SMALL AND MEDIUM SCALE ENTERPRISES

FINANCING AND MANAGEMENT

Course Outline

1. Overview of Small and Medium Scale Enterprises

• Definition of Small and Medium Scale Enterprises
• Features of Small and Medium Scale Enterprises
2. Financing Small and Medium Scale Enterprises
• Sources of Finance for Small and Medium Scale Enterprises
3. Financial Management for Small and Medium Scale Enterprises
• Overview of Financial management
• Functions of Financial Managers
• Objectives of Small and Medium Scale Enterprises
• Corporate Financial Planning for Small and Medium Scale Enterprises
4. Mathematical Foundation of Finance for Small and Medium Scale Enterprises
• Compounding and Discounting
• Application of Concept of Time Value of Money in Small and Medium Scale
Enterprises
5. Analysis of Financial Statements of Small and Medium Scale Enterprises
• Analysis of Liquidity ratios
• Analysis of Profitability ratios
• Leverage ratios
• Activity or Efficiency ratios

6. Working Capital Management for Small and Medium Scale Enterprises

• Definition and Meaning of Working Capital Management
• Determinants of Working Capital Management
• Working Capital Cycle
• Challenges of Working Capital Management in Small and Medium Scale
Enterprises
7. Managing Small & Medium Enterprises
• Introduction
• Components of Management
• Management Function
8. Human Resource Management for Small and Medium Scale Enterprises
• Definition and Meaning of Human Resource Management
• HR Planning
• Job Analysis (Defining and Designing the Work)
• Recruitment and Selection
• Performance Appraisal and Compensation
• Training and Development
• Succession Planning
9. Marketing Management for Small and Medium Scale Enterprises
• Definition and Meaning of Small and Medium Scale Enterprises
• Marketing Concept
• Marketing Mix for Small and Medium Scale Enterprises
➢ Product
➢ Price
➢ Place
➢ Promotion
10.Prospects and Challenges for Small and Medium Scale Enterprises in Nigeria
1.0 Overview of Small and Medium Scale Enterprises

According to the Nigeria Bureau of Statistics, small and medium scale enterprises (SMEs) in

Nigeria have contributed about 48% of the national GDP in the last five years. With a total

number of about 17.4 million, they account for about 50% of industrial jobs and nearly 90%

of the manufacturing sector, in terms of number of enterprises.

Though significant growth has been achieved in the MSME sector, there is still much to be

done. According to an article on “developing Africa through effective, socially responsible

investing”, “there still exists a ‘missing middle’, which finds it hard to access funds due to the

category of funding they belong to.” Other challenges encountered by the sector include lack

of skilled manpower, multiplicity of taxes, high cost of doing business, among others

1.1 Definition of SMEs

Small Enterprise: An enterprise whose total cost including working capital but excluding

cost of land is between ten million naira (N10,000,000) and one hundred million naira

(N100,000,000) and/or a workforce between eleven (11) and seventy (70) full-time staff and/or

with a turnover of not more than ten million naira (N10,000,000) in a year.

Medium Enterprise: A company with total cost including working capital but excluding cost

of land of more than one hundred million naira (N100,000,000) but less than three hundred

million naira (N300,000,000) and/or a staff strength of between seventy-one (71) and two

hundred (200) full-time workers and/or with an annual turnover of not more than twenty

million naira (N20,000,000) only.

Large Enterprise: Any enterprise whose total cost including working capital but excluding

cost of land is above three hundred-million-naira (N300,000,000) and/or a labour force of over

two hundred (200) workers and/or an annual turnover of more than twenty million naira

(N20,000,000) only.

1.2 Features of SMEs

2. One of the commonest characteristics of SMEs is that they are either sole

proprietorships or partnerships. Even when they register as Limited Liability

Companies, this is merely on paper, as their true ownership structure is one-man or

partnership

3. Most SMEs have labor-intensive production processes, centralized management and

have limited access to long-term capital; even their access to short-term financing is

limited and sometime attained at a penal rate of interest and other conditionality

4. Since partnership spirit in Nigeria is at its infancy, partners in many SMEs pursue

individualistic goals at the expense of the overall interest of the SMEs. Consequently,

mortality rate among SMEs is high as a result of mistrust that often develops among the

owners

5. Another major feature of many SMEs is their over-dependence on imported raw

materials and spare parts.

6. SMEs lack the appropriate management skills and because of lack of adequate capital

or sheer ignorance of technological advances, such entrepreneurs purchase obsolete and

inefficient equipment thereby setting the stage abinitio for lower level of productivity
 and poor product quality with serious consequences on product output and market

acceptability

2.0 Financing Small and Medium Enterprises

Finance is a body of facts, principles and theories that deals with sources and application of

funds by individuals, businesses and government. Finance is the bedrock of business

establishments. There are various sources of finance available to a business enterprise,

depending on its size, ownership or listed on the stock exchange.

2.1 Sources of Finance for Small and Medium Enterprises

Source of business finance could be;

• Short-Term Financing
• Medium-Term Financing
• Long-Term Financing
1. Short-Term Financing

This source of finance is less than one year used to build stock in anticipation of seasonal

demands.

Examples of short- term financing includes;

(a) Borrowing from Friends and Relatives:

This source of finance is unreliable and risky for the provider of finance. It is might be

difficult to enforce repayment against a defaulting relative

(b) Borrowing from Cooperatives:

This source of finance is restricted to only members of the cooperative. The amount that can

be raised is also limited. Depending on the cooperative, the loans from the cooperative might

be interest free or a minimal interest rate.

( c ) Trade Credits

Suppliers of raw materials and stocks offer short- term credit facilities to their customers. The

buyers will be required to pay at an agreed period of time. The supplier must carry out robust

due diligence before selling goods on credit to avoid default.

(d) Bank Borrowing

Bank borrowing takes two forms (Bank overdraft and bank loans)

(i) Bank overdrafts:

This is short term facility whereby the banks allow current account holders draw over and

above their current balance for payment of interest on utilized amount. An overdraft may be

secured or unsecured.

