Sri Lanka is a country with a burgeoning entrepreneurial spirit. For years, individuals island-wide have jumped at the chance to respond to local demand by starting their own business. But as any business owner can tell you, starting and running a thriving enterprise is far from easy. Compounding the challenge is that Sri Lanka has recently emerged from a 25-year ethnic conflict that decimated the country’s infrastructure, governance institutions and enterprises, particularly in the Northern and Eastern provinces of the country. Despite the risks, the promise of opportunity and reward still leads many Sri Lankans to set out on the path to business ownership.
Over the past year, I had a chance to both understand and address some of these challenges in my engagement as a Finance Advisor with MBAs Without Borders supporting the VEGA/BIZ+ program in Sri Lanka implemented by Land O’Lakes International Development. The VEGA/BIZ+ program is a United States Agency for International Development (USAID)-funded economic growth program that provides small- and medium-sized businesses with the financial assistance and management tools they need to grow and thrive. My role as a Finance Advisor with the program was to assess company financial records as part of the due diligence process of evaluating and monitoring the program’s grantees.
During one such engagement, I attempted to review historical cash flows of a dairy manufacturer. Dairy production and consumption in Sri Lanka has been growing steadily over the last forty years and is poised to play a significant role in helping to alleviate nutritional poverty and create employment opportunities across the country. The operation I visited runs smoothly and currently produces dairy products on a relatively large scale. But I quickly realized that they had not been keeping regular financial records, and those few records they had could not be used by a financial manager in their current form. Despite a long production history, the owner had difficulty explaining his costs, pricing rationale, or cash flow needs. While successful, the company relies on credit lines to manage periods of uncertain cash flow and, as a result, misses opportunities to improve the bottom line. By incurring avoidable financing charges, the company undermines its growth over time.
Overcoming the Roadblocks
While very high standards of accounting and reporting are commonplace among companies in Sri Lanka, some small business owners have a limited understanding of their financial position, including their actual cash needs, profitability, unit costs, or production volumes. Keeping thorough financial records and adopting good financial management practices overall ensures companies can perform at or above their potential, and can easily mitigate the risk of default in times of crisis. But if these practices aren’t implemented—even though the company could remain operational and even thrive—their growth and profitability can be limited by a lack of financial insight, leaving the business vulnerable.
Most of the companies VEGA/BIZ+ serves are based in former conflict areas. Many of them were forced to shut down operations during hostilities, and many were unable to immediately adapt their financial management systems when operations resumed between 2009 and 2010. In cases where a business continued to operate and maintain steady growth in the midst of the conflict, the owners were often resistant to change. Since their business had survived and grown surrounded by conflict, putting these systems in place seemed unnecessary. In some cases managers also resisted hiring accountants or financial managers as their value was not readily apparent. Many mistrusted how these records could be used; it was likely easier and safer to keep this information in the owner’s head and hands.
Despite these roadblocks, adopting a base level of financial management can increase firms’ ability to recognize problems and formulate appropriate responses based on accurate information. Instituting quality financial management practices, including accurate recordkeeping that provides a clear view into cash levels and credit windows, could have a game-changing effect on Sri Lanka’s business environment.
Recognizing Problems and Responding Quickly
Financial management begins with having a timely snapshot of the financial position of a business. This can enable business owners to make more informed and strategic decisions about current and future operations. At a base level, maintaining a record of production volume could allow companies to track seasonal variations in demand. It would help them to order bulk raw materials ahead of expected demand spikes or while prices are low. Without these snapshots, companies face periods of production shutdown when materials run out or are forced to pay unfavorable prices for those raw materials.
By tracking even more information, business owners can recognize emerging problems more quickly, and make critical corrective decisions that help them keep the lights on. For instance, by assessing the per-unit profit of the goods they produce and comparing the costs of production with the actual prices charged to customers, a company can more appropriately price their products. After conducting this exercise, one of the VEGA/BIZ+ grantees found that their average product price was far lower than expected. By taking discounts, transport fees, and spoilage into account in their financial projections, they realized they were charging prices well below competitors and even trending toward bankruptcy. With this information in hand, the business owner was convinced to adjust the company’s pricing strategy.
These snapshots can also help companies put a contingency plan in place to manage periods of low supply or demand. Companies need enough capital to manage day-to-day operations and to continue operations when revenue is low. Effectively budgeting working capital requires that business owners are also able to understand the company’s future performance. Banks require financial projections in advance of issuing business loans, so companies are often forced to put these together. It is expected that these projections will be optimistic, but it’s also important that they are realistic. A manufacturing company operating at capacity that doubled their sales in the past six months may project a significant increase in sales, but it would certainly raise concern for a prospective investor if their projected growth vastly outpaces historical performance or if they do not adjust projections for corresponding materials or utility costs. If a bank does issue a loan to a company that is unable to match actual performance with projections, this can lead to crushing debt burdens and potential insolvency. An accurate and timely understanding of both their current and future financial needs is therefore critical for companies.
Financial Management in Action
Improving financial management is often included as a technical assistance component of a business investment, but most small and medium businesses should simply start by establishing a system of financial record-keeping before attempting to automate accounting and financial management.
Having some basic financial tracking systems in place—basic logs, in written or electronic form—are essential to helping these businesses succeed. A manager should be able to track their production, sales, and purchases on a daily or weekly basis. They also need to know their cash flow needs. But providing these tools alone is not enough; businesses must also adopt them in practice. Effective utilization of these tools will take a business to the next level and ensure they can weather the roadblocks they may encounter down the road.
Integrating a practice of continued financial management into a business that has been operating without it since its inception is not easy. But dedicating the effort and time it takes to do so can go a long way in increasing the efficiency, profitability and a resilience of a company. For small and medium businesses in Sri Lanka, that can make all the difference—to surviving and thriving.
John Ginther is an MBAs Without Borders Advisor supporting economic growth in Sri Lanka. John holds an MBA and a Masters of Global Affairs from the University of Toronto.