Wednesday, June 4, 2008

SMEs - the correct use of finance (2/2007)

One of the common mistakes we make as SMEs, is to use our working capital to purchase fixed assets. I see it happen so often and must admit to having done it myself from time to time.

SMEs tend to ignore the working capital needs of their business, and instead look at their bank balance, when they need to purchase an asset. A month later they cannot pay their bills.

This is linked in a way to a culture of "pay cash" that many older entrepreneurs have. These are the people who lived through the 1930's depression, and avoid credit. They too have had an impact on their children, the baby boomers, who to a lesser degree take a similar approach.

SMEs need to pay more attention to the different financial needs they have, and to then use the correct source of funding. Cash is not always the best answer, just as much as credit is not always the correct answer.

Next time you need an asset, talk to your accountant. There are a lot of factors that influence the decision, such as gearing, cost of capital, opportunity cost. If these terms are strange to you, then talk to your accountant when making the decision.

Rob Smorfitt

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