Security takes the form of fixed or floating charges on asset on assets and sometimes personal

guarantees from the borrower.

ii) Bank Loans

Bank loan is a formal agreement between a bank and the borrower that the bank will lend a

specific amount of money for specific period. Interest is payable is payable on the whole of

this sum for the duration of the loan. Interest charges and requirement for security are similar
to an overdraft. Unlike overdraft that is payable on demand, bank loans have a fixed term

period.

Qualities Fund Providers Consider When Assessing Credit Worthiness of Borrowers

i. Character

ii. Capacity

iii. Conditions

iv. Collateral

v. Capital

Character: Character assessment will entail looking at a customer’s lifestyle and knowing

the type of person the he/she is. The lender will look at the honesty or reliability of the

customer. The past records with previous lenders could serve as reference to the prospective

lender

Capacity: The most important aspect of the lenders credit analysis of customers request is

the issue of the capacity of the borrower to repay the loan when due. The ability to repay

will depend on the pattern and volume of cash inflow and outflow. Character also entail

that the customer has requisite experience and know-how to handle the project being

contemplated

Capital: The expectation of a lender is that the borrower should make some equity

contribution into the business before approaching the lender for financial assistance. For
 example, the lender expects that the customer should be able to contribute about 30% of

the proposed borrowing

Conditions: This refers to the totality of the conditions of the environment in which the

customer operates. These could be economic, political and social conditions

Collateral: This has to do with the security the lender finds acceptable. Some form of

tangible security should back every credit granted. This is the alternative of recovering the

facility in the event that the primary repayment source is unrealistic

(e) Factoring

Factoring is a financial transaction whereby a business sells its account receivable (invoice) to

a third party (factor) at a discount. Sellers’s debts are purchased by the factor, usually without

recourse, who then undertakes to collect the receivables.

2. Medium-Term Financing

Medium-Term Financing are related to the purchase of fixed assets, and can be extended for

as long as ten years. Examples of medium-term financing includes;

(a) Term Loans

This facility is granted for specific purpose. Loan account will be opened for the customer if

approved, while the customer’s current account is credited with the amount approved. Interest

is then calculated on a reducing balance basis. Medium -term loan ranges between 2 -5years
(b)Hire Purchase Agreement

A hire purchase agreement is a credit sale agreement whereby the owner of the asset grant the

purchaser the right to take possession of the asset but ownership will not pass until all the hire

purchase payments have been made.

Leasing

A lease is a contract between the owner of an asset (lessor) and the user of the asset (lessee)

granting the user or lessee the exclusive right to use the asset, for an agreed period in return

for the payment of rent. Leasing is different from hire purchase contract in the sense that in

hire purchase, the asset passes to the purchaser on the fulfillment of certain conditions, whereas

lease agreement creates the right to use an asset for a definite period of time

Types of Lease:

(i) Operating Lease: An operating lease is a short- term cancellable lease between the lessor

and the lessee whereby the lessor is responsible for the upkeep, insurance, servicing and

maintenance of the asset.

(ii) Finance Lease:

A finance lease is medium/ long term lease agreement between the lessee (user of the asset or

provider of the finance). In some cases, the provider of finance for the asset is not the

necessarily the supplier of the leased asset. The lessor might buy the asset from the supplier

and immediately leases it to the lessee.

Features of Finance Lease

(i)It is not usually cancellable.

(ii) The lessee is responsible for the upkeep, insurance, servicing and

maintenance of the asset.

(iii) The lease has a primary period that covers the whole or most of the

useful economic life of the asset.

(iv) The lessor will ensure that the lease payment during the primary

period covers the full cost of the asset and a finance charge.

(v) At the end of primary period, the lessee has the option of

continuing to lease the asset for an indefinite period, for a nominal rent.

(3) Long-Term Financing

These are business financing that extends beyond ten years. Examples of long-term financing

includes;

(a) Debentures

Debentures are usually issued by longer established companies to raise money from

institutional like merchant banks, insurance companies, pension funds and specialist

institutions. Debentures issued by listed companies require trust deed where the trustee is

empowered to act on their behalf including appointment of receiver in case of default.

 (b) Ordinary Share

Ordinary shareholders are the owners of the firm that exercise control over the firm through

their voting rights. Ordinary shareholders bear the greatest risk of the firm since the company

must pay all fixed obligations before it can pay dividends to ordinary shareholders. The holders

of ordinary shares earn their reward in form of ordinary dividend. A firm planning to raise

funds through ordinary shares will incur floatation cost

(c ) Retained Earnings

Retained earnings are part of a company’s profit not paid out as ordinary dividend. It is a cheap

source of raising finance as compared to ordinary and preference share issue as no issue cost

is involved. Raising funds through retained earnings does not result in the dilution of control

since there is no share issue to outsiders. It is a veritable source of finance for firms that cannot

access funds from the capital market.

(d) Preference Share

This is a long-term source of finance for incorporated companies. Preference shareholders

receive fixed rate of dividends before ordinary shareholders but after debenture holders.

Preference shareholders have both the features of ordinary and debenture holders; hence they

are called hybrid securities. Preference share can be cumulative and non-cumulative,

redeemable and non-redeemable, participating and non- participating.

(e) Venture Capital

Venture Capitalist are high net-worth business angels who are willing to invest risk-based

capital in small unquoted companies. In addition to funding, business Engels are able to

provide expertise and advice to assist the investor company. The business angels usually assist

in cushioning the effect of financing cost on start-up companies.

3.0 Financial Management for SME

3.1 Definition of Financial Management

Financial management is the study of how firms make their investment, and financing

decisions. This entails how much to invest in either physical asset or financial assets

(securities) and how much of their current income to pay-out to the owners of the firms and

the amount and type of financial assets to issue. These two broad financial decisions made by

firms can further be appreciated by considering the two sides of a typical firm’s statement of

financial position.

On the asset side of the balance sheet are items that the firm owns both on the short-term

(current asset) and long-term (non-current asset). On the liabilities side, are what the firm owes

to its owners (shareholders) and or outsiders (creditors) on both the long-term (long-term

capital) and short term (current liabilities). The firm uses what it owes to finance (financing

decision) the acquisition of what it owns (investment decision).

