FINANCIAL MANAGMNT PRACTICES IN SME SECTOR

PRESENTED BY:

SANA KHAN

FAIZA ISMAIL

MANAHYL ASHFAQ

FATIMA JAFFERI

MUNEEBA NASEER

UMER MALIK

OBJECTIVE

Achieve maximum possible profitincrease in employment levelexpansion of economyImprove savings and reduce lendingExpand economic activities which have direct

impact on exports Technological innovativenessTo generate sustainable community having

small businesses to cater lower class groups.Prevent social conflictsHigher wages of salaried people.

What Are SmesSME – Small and Medium EnterprisesHas significant role in the economy of any nationDue to

Innovation Technological enhancement Economical and environment stability That leads to productivity

Attracting the Capital Investment – The Main Goal of SME

SME – the Driving Force for business & Development

An indispensable part of Economy

Significance of SMES SMEs – Worldwide Significance

especially in developing countries

SMEs contribute to output by participating in the mainstream economy

SMEs – A nursery for larger firms of the future

The SMEs involved in technological development

Government policy, including tax policies, play a great to know how well the SME sector contributes to a healthy economy

SMEs have an inclination to employ labor-intensive production processes than large enterprises. 

Types of SMESSectorial Division of

SMES Agricultural Sector Industrial Sector

Communication Sector Service Sector

Infrastructure Sector

SME Interjection at Provincial Level

How Rate of Employment enhance GDP Growth in SMES

PROBLEMS AND CONSTRAINTS ARISING FROM THE CURRENT POLICY ENVIRONMENT The current SME policy of Pakistan does not take into

explicit account the heterogeneity of the sector The empirical evidence suggests the need to adopt

the group-specific approach Following are the major factors with a direct bearing

on why some products are preferably produced at small scale level:

1. Dispersed resource processes 2. Local markets3. Service industries 4. Separable manufacturing operations5. Handmade projects6. Simple assembly processes 7. Differentiated products 8. Small market size.

Continued… Enterprise dynamics should provide the basis

for policy formulation to meet the short and long run needs of SMEs

Survival in a competitive environment or in a shrinking market. These are grouped under the following majors heads

1. Rules and regulations2. Labour laws3. Access to institutional finance4. Tax liability5. Trade restrictions.

CONTINUED…Compliance of labour laws is prohibitive

in terms of time and money There is also lack of awareness of

existing labour regulations, especially among the smaller entrepreneurs

Government of Pakistan introduced a number of schemes in the past targeted at provision of institutional credit to the SME

There is sufficient evidence that local tax authorities harass small firms regarding assessment of income tax

CONTINUED…Technological constraints constitute a

formidable problem for the small, but much more for the medium firms

These firms rely heavily on old technologies and replicate low-15 15 quality old products.

Obviously they do not find a niche in the world market for those products

ISSUES OF SMALL AND MEDIUM ENTERPRISE:The Pak SMEs don’t manage to effectively utilize

the available technology suited to their resources. Identification and acquisition of appropriate

technology is difficult for SMEs the SMEs and the large firms - equally ignorant

and careless about their role in environmental degradation in Pakistan

Pakistan - currently facing multiple diversified challenges of terrorism, politics, social issues, and energy supply

OPTIMAL FINANCIAL BEST PRACTICES: Information technology -

Organize work around results, not tasks -

Capture data only one time—accurately -

Incorporate controls into information processing -

Empower users to create, maintain, and use data for decision making.-

BEST PRACTICESConsolidation - allows the company to achieve

- economies of scale,- reduce complexity- improve performance, and - increase the productivity

Outsourcing - Inefficiencies, errors, and no value-added activities should be identified and removed from the affected process

Networking - Provides a platform for people in projects, teams, while avoiding

the need to bring these individuals to the same physical location

Virtual office - Companies are creating virtual offices to utilize information and

IT technologies to link individuals across the globe.

SMEs face following problems in its business activities. •Lack of IT Support

•Lack of Formal Procedure and Discipline

•Lack of Human Resource

•Lack of Financial Resources

•Lack of Awareness and Con

•Labor Intensive

•High Cost

•Loss of Customers

•Black Economy

•Low Financial Planning

Issues

Consideration with Pakistan’s example, based on a survey:Environmental Problems: Place policy-guided mechanism for the education of entrepreneurs and effective control of

environmental damage by SMEs

Reducing material waste can be one means of reducing cost

Similarly saving national resources (electricity and water etc.) may translate into competitiveness and economic gains at the SME level.

