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Modern Financial Management Theories & Small Businesses

The following are some examples of modern financial management theories formulated on principles considered as ‘a set of fundamental tenets that form the basis for financial theory and decision-making in finance’ (Emery et al.1991). An attempt would be made to relate the principles behind these concepts to small businesses’ financial management.Agency Theory
Agency theory deals with the people who own a business enterprise and all others who have interests in it, for example managers, banks, creditors, family members, and employees. The agency theory postulates that the day to day running of a business enterprise is carried out by managers as agents who have been engaged by the owners of the business as principals who are also known as shareholders. The theory is on the notion of the principle of ‘two-sided transactions’ which holds that any financial transactions involve two parties, both acting in their own best interests, but with different expectations.Problems usually identified with agency theory may include:i. Information asymmetry- a situation in which agents have information on the financial circumstances and prospects of the enterprise that is not known to principals (Emery et al.1991). For example ‘The Business Roundtable’ emphasised that in planning communications with shareholders and investors, companies should consider never misleading or misinforming stockholders about the corporation’s operations or financial condition. In spite of this principle, there was lack of transparency from Enron’s management leading to its collapse;ii. Moral hazard-a situation in which agents deliberately take advantage of information asymmetry to redistribute wealth to themselves in an unseen manner which is ultimately to the detriment of principals. A case in point is the failure of the Board of directors of Enron’s compensation committee to ask any question about the award of salaries, perks, annuities, life insurance and rewards to the executive members at a critical point in the life of Enron; with one executive on record to have received a share of ownership of a corporate jet as a reward and also a loan of $77m to the CEO even though the Sarbanes-Oxley Act in the US bans loans by companies to their executives; andiii. Adverse selection-this concerns a situation in which agents misrepresent the skills or abilities they bring to an enterprise. As a result of that the principal’s wealth is not maximised (Emery et al.1991).In response to the inherent risk posed by agents’ quest to make the most of their interests to the disadvantage of principals (i.e. all stakeholders), each stakeholder tries to increase the reward expected in return for participation in the enterprise. Creditors may increase the interest rates they get from the enterprise. Other responses are monitoring and bonding to improve principal’s access to reliable information and devising means to find a common ground for agents and principals respectively.Emanating from the risks faced in agency theory, researchers on small business financial management contend that in many small enterprises the agency relationship between owners and managers may be absent because the owners are also managers; and that the predominantly nature of SMEs make the usual solutions to agency problems such as monitoring and bonding costly thereby increasing the cost of transactions between various stakeholders (Emery et al.1991).Nevertheless, the theory provides useful knowledge into many matters in SMEs financial management and shows considerable avenues as to how SMEs financial management should be practiced and perceived. It also enables academic and practitioners to pursue strategies that could help sustain the growth of SMEs.Signaling Theory
Signaling theory rests on the transfer and interpretation of information at hand about a business enterprise to the capital market, and the impounding of the resulting perceptions into the terms on which finance is made available to the enterprise. In other words, flows of funds between an enterprise and the capital market are dependent on the flow of information between them. (Emery et al, 1991). For example management’s decision to make an acquisition or divest; repurchase outstanding shares; as well as decisions by outsiders like for example an institutional investor deciding to withhold a certain amount of equity or debt finance. The emerging evidence on the relevance of signaling theory to small enterprise financial management is mixed. Until recently, there has been no substantial and reliable empirical evidence that signaling theory accurately represents particular situations in SME financial management, or that it adds insights that are not provided by modern theory (Emery et al.1991).Keasey et al(1992) writes that of the ability of small enterprises to signal their value to potential investors, only the signal of the disclosure of an earnings forecast were found to be positively and significantly related to enterprise value amongst the following: percentage of equity retained by owners, the net proceeds raised by an equity issue, the choice of financial advisor to an issue (presuming that a more reputable accountant, banker or auditor may cause greater faith to be placed in the prospectus for the float), and the level of under pricing of an issue. Signaling theory is now considered to be more insightful for some aspects of small enterprise financial management than others (Emery et al 1991).The Pecking-Order Theory or Framework (POF)
This is another financial theory, which is to be considered in relation to SMEs financial management. It is a finance theory which suggests that management prefers to finance first from retained earnings, then with debt, followed by hybrid forms of finance such as convertible loans, and last of all by using externally issued equity; with bankruptcy costs, agency costs, and information asymmetries playing little role in affecting the capital structure policy. A research study carried out by Norton (1991b) found out that 75% of the small enterprises used seemed to make financial structure decisions within a hierarchical or pecking order framework .Holmes et al. (1991) admitted that POF is consistent with small business sectors because they are owner-managed and do not want to dilute their ownership. Owner-managed businesses usually prefer retained profits because they want to maintain the control of assets and business operations.This is not strange considering the fact that in Ghana, according to empirical evidence, SMEs funding is made up of about 86% of own equity as well as loans from family and friends(See Table 1). Losing this money is like losing one’s own reputation which is considered very serious customarily in Ghana.Access to capital