3.2 Functions of a Finance Manager

1. Financial Analysis and planning

This function entails the analysis of financial data into a form that can be used to monitor

the firm’s financial position, evaluate the need for additional productive capacity and

determine the additional financing needs of the firm

2. Determination of optimal Asset Structure:

This is the determination of appropriate mix and type of asset that should be on the

firm’s

Statement of financial position is one of the major functions of financial manager. Once

the mix of current and non-current assets is determined, the next step is to ascertain the

optimal mix current and non -current asset.

3. Determination of optimal capital structure:

Two major decisions are usually made. They include the most appropriate mix of short-

term and long-term financing and the specific short-term or long- term sources of

financing that the firm should seek at a given point in time. The first decision affects the

firm’s profitability and overall liquidity while the second, has implication for the

determination of available alternatives and their costs.

 3.3 Objectives of the Small Business Firms

Profit Maximization

This is the first stated objective of the firm. Most businesses believe that as long as they

increasing revenue while keeping down costs, they are achieving this objective.

Profit maximization objective is easily understood and measurable. It has also been criticized

for being vague, ignores time value of money and risk or uncertainty of future earnings.

Satisficing

Proponents of this objective view business as a coalition of stakeholders; investors, loan

creditors, management, staff, suppliers and customers. Since the various stakeholders are equal

partners, the firm’s objectives should offer all stakeholders a satisfactory return. This implies

that all stakeholders view profit same way and should assume the same level of risk. Satisficing

objective suffers similar defects as that of profit maximization.

Shareholders Wealth Maximisation

This objective provides that any extra wealth created will belong to equity/ordinary

shareholders. The wealth of shareholders will be maximised if the market price of firm’s share

goes up. Market price of company’s shares reflects the value placed on the firm by market

participants. This is about company’s investment, financing and dividend decisions.

Superiority of SWM

• It considers timing of return on investment

• It takes into account of both return and risk

• It balances short and long-term benefits than profit maximisation

Agency Relationship

This exists where the day-to-day running of the firm is vested in the hands of managers

separate from the shareholders of the firm. There are fears that management might maximise

their welfare rather maximising the wealth of shareholders.

Agency problems in form of conflict of interest can arise if;

• Management enjoy generous fringe benefits

• Management did not put their best in the discharge of their functions

• Management places their interest far and above that of the organisation.

3.4 Corporate Financial Strategy

Corporate financial strategy is the blueprint of how an organization can survive in a

dynamic business environment.

Types of Corporate Financial Planning

• Planning

• Analyzing

• Adaptability
 • Growth

Formulating Corporate Financial Strategy

1. Review your strategic plan

Financial planning should start with your company’s strategic plan. You should think about

what you want to accomplish at the start of a new year and ask yourself a series of questions

such as;

• Do I need to expand?

• Do I need more equipment?

• Do I need to hire more staff?

• Do I need other new resources?

• How will my plan affect my cash flow?

• Will I need financing? If yes, how much?

• Then, determine the financial impact in the next 12 months

2. Develop financial projections

Create monthly financial projections by recording your anticipated income based on sales

forecasts and anticipated expenses for labour, supplies, overhead, etc. (Businesses with very

tight cash flow may want to make weekly projections.). Now, plug in the costs for the projects

you identified in the previous step.

3. Arrange financing

Use your financial projections to determine your financing needs. Approach your financial

partners ahead of time to discuss your options. Well-prepared projections will help reassure

bankers that your financial management is solid.

4. Plan for contingencies

What would you do if your finances suddenly deteriorated? It’s a good idea to have emergency

sources of money before you need them. Possibilities include maintaining a cash reserve or

keeping lots of room on your line of credit.

5. Monitor

Through the year, compare actual results with your projections to see if you’re on target or

need to adjust. Monitoring helps you spot financial problems before they get out of hand.

6. Get help

If you lack expertise, consider hiring an expert to help you put together your financial plan.

4.0 Mathematical Foundation of Finance

4.1 Compounding and Discounting methods

A basic concept in investment is that money has a time value. The concept states that money

expected in the future is not equivalent to money held today because;

• Money held today can be invested to earn interest

• Future money or future cash flows are uncertain and may not be realised

• Inflation will also reduce the purchasing power of money in the future

It is therefore better to receive a naira now than receive the same amount in the future.

Simple Interest

The simple interest is the interest earned on an original amount invested (the principal). The

amount of principal and interest payments remain the same from period to period. Simple is

computed as;

Interest = Principal X Rate (% per year) X Time (in years)

• Simple Interest

Assume WAC Company Ltd. Invests N3,000 for a period, at a simple interest of 16% per year.

Calculate the simple interest due to WAC Ltd. At the end of two years?

Solution

Interest =Principal X Rate X Time

Interest =N3,000 x 0.16 x 2

Interest = N960
Compound Interest

The Compound interest is the interest earned on the principal plus previously earned interest.

Interest is added to the principal as it is earned during the period. Interest is then computed on

the new balance (compound amount) during the next period. Interest can be compounded daily,

monthly, quarterly, semi-annually, or annually.

Example

Assume WAC Company Ltd. Invests N3,000 for a period, at a compound interest of 16% per

year. Calculate the compound interest due to WAC Ltd. at the end of two years?

1 2 3 4
Year Balance at Compound Balance at the
Beginning Interest(2X0.16X1) end of the period

1 N3,000 N480 N3,480

2 N3,480 N556.8 N4,036.80

Future Value of a Single Amount

The future value of a lump sum (single amount) invested today can be computed as;
FV = P(1+R)n
Where,
FV = Future Value
P = Principal
R = Interest rate per annum
n = Number of years
Example

An investor has identified a three-year investment paying 15% per annum. If he invests

N6,250,000, how much will his investment be worth at the end of the 3 years.

FV = P(1 +R)n

FV =N6,250,000(1+0.15)3

FV =N6,250,000(1.15)3

FV =N6,250,000(1.5209)

FV =N9,505,625

Multi-period Compounding

The formula for calculating the future value of a single amount for a multiple compounding

period is given as;

FV = P(1 + r/m)nm

Where,

FV = Future value

r = interest rate per annum

m = numbers of compounding period

n = number of years
Example

WAC Ltd took a loan of N50,000 from Keystone bank agreeing to repay the principal with

interest rate at 8% compounded semi-annually. How much will company repay at the end of

3 years?

