Common Problem in Business Management - Assignment Example

Question In starting up a business, the most common problem of entrepreneurs is capital. Small and Medium Enpterises (SMEs) are often times very much dependent on banks and other financing institutions to generate funds to finance their start-up business and for expansions later on. A study conducted by Deakins (1999) shows that entrepreneurs often face difficulties and problems in raising bank finance. “UK bank practices of risk assessment can be variable and that adverse selection – where potentially viable projects are not receiving finance is higher than it needs to be.” 1 However, there also banks and other financial institutions that would grant loans and financing based on trust and character2. Therefore, it would help a lot if the person whom the entrepreneur approaches in getting loans knows them personally and can trust them. Maintaining good relationships with bank managers will greatly increase the chances of the entrepreneur of getting financial support from the bank as the manager will identify will the entrepreneur. In a study conducted by Cressy (1996)3 and Petersen & Rajan (1994)4, there are bankers who attached more weight to human capital than the business itself.5 By nature, bank managers have different attitudes towards risk. While others are conservative, others may be more open to possibilities. Knowing the attitudes of the bank manager is therefore crucial as bank managers have discretion to grant loans up to a certain limit. Within the discretion limit of the bank manager, his/her power to grant loan is absolute. This makes good relationships with bank managers a very good asset when trying to get a loan for start-up or for expansion of small business. The key here is to build good and strong relationship with bank managers and at the same time position the business in such a way that it will show good prospects for success. After all, bank managers will not grant the loan on a whim even if it is still within his/her discretionary limits. Most of the bank managers have their own set of standard criteria, which they use in evaluating loans. These criteria may be any or all of the following: (a) business security (b) personal guarantees, (c) business prospects (d) loan applicant and the amount of equity that the applicant is putting into the business. Perrow (1979)6, observed that when bankers are faced with similarly situated loan applicants and it is very hard to discern which one should be given priority, “we rely on familiarity.” We cannot deny the fact that in our everyday transaction we judge situations by familiarization. Where something is familiar, we tend to favor the same, as the fear of the unknown is often worst than the fear of the known. Social relationships and social similarity7 plays a vital role in the decision-making process of any organizations. According to Uzzi (1997)8, embeddedness that is characterized by being deeply familiar with an area, its culture and its people would “increase trust and reduce risk.” 9 Bankers are more open to trust if they know the person well and the community from where such person comes from. Strong roots therefore helps a lot in establishing credibility to bankers. A study conducted by the Bank of England (1996)10 tend to show that both entrepreneurs and bankers would tend to transact more with each other where there is already an established record between them. Question 2 Access to start-up capital is often difficult for an entrepreneur. Financial resources are often scarce at the start of the business and even when the business has been operating for a couple of years. There are two major types of financing a business venture, namely through debt and through equity. Debt is money borrowed from banks and other lending institutions, which needs to be paid with interest on top of the principal. On the other hand, equity is money paid by shareholders, including the owner which not be repaid and not will it charge interest. However, as equity becomes part of the capital of the business, the persons/entities, which put up equity will become one of the owners of the company and shall share in the profits thereof. Large established firms would find it relatively easier to generate funds through loans and equity. However, small businesses an entrepreneur often finds if difficult to access such facilities for a number of reasons. Many entrepreneurs find it difficult to invite people to invest in their new business primarily due to the fact that these businesses are often untested in the market. Thus, due to lack of investors who are willing to put up substantial equity, many entrepreneurs are forced to commence their businesses out of shoestring budgets coming mostly from their own saving account. Accordingly, most entrepreneurs have more success in borrowing money than generating equity. Yet, eventhough around 60% of entrepreneurs gain the necessary capital from loans, this often do not come easy. For the innovated entrepreneurs, access to capital is often doubly difficult as banks and other financing institutions often see them as poor credit risk (Svensen 2003). Often times, entrepreneurs most especially the start-up businesses have difficulties accessing financing from banks. Although banks may advertise that they are willing to finance business ventures, this should not be construed as an easy open invitation to the access the resources of the banks. Most banks are conservative ad they have sets of standards, which they follow. According to a study conducted by Cole & Wolken11 of the US Federal Reserve Board and reiterated in the study of Levie J & Warhauus of the London Business School12 “depository institutions typically require several years of financial history for a (business) borrower to quality for credit.” Being