The 1971 Bolton report on small firms outlined issues underlying the concept of ‘finance gap’ (this has two components-knowledge gap-debt is restricted due to lack of awareness of appropriate sources, advantages and disadvantages of finance; and supply gap-unavailability of funds or cost of debt to small enterprises exceeds the cost of debt for larger enterprises.) that: there are a set of difficulties which face a small company. Small companies are hit harder by taxation, face higher investigation costs for loans, are generally less well informed of sources of finance and are less able to satisfy loan requirements. Small firms have limited access to the capital and money markets and therefore suffer from chronic undercapitalization. As a result; they are likely to have excessive recourse to expensive funds which act as a brake on their economic development.Leverage
This is the term used to describe the converse of gearing which is the proportion of total assets financed by equity and may be called equity to assets ratio. The studies under review in this section on leverage are focused on total debt as a percentage of equity or total assets. There are however, some studies on the relative proportions of different types of debt held by small and large enterprises.Equity Funds
Equity is also known as owners’ equity, capital, or net worth.
Costand et al (1990) suggests that ‘larger firms will use greater levels of debt financing than small firms. This implies that larger firms will rely relatively less on equity financing than do smaller firms.’ According to the pecking order framework, the small enterprises have two problems when it comes to equity funding [McMahon et al. (1993, pp153)]:1) Small enterprises usually do not have the option of issuing additional equity to the public.
2) Owner-managers are strongly averse to any dilution of their ownership interest and control. This way they are unlike the managers of large concerns who usually have only a limited degree of control and limited, if any, ownership interest, and are therefore prepared to recognise a broader range of funding options.Financial Management in SME
With high spate of financial problems contributing to the high rate of failures in small medium enterprises, what do the literature on small business say on financial management in small businesses to combat such failures?
Osteryoung et al (1997) writes that “while financial management is a critical element of the management of a business as a whole, within this function the management of its assets is perhaps the most important. In the long term, the purchase of assets directs the course that the business will take during the life of these assets, but the business will never see the long term if it cannot plan an appropriate policy to effectively manage its working capital.” In effect the poor financial management of owner-managers or lack of financial management altogether is the main cause underlying the problems in SME financial management.Hall and Young(1991) in a study in the UK of 3 samples of 100 small enterprises that were subject to involuntary liquidation in 1973,1978,and 1983 found out that the reasons given for failure,49.8% were of financial nature. On the perceptions of official receivers interviewed for the same small enterprises, 86.6% of the 247 reasons given were of a financial nature. The positive correlation between poor or nil financial management (including basic accounting) and business failure has well been documented in western countries according to Peacock (1985a).It is gainsaying the fact that despite the need to manage every aspect of their small enterprises with very little internal and external support, it is often the case that owner-managers only have experience or training in some functional areas.There is a school of thought that believes “a well-run business enterprise should be as unconscious of its finances as healthy a fit person is of his or her breathing”. It must be possible to undertake production, marketing, distribution and the like, without repeatedly causing, or being hindered by, financial pressures and strains. It does not mean, however, that financial management can be ignored by a small enterprise owner-manager; or as is often done, given to an accountant to take care of. Whether it is obvious or not to the casual observer, in prosperous small enterprises the owner-managers themselves have a firm grasp of the principles of financial management and are actively involved in applying them to their own situation.” McMahon et al. (1993).Some researchers tried to predict small enterprise failure to mitigate the collapse of small businesses. McNamara et al (1988) developed a model to predict small enterprise failures giving the following four reasons:- To enable management to respond quickly to changing conditions
- To train lenders in recognising the important factors involved in determining an enterprise’s likelihood of failing
- To assist lending organisations in their marketing by identifying their customer’s financial needs more effectively
- To act as a filter in the credit evaluation process.They went on to argue that small enterprises are very different from large ones in the area of borrowing by small enterprises, lack of long-term debt finance and different taxation provisions.For small private companies, these measures are unreliable and textbook methods for judging investment opportunities are not always useful in organisations that are privately owned to give a true and fair view of events taking place in the company.Thus,modern financial management is not the ultimate answer to every business problem including both large and small businesses.However,it could be argued that there is some food for thought for SMEs concerning every concept considered in this study. For example it could be seen (from the literature reviewed )that, financial records are meant to examine and analyse corporate operations. Return on equity, return on assets, return on investment, and debt to equity ratios are useful yardsticks for measuring the performance of big business and SMEs as well.