Solution

FV = P(1 + r/m)nm

FV =50,000(1 + 0.08/2)2*3

FV =50,000(1.04)6

FV =50,000(1.2653)

FV =N63,265.00

Future Value of Irregular Payments/Receipts

The timing of each series of payment/receipt affects the future value computation since interest

will not accrue until the end of each period. The last payment will not attract interest since

each series of payment or receipt is assumed to be made at the end of each year. However, if

individual payment is made at the beginning of each year, the last payment will attract interest.

Example

Calculate the future value of the series of payment N5,000 in the first year, N6,000 in the

second year and N7,000 in the third year with each payment made at the end of each year at

an interest rate of 20% per annum.

Solution

FV = N5,000(1+0.2)2 + N6,000(1+0.2) +N7,000

FV =N5,000(1.2)2 +N6,000(1.2) +N7,000

FV =N5,000(1.44) +N6,000(1.2) +N,7000

FV =7,200 + 7,200 + N7,000

FV =N21,400

Supposing the series of payments in the example above are made at the beginning of each year,

how will it affect the future value calculation.

Solution

FV =N5,000(1+0.2)3 + N6,000(1+0.2)2 +N7,000(1+0.2)

FV =N5,000(1.2)3 +N6,000(1.2)2 + N7,000(1.2)

FV =N5,000(1.728) + 6,000(1.44) + N7,000(1.2)

FV =8640 + 8640 + 8400

FV =N25,680

Future Value of Regular Payments/Receipts: Annuity

An Annuity is a series of equal payments or receipts over some periods, with compound

interest on the payments or receipts. There are two types of Annuity

• Ordinary Annuity
 • Annuity Due

Ordinary Annuity is a series of equal payments or receipts that occur at the end of each period

involved.

Annuity Due is a series of equal payments or receipts that occur at the beginning of each period

involved.

Formular for Future Value of Ordinary Annuity

FV = A (1+r)n -1

• r

Where

A =Annuity per annum

r =Interest rate per annum

n =Number of years

FV =Future value

Example

Calculate the future value, if Rita makes a deposit of N6,000 to a savings plan at the end of

three consecutive years, with each payment earning 16% interest compounded annually?

Solution

FV = A (1+r)n -1
 r

FV =6,000 (1 +0.16)3 -1

0.16

FV = N6,000(3.5056)

FV = N21,033.60

Formular For Future Value of Annuity Due

FV = A (1+r)n+1 – (1 +r)

r =Interest rate per annum

n =Number of years

FV =Future value

Example

Calculate the future value, if Rita makes a deposit of N6,000 to a savings plan at the beginning

of three consecutive years, with each payment earning 16% interest compounded annually?

Solution

FV = A (1+r)n+1 – (1 +r)

FV = N6,000 (1+0.16) 3+1 – (1 +0.16)

 0.16

FV = N6,000 (1.16)4 -1.16

0.16

FV =N6,000 1.81 – 1.16

0.16

FV =N6000 0.65

0.16

FV =N6,000(4.0625)

FV =N24,375

PRESENT VALUE OF A SINGLE AMOUNT

Following the concept of time value of money, money held today is worth more than the same

amount of money to be received in the future.

Recall Future Value of single amount

FV =P(1 + r)n

Making P the subject of the formular

P = FV

(1+r)n
Where

P =Present value

FV=Future value of an amount to be accumulated

r =Interest rate per annum

n =Number of years

Example

Calculate the present value of an investment by Dunni Ltd expected to have a future value of

N5,036,000.80 for three years at 15% interest rate per annum.

Solution

PV = FV

(1 + r)n

PV = N5,036,000

(1+0.15)3

PV = N5,036,000

(1.15)3

PV = N5,036,000

1.5209
PV = N3,311,197.32

Present Values of Multiple Payments/Receipt

Calculate the present values of the following series of payments if interest rate is 25% per

annum.

Year Annual Payments(N)

1 25,000

2 28

3 32

4 40

5 42

Solution

PV =FV + FV…………FV

(1+r)1 (1+r)2 (1 + r)n

PV = N25,000 + N28,000 + N32,000 + N40,000 + N42,000

(1 +0.25)1 (1 + 0.25)2 (1 +0.25)3 (1+0.25)4 (1+0.25)5

PV = N25,000 + N28,000 + N32,000 + N40,000 +N42,000

(1.25)1 (1.25)2 (1.25)3 (1.25)4 (1.25)5

PV =N25,000 + N28,000 + N32,000 + N40,000 + N42,000

1.25 1.5625 1.9531 2.4414 3.0517

PV = N20,000 + N17,920 + N16,348 + N16,384 + N13,762

PV = N84,414

Present Values of Regular Payments/ Receipts

Multiple payments that have to be made today either at the end or beginning of the year to

achieve a predetermined amount is called Annuity.

Formular For Present Value Ordinary Annuity

PVOA = A 1-(1+r)-n

Example

If Innocent needs to repay a car loan of N17, 408,300 over the next three years.

The loan which is at an interest rate of 10% P.A shall be repaid in equal installments. Calculate

the amount of each installment.

Solution

17,408,300 = A 1-(1+r)-n

17,408,300 = A 1 – (1+0.1)-3

0.1
17,408,300 = A 1 – (1.1)-3

0.1

17,408,300 = A (2.4869)

A = 17,408,300

2.4869

A = N7,000,000

Present Value of Annuity Due:

The present value of an annuity due is the amount that would be invested today at a certain

compound interest rate to enable the investor to receive the series of future payment from now

over a specified period.

PVAD= A (1 +r) – (1 + r)-(n-1)

Example

Paul has N 70,000 debt obligation to repay at the beginning of each of the next three years.

Paul wants to know how much he would have to invest today to enable him repay the debt if

the amount invested earns 10% compounded annually.

PVAD= A (1 +r) – (1 + r)-(n-1)

r
PVAD = 70,000 (1+0.1) – (1+0.1)-(3-1)

0.1

PVAD = 70,000 1.1 – 1.1-2

0.1

PVAD = 70,000 (2.7355)

PVAD = N191,485

Present Value of A Perpetual Annuity

A perpetual annuity is a series of equal periodic payments or receipts expected indefinitely.

Example of perpetual annuity is dividend on irredeemable preference shares

PPA = A

Where A, occurs at the end of the year

Example

Ayo expects a perpetual sum of N15,000 annually from the estate of his late uncle.