Identification and acquisition of appropriate technology is a difficult task for SMEs

At the ground level the SMEs and the large firms are equally ignorant and careless about their role in environmental degradation in Pakistan

The Mid Term Development Framework (MTDF: 2005-10)

Pakistan was currently facing multiple and diverse challenges relating to terrorism, politics, social issues, economy and energy supply

Need Of SMEsTo ensure a smooth link between macro (economy-wide)

and micro (sectoral) policies through an effective institutional mechanism

To improve the business environment

The most effective way of delivering institutional support

Focus on selected sectors with growth potential

Make the support limited on a time scale

Need Of SMEs cont..Pakistan had gone through different phases of

business and had suffered due to different problems such as finance

Furthermore, if the rate of unemployment increased, there would be more economic problems in the country

Therefore the government needed to take action to support private and independent working enterprises to boost the economy by increasing its support of SMEs to generate employment and income.

Financial Characteristics

Small business

Usually private held

Might not have an accountant

Few workers

Informal leadership and the preference of oral over written form of communication

Owner more involved in the daily running of the business

Limited or no separate business units

Restricted to a limited geography

Less Dependence on IT

Small and Flat organizational structure

Supports functions

Reason:

Most of them are integrated with each other

High liquidity

Serves foreign orders through direct exports

Contributes about 30% to Pakistan’s GDP

Optimal Best PracticesWorking capital should be strictly monitoredThis will help the companies to make decisions about

purchase or sale of assets

Inventory should be managed and economically used.

A reasonable credit period should be allowed to the accounts receivables.

The collection procedures should be regularly revised.

Optimal Best Practices Show us the best form of functions of SMEs to get most of returns.

A prototype that every SME should follow in order to get the best results. Some approaches are:

A company must have- An operating account: For each production center. Product or service line: For showing their profitability For decision making based on the specifics

Cash Management should be done carefully and actively.It allows the company to see its cash flow and optimum payment and collection periodIt also shows the liquidity of the enterprise.

Ratios should be definedIt allow them to control the key aspects of finances, like liquidity, debt, asset turnover, gross and net profit margin.

Analysis of Company

Financial Analysis of our 6 Companies

Cash Management PracticesDisadvantages

Cash Management Advantages

Receivables Management

Inventory Management

Fixed Asset

Financial Planning Practices

Financial Planning Practices

Recommendations

Recommendations

BUSINESS/OWNER DETAILS: Management training programs conducted without

specialization

So , Base training programs for management should occur for better rsults and improved performance

A Positive impacts on revenue

Companies that do not use computers for recording data must switch on to using it

More convenient and less time consuming way of recording

FINANCIAL MANAGEMENT: SMEs should record transactions on a regular base

Accounting reports and cash flows should be prepared monthly to keep a track of everything

FINANCIAL REPORTING AND ANALYSIS: Cash flows are prepared regularly

But statements of financial positions are prepared infrequently So, the income statement and balance sheet should be

prepared on frequent basis

As a result, The company’s financial position and probability ratio will be

analyzed.

CASH MANAGEMENT PRACTICES: Should be maintained regularly with computerized system

Smes Invest their excess cash into profit earning projects rather than just keeping it in the bank

Budgeting - The Back Bone of any company

So cash budgeting should be done on regular basis

RECEIVABLE MANAGEMENT: They might be able to profit from selling on credit Can attract more customers Data should be recorded timely on computers They should keep a track of all transactions.

INVENTORY MANAGEMENT:

The computer receivable management To overcome the risk of bad debts

Inventory budget to be maintained on frequent basisTo help to increase liquidity ratio

FIXED ASSET MANAGEMENT:

Fixed assets should be managed carefully

Companies, such as PPES, do not keep a careful record of its fixed assets that might lead to certain issues

So, they should maintain records

Later if they sell their fixed assets after deducting the depreciation they can check if they have earned profit or not.

FINANCIAL PLANNING:Most companies not involved in financial planning

A negative approach!

They can be better aware of the financial position of the company

They should make a proper financial budget

Can direct all their resources in accordance to it

This will enable them to work towards achieving the ideal cost-minimizing performance