Making the case for effective and formalised strategic financial management in small and medium sized enterprises in the UK2007IntroductionFinancial management, that is the ways of raising, utilizing and monitoring funds, is crucial for any business, large or small. An effective financial management enables a company to maximize profits, increase shareholders’ wealth, expand the business and achieve long-term goals. In today’s world, the role of the Chief Financial Officer is not simply of managing the company’s finances but also to direct the funds towards the company’s broader strategic goals. Hence, financial management is not simply “number crunching” but an important strategic role for the company (Johanson et al, 1996).
The finance function moves beyond internally driven strategies to those that drive competitive advantage of the company. For the small and medium businesses, financial management is all the more important since such companies have to operate under limited funds and have to utilize finance judiciously in order to expand and achieve goals. Accounting practices may be considered as twofold: 1) financial accounting is a score-keeping and reporting tool addressed to external audiences; 2) management accounting helps managers to control costs and increase revenues.
The UK Accounting Standards Board Statement of Best Practices on the Operational and Financial Review calls for “discussion identifying the principal risks and uncertainties in the main line of business, together with a commentary on the approach on managing these risks, and, in qualitative terms, the nature of the potential impact on the results” (quoted in UNCTAD, 2000). In 2005, the government issued guidelines for reporting of Key Performance Indicators (KPI). The Operational and Financial Review (OFR) that was applicable till then was replaced with the new guidelines that was applicable to the 1290 quoted companies. In this paper, I will discuss the requirements for an effective and formal strategic financial management in small and medium businesses in the United Kingdom.
First, I will discuss the economic backdrop of the business environment in the UK. Then, I will discuss various aspects of financial management like fund raising and dividend policies from the perspective of enterprises. The UK EconomyThe United Kingdom is the second-largest economy in Europe, after Germany and the fifth largest in terms of GDP at market prices (Economy Watch).
With GDP in terms of purchasing power parity at $1.93 trillion in 2006, UK witnessed economic growth of 2.8 percent over the previous year. The UK is a major trading and financial services center, with 80.4 percent of its employment generated from the services. Economic growth was hampered after the 2001 slump and it lost its share in international trade after the emergence of offshore activities. However, output growth recovered in 2006, making it difficult for a section of the policy-makers to push for the UK to join the European Union (CIA). The brisk growth in 2006 was supported by moderate shortfall of labor supply compensated by inward migration.
Although consumer price index rose just about 3 percent, it is expected to fall (OECD). The Bank of England has raised interest rates in order to control inflation. The last budget raised tax rates, which would dampen consumer sentiments a little. Although the gap in GDP growth rate between the UK and other Western European economies has narrowed, that with the US, Canada and Australia is still significant because of productivity differentials.
The UK compares poorly with other OECD countries in terms of basic literacy and vocational skills, as a result of which there has not been much productivity growth despite significant investments in information technology. The education system is improving but many people drop out of education without getting an apprenticeship for a vocation (OECD, 2004).