The Toronto Photography Scene

The Toronto photography scene is full of young and upcoming new Canadian photographers, and there are many ways to get involved in this exciting area of Toronto culture. One way is by visiting one of the many photography galleries in Toronto. There are more than 20 of them in the city, including the Christopher Cutts Gallery, Gallery 44, and the Monte Clark Gallery. Many of these double as Toronto photography studios or printing workshops, but also feature work by famous, as well as local photographers. Some even offer photography workshops and classes, such as the IX Gallery in Riverside, which holds such events monthly. Others boast special exhibits of specialty or vintage photography regularly. Analogue Gallery focuses on music photography of famous artists, such as Bob Dylan, Bjork, and the Beatles, while SPORT Gallery focuses on sports photography. Whatever your artistic tastes, Toronto has a photography gallery that you will enjoy.Another way to get involved is by joining the Toronto Camera Club. It was founded over 100 years ago, in 1888, and on its website, claims to be the “oldest camera club in Canada.” Although membership fees for a year are $100 (or $50 for students), membership gets you access to their Toronto photography library and darkroom, the ability to enter their competitions, and the chance to go on club outings. They hold weekly meetings with competitions, weekly lectures, monthly visits to local Toronto photography hotspots, and occasional overnight photography field trips. They also have workshops and training to help you learn new techniques and improve your photography. It’s a great way to get to know other people that love photography and want to have fun too!Finally, go out with your camera and take some pictures! There are lots of great Toronto photography photo opportunities, such as Union Station, Lake Ontario, the many gardens, and the older historic parts of Toronto. Niagara Falls is only an hour and a half drive from Toronto and is perhaps one of the most photographed locations in the world. If you shoot a photograph that you think is particularly good, submit it to one of the Toronto photography galleries that accepts submissions from emerging local artists. Bau-Xi Photo, a relatively new photo gallery, is encouraging new photographers to submit their work. 44 Wide specializes in helping new artists print and exhibit their photography, and even offers discounts to artists who use their printing services.So don’t be shy: Get out there and get involved in the Toronto photography scene! There are lots of great opportunities to admire, learn, and even display your own work.

Know All About Software Testing As a Career Option

Software testing is a process that helps in evaluating attributes or capabilities of a program or system in order to make sure that it meets all necessary expectations and delivers desired results. The job of a software tester is important because he/she is trained to detect flaws, if any, in the software. By using different parameters, testers test various software, before they come in the market, in order to make sure that they are error – free. Backed with an impeccable business knowledge and technical competency, software testing is indispensable to launch a top-notch product in the market without any bug or flaw.Some of the leading companies offering software testing jobs in India are -1 = AppLabs
2 = IBM India
3 = Symantec Corporation
4 = QualityKiosk
5 = Groupon
6 = Microsoft
7 = Accenture
8 = Cognizant Technology Solutions
9 = Groupe Steria
10 = HCL Technologies
11 = HP
12 = Hexaware Technologies
13 = Infosys
14 = Tata Consultancy Services
15 = Tech Mahindra
16 = WiproWhat skills are required to become a software tester?1 = Good communication skills
2 = Analytical skills
3 = Team player
4 = Domain knowledge
5 = Eye for details
6 = Business savvyWhat are the educational qualifications required for testing jobs?Although there is no obligation to have specified degree to become a tester, it is useful to possess a degree in computer science, especially in different technical testing roles, like performance testing, etc.A Bachelor of Engineering degree or MCA would be an added benefit. Also, if you have an exposure to Oracle, Java and other computer languages, then you will enjoy an edge over other applicants. Some of the leading colleges in India, which are offering testing education are-1 = Anna University, Chennai
2 = Arcus Infotech, Bangalore
3 = Indian Institute of Software Testing, Coimbatore
4 = Thiagarajar College of Engineering, MaduraiAfter completing your testing program, you can plan your career as a-1 = Reliability Engineer
2 = Software Quality Engineer
3 = Software test lead
4 = Software test manager
5 = Software test architect
6 = Software test designer
7 = Quality Manager
8 = Quality Engineer
9 = Quality Auditor
10 = Quality TechnicianRemunerationAs a software tester, you can earn a lucrative salary package. A fresher can earn anywhere between Rs 3-5 lakh/annum. An experienced software tester can earn between Rs 7-10 lakh/annum. If you are working for an overseas client, then your testing job would also include foreign traveling.What is the scope?There is a huge scope for software testing jobs both in India and abroad. The Indian Testing Board has over 30,000 certified testers in the ISTQB (International Software Testing Qualifications Board) foundation level exam. It is a globally acclaimed certification for testers. Moreover, the software industry is both rewarding and challenging.Every day, new software is launched in the market, and as a result, there is a burgeoning demand of testers, who can test software at different levels and find out the defect, if any. According to the latest “Software Testing Market India 2014″, India has become the world’s most preferred outsourcing destination for software testing services because of its workforce and operational efficiencies.Furthermore, the government initiatives also act as a major force behind the growth of the testing industry in India. Moreover, India’s IT spending may touch the mark of $73.3 billion by 2015 and as per the market report, the growth of IT industry in India may make it the 3rd largest IT market in the Asia Pacific region by 2016. It means, there are abundant opportunities available for software testers. Also, as a software tester, you get a chance to work in the international arena also.Your career progressionAs a software tester, your career progression would follow the following hierarchy -Junior Test Engineer->Test Engineer->Senior Test Engineer->Team Leader->Test Manager->Project ManagerEven after spending some years in the testing field, you can explore opportunities in below fields -1 = Automation Testing
2 = Performance Testing
3 = Business Analyst