Lecture 5

Why is finance especially important for SMEs?

Limited resources and records make funding harder to obtain. Owners often lack a finance specialist, especially in young firms.

Why can a profitable SME run out of cash?

Customers pay later than the firm must pay its bills. Growth can make this cash gap larger.

What makes SME finance distinctive according to Ang (1991)?

The owner’s income, wealth and control are tied to the firm. Outsiders have limited information.

What did Carraher & Van Auken (2013) find?

Owners comfortable with financial statements use them more in decisions. This is an association, not proof of causation.

What is NPV, and is a positive NPV enough?

NPV compares discounted extra cash flows with the investment cost. Positive NPV creates expected value, but funding and liquidity must also be feasible.

What is the usual SME financing hierarchy?

First retained earnings, then owner funds, debt and external equity. This generally preserves control for as long as possible.

Why might a bank require collateral or a personal guarantee?

It knows less about the firm than the owner does. Security reduces the bank’s risk but increases the owner’s personal exposure.

What is financial literacy?

Understanding and using financial information to forecast cash, assess investments and compare financing options.