What is the present value of annuity if Ayo can invest at the rate of 20% per annum?

PPA = N15,000

0.2
PPA = N75,000

4.2 Application of Time Value of Money

A sinking fund is a fund established by an economic entity by setting aside revenue over a

period of time to fund a future capital expense, or repayment of a long-term debt

Loan amortization is simply the process of a borrower paying back the borrowed money in

installments and thus decreasing the outstanding loan amount, or principal.

Example

Keystone bank needs to provide N5m to replace its ATM machine in Oregun branch in 5 years

time. In order to provide this amount, the company has decided to set aside an equal amount

annually out of its profits. The bank will invest any amount set aside at 20% interest rate per

annum. Calculate the amount the bank should set aside annually and present the sinking fund

schedule.

Solution

FVOA = A (1 + r) n -1

N5,000,000 = A (1 + 0.2)5 -1

0.2

N5,000,000 = A (1.2)5 -1 = A 1.4883

 0.2 0.2

N5,000,000 = A (7.4416)

A =N5,000,000 = N671,898.52

7.4416

Year A b c D=a+b+c

Bbf interest@20% Sinking fund Bcf

1 - - 671,898.85 671,898.85

2 671,898.85 134,379.77 671,898.85 1,478,177.17

3 1,478,177.42 295,635.43 671,898.85 2,445,711.45

4 2,445,711 489,142.29 671,898.85 3,606,752

5 3,606,752 721,350.52 671,898.85 500,000

Rita needs to repay a N5m loan with Keystone bank over the next 5 years. The loan which is

at an interest rate 20% per annum shall be repaid in equal installments. Calculate the amount

of each installment and show loan amortization schedule.

Solution

PVOA = A 1- (1+r)-n

PV =N5m
i =20%

n =5years

A =?

N5,000,000 = A 1 – (1+r)-n

N5,000,000 =A 1 – 1+0.20-5

0.2

N5,000,000 = A 1 – 1.2-5

0.2

• N5,000,000 = A(2.9906)

• A = N5,000,000

• 2.9906

• A = N1,671,905.30
Loan Amortization Schedule

Year A b c D=c-b E=a-d

Principal amt Annual Installment Principal Payment amount
owing b/f interest payment payment owing c/f
@20%
1 500,000 1,000,000 1,671,905 671,905.30 4,328,094.7
2 4,328,094.7 865,618.94 1,671,905 806,286.36 3,521,808.34
3 3,521,808.34 704,361.67 1,671,905 967,543.63 2,554,264.71
4 2,554,264.71 510,852.94 1,671,905 1,161,052.36 1,393,212.34
5 1,393,212.34 278,642.47 1,671,905 1,393,262.83 0

5.0 ANALYSIS OF FINANCIAL STATEMENTS

Financial Statements

SMEs commonly use three types of financial statements

Statements of financial position

This is a report of the financial position of an organization at one moment in time,

providing a snapshot of SME’s financial health. The information contained in the

statement of financial position shows SMEs ability to meet present and future

obligations with current resources. How much is owed and how much is owned by

the organization.
Components of Statement of Financial Position

Assets Liabilities Equity

Represents what is Represent what is owed Represents the capital or

owned by the SME or by the bank to others net worth of the bank

owed to it by others

Are items in which an It includes capital

SME has invested its contribution of owners,

funds for the purpose of retained profits and

earning revenue current year surplus

Statements of comprehensive income

Statements of comprehensive income reports the SMEs financial performance over

a specified period of time usually one year. It summarises all revenue earned and

expenses incurred during a specified accounting period. An SME prepares an

income statement so that it can determine its net profit or loss (the difference

between revenue and expenses)

Revenue Expenses

Refers to money earned by an SME for Represent costs incurred for goods and

goods sold and services rendered services used in the process of earning

during accounting period. revenue.

Statement of Cash Flow

Statement of Cash Flow shows where an SMEs cash is coming from and how it is

being used over a period of time. A cash flow statement classifies the cash flows

into operating, investing and financing activities:

Operating Activities: Income generated or money expended on services provided

Investing Activities: Income and expenditures that have been made from or on

resources intended to generate future income and cashflow

Financing Activities: Resources obtained from and resources returned to the

owners.

Financial Analysis
Financial Analysis is the computation of analytical ratios from financial statements

and interpretation of these ratios to determine their trends as a basis for

management decisions.

The key objective of measuring the financial health of an organization is to

determine the capacity of an SME to attain sustainability from revenues generated

from its business operations

Ratio Analysis

Ratio analysis is a financial management tool that enables managers of SME to

assess their progress. Ratio analysis help answer two primary questions. Is the

SME achieving progress towards profitability? How efficient is it in achieving its

objectives?

Taken together, the ratios provide perspective on the financial health of an SME

Users of Financial Statement Analysis

• Equity/shareholders

• Loan/debenture holders

• Trade union
 • Management

• Government

• Financial analysts;

• Stockbrokers;

• Competitors;

• Community where the company is located

• Financial institutions.

Four Ratios are particularly important for an SME:

5.1 LIQUIDITY RATIOS: These measure the company’s ability to fulfill its short-term

financial strength or liquidity,

The commonly used liquidity ratios are;

*Current ratio = Current assets

Current liabilities
*Quick ratio = Current assets - Inventories
Current liabilities
5.2 PROFITABILITY RATIOS: The profitability of a company can be measured by the

profitability ratios

(a) Profitability Related to Sales

* Gross Profit Margin = Gross Profit(sales-cost)

Sales
 *Admin expenses ratio = Admin Expenses
Sales
(b) Profitability Related to Investment

*Return on Assets = Profit after tax

Total asset

*ROCE = EBIT
Total capital Employed
*Return on Equity = Profit after tax
Total Equity
5.3 LEVERAGE RATIOS: These ratios measure the company’s ability to meet its long-term

debt obligations. They throw light on the long-term solvency of a company. The commonly

used leverage ratios are as follows;