small and often unstable, small businesses does not usually inspire confidence from the financing institutions who are also bent on protecting their resources from risky exposures. Start-up businesses are the most prone to rejection from financial institutions no matter how good their ideas may be simply on the fact that theses companies have no financial track record upon which the financing institutions may base their confidence on the ability of that certain company to repay their debts. Unlike big corporations, assurance from the entrepreneur to the bank that they can indeed pay and not foldout in a few months is often very difficult to give since most entrepreneurs since they have not established any business trends and trading patterns. Note that big and established companies have already proven track records of many years upon which the financial institutions could base their predictions and forecast for the firm’s sustainability and ability to repay debts. In some instances, the loans applications of the entrepreneur is approves subject to strict monitoring. More often than not, cost for monitoring and bonds are attached to the loan granted (Jensen & Meckling 1976). The justification for this is often centered on security of the financial institutions capital exposure. More often than not, this may prove to be difficult for the small entrepreneurs are they don’t have the necessary collateral, which they can mortgage13 to secure the loan. Most of the loans granted to small entrepreneurs are short-term in anticipation of the probable life span of the business endeavor. On the other hand, big companies with established records don’t usually have many difficulties in securing loans with minimal monitoring and even less collateral requirements. The fact that these big companies have stable operations and have substantial assets, which can easily be located, would normally be enough assurance for the financial institutions of its ability to pay their debts. In England, syndicated loans14 are popular among large companies and the banking institutions. This is due to the fact that banks are willing to extend financial support to big companies to satisfy it needs. Question 3 Normally, there are at least six stages of growth in a business cycle. Along this stages, the roles of the entrepreneurs evolve and expand together with the business. To understand the changes roles of the entrepreneurs, let us discuss the different stages of the business and how the entrepreneur fits into the scheme of things. a. Conception/Start-up The conception/start-up stage is very crucial in organizing a business company. This is the first test as to whether the business will survive or at die down. At this stage, the entrepreneur executes all major tasks from planning, administration, marketing, fund sourcing etc. As system is usually minimal at the start of the business, supervision is not really that extensive. b. Survival The second stage of the business growth is survival. Here the entrepreneur will start to ascend to the level of manager where he/she will not have his/her first supervisor. As some degree of systems is now organized at this stage of the business development, the entrepreneur will now exercise a degree of supervision over cash flow projections, planning and forecasting while the supervisor will now execute the actual work as ordered by the entrepreneur/manager. c. Success Accordingly, there are two stages of success. First is the stabilization of cash flow making the company financially viable. At this stage, the entrepreneur/manager will still need to keep very close supervision on the aspects of finances, marketing and production but may start to look into other business interest which may be useful in expanding the company. The second stage of success happens when the owners would decide to go for major growth or expansion. Here the entrepreneur will now hire a team of managers, which will take change of the growth of the business. Systems will now be more elaborate at this point which can be described in terms of a simple line and segment management systems where each business segment will have some degree of autonomy but are still directly reporting to the line managers including the entrepreneur as the general manager15. d. Take-off The take-off stage would require that the entrepreneur will now start to delegate management duties. Characterized by fast growth and increasing complexities in terms of systems, the entrepreneur will now need to relinquish some of his/her control over some aspects of the business to the managers. At this point also, the need to experiment and break new grounds is very important to stay ahead of the business competition. e. Maturity The business is said to have matured when it reached at certain level where it can control a certain market share. At this point, financial growth is stable. As to the role of the entrepreneur, further decentralization would abdicate more roles and powers in favor of the management team. Strategic and operational planning will therefore be needed and shall be the focus of the entrepreneur/manager at this stage and no longer the nitty-gritty supervision of day to day operations. Crucial at this point is the decentralization of decision-making processes where the management team and segment managers will now have a degree of autonomy to determine their operational systems and transactions based on the company goals and strategies16. Bibliography 1. Bank of England (1996) The Financing of Technology-Based Small Firms. London: Bank of England 2. Binks, M. & Ennew, C. (1991) The Changing Relationship Between Banks and Their Small Business Customers in the UK” National Small Firms Policy and Research. 3. Blackwell, D.W. and Winters, D.B. 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