliabletextbook and methods for the assessment of investment opportunities are not always useful in organizations that are privately owned, to give a true picture of events in society.

Sun modern financial management is not the final answer to any business problem, both small and large enterprises. 'However, this study argue that there is food for thought for SMEs in relation to each concept in mind a couple . For example, it could be seenfor the study (literature), has meant that financial records and analyze business operations. The return on equity, return on assets, return on investment and foreign-to-equity ratio are useful benchmarks for measuring the performance of the economy and SMEs.

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