* Debt-Equity Ratio = Long-term debt

Shareholders’ equity

*Total debt ratio = Total debt

Total asset
* Propriety ratio = Shareholders’ equity
Total assets

5.4 ACTIVITY OR EFFICIENCY RATIOS: These are also known as turnover

ratios. These ratios measure the efficiency in asset management. They express the relationship

between sales and the different types of assets, showing the speed with which, these assets

generate sales
 *Current asset turnover = Sales
Current assets
*Fixed asset turnover = Sales
Fixed assets
*Total asset turnover = Sales
Total assets

The financial statement below is extracted from the annual reports of PM Plc
Statements of Financial Position for the year ended 31 December 2021
2021(‘000) 2020(‘000)
Assets
Property, plant and equipment 16,459,377 13,850,434
Intangible assets 77,163 101,815
Repayments 148,451 147,125
Trade and other receivables - 58,485
Total Non -Current Assets 16,684,991 14,157,859

Inventories 19,993,070 14,440,448

Trade and other receivables 4,388,620 4,143,787
Prepayments 305,839 360,379
Cash and cash equivalents 8,543,707 16,500,732
Total Current Assets 33,231,236 35,445,346
Total Assets 49,916,227 49,603,205

Equity
Share capital 488,168 488,168
Share premium 350,211 350,211
Retained earnings 8,720,870 7,804,903
Total Equity 9,559,249 8,643,282

Liabilities
Employee benefits and liabilities 3,965,520 2,520,881
Deferred tax liabilities 1,658,048 1,391,983
Total non Current liabilities 5,623,568 3,912,864
Current liabilities 5,166,154 6,053,200
Trade and other payables 19,838,045 18,724,244
Loans and borrowings 9,729,211 12,269,615
Total current liabilities 34,733,410 37,047,059
Total liabilities 40,356,978 40,959,923
Total equity and liabilities 49,916,227 49,603,205

Statements of profit or loss and other comprehensive income for the year ended 31 December
2020 in thousands of naira.
2021(‘000) 2020(‘000)
Sales 126,436,219 120,256,164
Cost of Sales (97,505,943) (92364739)
Gross profit 68,930,276 27,891,425
Other income 373,490
Selling and distribution expenses (7,51,620) (6,226,312)
Administrative expenses (4,063,728) (3,481,949)
Results from operating activities 17,294,928 18,556,654
Finance income 917,369 1,259,604
Finance costs (1,712,377) (503,704)
Net finance costs (795,008) 755,900
Profit before tax 16,499,920 19,312,554
Income tax expense (5,768,642) (6,243,033)
Profit for the year 10,731,278 13,069,521
Other comprehensive income
Items that will never be reclassified
Re-measurements of defined benefits (646,071) 91,194
Related tax 193,821 (27,358)
Other comprehensive income net tax (452,250) 63,836
Total comprehensive income 10,279,028 13,133,357
Profit attributable to:
Owners of the company 10,731,278 13,069,521

Required: Calculate the following ratios for the year ended 2021/2020 and state with reasons
whether you would invest in PM shares.
i. Current ratio
ii. Total debt ratio
iii. Gross profit ratio
iv. Return on Assets
v. Quick ratio
 Working Capital Management

6.0 Overview of Working Capital Management

Working Capital is a financial metric which represents operating liquidity available to a

business, organization or other entities, including government entity. Working capital

management focuses on a firm’s current accounts which comprise of current assets and current

liabilities. A firm is expected to maintain positive working capital to ensure that a firm is able

to continue its operations and has sufficient funds to satisfy both maturing short-term debts

and upcoming operational expenses.

A company’s working capital is calculated as:

Working capital = Current assets – Current liabilities

Working capital ratio= Current assets

Current Liabilities
It measures the extent to which a firm’s short- term assets cover its short- term debt. If current

assets are less than current liabilities, a firm has working capital deficiency, also called a

working capital deficit.

• Nature of Working Capital

• Gross Working Capital

• Net working Capital

Gross Working Capital: This refers to all the current assets and represents the amount of funds

invested in current assets. Current assets are those assets which can be converted into cash

within the short-term period. Therefore, gross working capital is the total of all current assets

such as;

➢ Inventories (Raw materials, work-in-progress, finished goods etc.)

➢ Trade debtors

➢ Loans and advances

➢ Cash and bank balances

➢ Bills receivable

➢ Short-term investment ; Gross working capital=Total current assets

Net Working Capital: This is the excess of current assets over current liabilities. The

difference between current assets and current liabilities is called net working capital

Net Working Capital = Current Assets – Current Liabilities

A positive net working capital is when current assets exceed current liabilities

While a negative working capital will arise when current liabilities exceed current assets.

Example: The following is the balance sheet of M-G Ventures Ltd as at 31 December,2021

Solution

Gross Working Capital

Liabilities N Assets N

Capital 100,000 Plant and 75,000

Machineries

Profit 20,000 Land and Building 50,000

Long-Term 60,000 Furniture 25,000

Borrowings

Sundry Creditors 21,500 Stock Investment 20,000

Bills Payable 8,500 Sundry Debtors 25,000

Bills receivables 10,500

Semi –Finished 4,500

Goods

Total 210,000 Total 210,000

Net Working Capital

The ratio of current assets to current liabilities=N60,000: N30,000 (2:1)

S/N Item Description Amount (N)

1 Total Current Assets 60,000

2 Less-Total Current Liabilities:

3 i. Sundry Creditors 21,500

4 ii. Bills Payables 8,500 30,000

Net Working Capital 30,000

6.2 Determinants of Working Capital

Nature of the Business:

The nature and volume of business is an important factor in deciding the needed working

capital

Public utility service (like railway companies) as compared to manufacturing concerns require

a lesser amount of working capital. A larger amount of working capital is required for trading

or merchandising institutions

Size of Business Venture:

Size of the business venture is an important determinant of working capital

The general principle in this regard is that the bigger the size of the unit, the greater the amount

of working capital requirement. However, consumers goods industry would require a larger

amount of fixed capital than working capital

Duration in the Manufacturing Process:

The longer the period of manufacturing, the larger the inventory required

Length of Cash Conversion Circle:

The length of cash conversion cycle is an important determinant of working capital. A firm

with shorter cash conversion cycle would require greater amount of working capital than a

firm with longer cash conversion cycle

Buffer Stock:

Where there is need to stockpile raw materials, larger amount of working capital required. This

becomes necessary for items that are seasonal.

To Avoid Stock-Out:

Organisations keep inventory to avoid and/ minimize stock-out and its associated costs.

6.3 Working Capital Cycle

This is also known as operating cycle, refers to the duration between the firm’s payment of

cash for raw materials, entering into production and inflow of cash from debtors and realization

of receivables. It is the length of time it takes to turn the net current assets and liabilities into
cash. The longer a business is tying up its working capital without earning a return on it. A

positive working capital cycle balances incoming and outgoing payment to minimize net

working capital and maximise free cash flow.

Components of Working Capital Cycle

i. Conversion of cash into raw materials

ii. Conversion of raw materials into WIP

iii. Conversion of WIP into finished goods

iv. Conversion of finished goods into account receivables and debtors through sales

v. Conversion of accounts receivables into cash

Calculation of Working Capital Cycle

i. Raw materials stock turnover = Raw materials X 360

Purchases
ii. WIP turnover = Work-In-Progress x 360
Cost of goods sold
iii. Finished goods stock turnover = Finished goods x 360
Cost of goods sold
iv. Debtors collection period = Debtors X 360
Sales
vi. Creditor’s payment period = Trade creditors X 360
Purchases
Working capital cycle= R + W + F +B +D - C

Were
R = Raw materials

W= WIP

F = Finished stock

B = Cash at bank

D = Debtors and receivable collection period

C = Credit period available

Example

The following data have been extracted from the financial statements of a manufacturing firm.

Items Amount (N’000)

Purchases 3,000

Stocks: Raw materials 250

Work-in-progress 200

Finished goods 170

Sales 2,650

Cost of goods sold 1,800

Debtors 210

Creditors 175

Assuming a 360 day a year, determine the firm’s working capital (operating) cycle
Solution

Raw material stock turnover = 250 x 360 = 30 days

3,000
WIP turnover = 200 x 360 = 40 days
1,800

Finished goods stock turnover= 170 x 360 = 34 days

1,800
Debt collection period = 210 x 360 = 29 days
2,650
Less creditors’ average payment = 175 x 360 = 21 days
period 3,000
WCC = 30 + 40 + 34 + 29 – 21 = 112days

6.4 Problems of Working Capital Management

Over Capitalisation

This occurs where a firm operates with excessive working capital

The implication of over capitalization is that a lot of resources that could have been invested

elsewhere are invested in working capital.

Over capitalization will lower the rate of return on the company’s investment

Symptoms of Over-Capitalisation

• Huge investment in stock

• Excessive debtors balance

 • Huge idle cash

• Low level of creditors

• An accelerated increase in sales

• Build- up in debtors and stock at a rate faster than sales

Solution to Over-Capitalisation

• Significant reduction in investment in working capital

• Increased long-term investment

Overtrading

This is a situation of insufficient working capital. Overtrading can be described as the inability

of a firm to provide the level of working capital required to sustain a given level of trading.

Symptoms of overtrading

• Lack of cash flow. The company will repeatedly have a dip into overdraft and borrow
cash regularly.
• Small profit margins
• Excessive borrowing
• Loss of suppliers support for credit
• Offering of unreasonable discount to induce sale
• Inability to pay salaries, tax and dividend as at when due

7.0 Managing Small & Medium Enterprises

7.1 Introduction

Management can be defined as all the activities and tasks undertaken by one or more persons

for the purpose of planning and controlling the activities of others in order to achieve an

objective or complete an activity that could not be achieved by the others independently.

7.2 Components of Management

Activity Major Management Functions

Planning Predetermining a course of action for
accomplishing organizational objectives
Organizing Arranging the relationship among work units
for accomplishment of objectives and the
granting of responsibility and authority to
obtain those objectives
Staffing Selecting and training people for positions in
the organization
Directing Creating an atmosphere that will assist and
motivate people to achieve desired end results
Controlling Establishing, measuring, and evaluating
performance of activities toward planned
objectives

7.3 Management Functions

If a manager’s goal is to create a lasting, high performance environment in the company the

following tasks must be basically performed by such manager.

i. Building a positive work environment

ii. Establishing strategic direction

iii. Allocating and marshalling resources

iv. Upgrading the quality of management

 v. Creating excellence in operations and execution

Building a Positive Work Environment

Every company has a particular work environment that dictates to a large extent how its

managers respond to problems and opportunities. A company’s work environment is partly a

heritage of its past leaders. However, shaping that environment is critically important part of

every incumbent manager’s job, regardless of what was inherited. Over time, most managers

exert influence on their work environment by three types of actions:

• Goals and performance standard, they establish

• The value they establish for the organization

• Established business and people concepts that are consistent with their goals and values

Establishing Strategic Direction

Whether the manager is the prime mover of the company’s strategy or not, he or she is

responsible for ensuring that a process is in place for strategic planning.

A commonly accepted framework for strategy formulation and appraisal highlights the

following elements:

• the task, its defined mission, competitive position, functional goals and efforts,

• available resources including leadership, human, financial, technological etc. and

• Structure, including organization, controls, systems, standards, rewards, policies,

processes and values.

During the process of strategy formulation and review, the manager is faced with a sequence

of important decisions that determine the effectiveness of the strategy. Successful strategies

usually start with good ideas and evolve over time as they are exposed to the realities of the

market place.

Allocating and Marshalling Resources

Successful strategy requires resources to convert them into reality. The manager’s role in

resource allocation stems from three distinctive features of the job.

a. First, the manager is the person who can commit resources across the entire business

b. Second, the manager must be the chief decision maker of trade-offs among key projects

and functions competing for limited resources. Since most businesses lack the resources

to do everything that is proposed, this is usually a major responsibility.

c. Third, once a decision is made to pursue a strategy, the manager assumes the

responsibility for allocating the resources needed to ensure success.

Allocating resources often involves the manager in a series of negotiations with external

entities (i.e. financial institutions, major investors, government agencies and labour unions) as

well as internal constituents. Resource allocation is not limited to strategic decisions alone; it

extends to operational decisions as well. It is however essential that both resource allocation

is productively employed.
Upgrading the Quality of Management

Many managers contend that the selection, development, and deployment of people are the

most important responsibilities. Therefore, most managers of SMEs involve themselves in:

• Defining and supervising the process for selecting and developing the company’s senior

and middle management.

• Seeing that each function periodically analyses its skill requirement and people needs

• Setting job requirements and standards

• Making sure that outstanding managers are challenged and their talents effectively

developed and utilized

• Ensuring competitive rewards for meeting targets

• Making sure that the on-boarding process is rigorous and competitive to attract best

hands

Creating Excellence in Operations and Execution

Typically, the manager influences day-to-day operations in three major ways:

• By his/her style

• By the management processes used; and

• By the way time is allocated

If the manager is a direct, personal leader, things will usually be done in a direct, personal way.

Less direct leaders may rely on a consensus-driven approach. The manager’s responsibilities

cover a wide range of activities. Individually, they may not be as important or as interesting
as the development of a business strategy. Taken together, however, they keep the business

going effectively, thus meeting its goals. A primary skill of the manager is to pick the specific

areas where his or her involvement will have the greatest impact on business results. The scope

of the job is such that a manager nearly faces many problems and opportunities that he/she can

possibly deal with personally. The manager may decide to put greater emphasis on strategy

formulation; at another time, the focus may be on the development of people or the working

environment knowing what to emphasize, when to emphasize it, what and when to delegate,

and to whom to delegate are crucial decisions that managers face.

8.0 Human Resource Management for Small and Medium Enterprises

8.1 Overview of Human Resource Management

HRM is a process of making the efficient and effective use of human resources so that the set

goals are achieved. HRM is thus a management function that helps managers to recruit, select,

train and develop members for an organisation. HRM is concerned with people’s dimension

in organisations.

The following constitute the core of HRM

a. HRM Involves the Application of Management Functions and Principles. The functions

and principles are applied to acquiring, developing, maintaining and providing remuneration

to employees in organisation.

b. Decision Relating to Employees must be integrated. Decisions on different aspects of

employees must be consistent with other human resource (HR) decisions.

c. Decisions Made Influence the Effectiveness of an Organisation. Effectiveness of an

organisation will result in betterment of services to customers in the form of high-quality

products supplied at reasonable costs.

d. HRM Functions are not confined to Business Establishments Only but applicable to non-

business organisations such as education, health care, recreation and like. HRM refers to a set

of programs, functions and activities designed and carried out in order to maximise both

employee as well as organisational effectiveness.

Function of HRM in the Organisation

(I)Deciding what staffing needs and whether to use independent contractors or hire employees

to fill these needs,

(ii) Recruiting and training the best employees,

(iii) Dealing with performance issues

(iv) Ensuring your personnel and management practices conform to various regulations.

(v) Managing your approach to employee benefits and compensation,

(vi)Employee records and personnel policies.

8.2 Human Resource Planning (HRP)

8.2.1Definition

HRP is the process of determining manpower needs and formulating plans to meet these needs

Aims of Human Resource Planning

● Attract and retain the number of people required with the appropriate skills, expertise and

competencies;

● Anticipate the problems of potential surpluses or deficits of people;

● Develop a well-trained and flexible workforce, thus contributing to the organisation’s ability

to adapt to an uncertain and changing environment;

● Reduces dependence on external recruitment when key skills are in short supply by

formulating retention, as well as employee development strategies;

● Improve the utilisation of people by introducing more flexible systems of work

8.3 Job Analysis (Defining and Designing the Work)

Definition

Definition of Job Analysis Job analysis is a systematic analysis of the behaviour required to

carry out a task with a view to identifying areas of difficulty and the appropriate training

techniques and learning aids necessary for successful instruction. It can be used for all types

of jobs but is specifically relevant to administrative tasks.

Designing the Job In designing the job one has to start by:

1. Identifying the use to which the information will be put: This will determine the type of

data you collect and the technique you use to collect them

2. Collection of Background Information: According to Terry, “The make-up of a job, its

relation to other jobs, and its requirements for competent performance are essential

information needed for a job evaluation. This information can be had by reviewing available

background information such as organisation charts, class specification and the existing job

descriptions ITQ 1: What is job analysis? which provide a starting point from which to build

the revised job description”.

3. Selection of Jobs for Analysis: To do job analysis is a costly and time-consuming process.

It is hence, necessary to select a representative sample of jobs for purposes of analysis.

Priorities of various jobs can also be determined. A job may be selected because it has

undergone undocumented changes in job content. The request for analysis of a job may

originate with the employee, supervisor, or a manager. Some organisations establish a time

cycle for the analysis of each job. For example: A job analysis may be required for all jobs

every three years. New jobs must also be subjected to analysis.

4. Collection of Job Analysis Data: Job data on features of the job, requited employee

qualification and requirements, should be collected either form the employees who actually

perform a job; or from other employees who watch the workers doing a job and there by

acquire knowledge about it; or from the outside persons, known as the trade job analysis who

are appointed to watch employees performing a job.

5. Processing the Information: Once job analysis information has been collected, the next

step is to place it in a form that will make it useful to those charged with the various personnel

functions. Several issues arise with respect to this. First, how much detail is needed? Second,

can the job analysis information be expressed in quantitative terms? These must be considered

properly.

6. Preparing Job Descriptions and Job Classifications: Job information which has been

collected must be processed to prepare the job description form. It is a statement showing full

details of the activities of the job. Separate job description forms may be used for various

activities in the job and may be compiled later on. The job analysis is made with the help of

these description forms. These forms may be used as reference for the future.
7. Developing Job Specifications: Job specifications are also prepared on the basis of

information collected. It is a statement of minimum acceptable qualities of the person to be

placed on the job. It specifies the standard by which the qualities of the person are measured.

Job analyst prepares such statement taking into consideration the skills required in performing

the job properly

8.4 Recruitment and Selection

2.1 Definition of Recruitment and Selection

Recruitment forms a step in the process which continues with selection and ceases with the

placement of the candidate. It is the next step in the procurement function, the first being the

manpower planning. Recruiting makes it possible to acquire the number and types of people

necessary to ensure the continued operation of the organisation. Recruiting is the discovering

of potential applicants for actual or anticipated organisational vacancies.

2.2 Issues that Attract Employees to Organisation

The factors that attract employees to an organisation can be classified as internal and external

factors. The internal factors are:

• Wage and salary policies

• The age composition of existing working force

• Promotion and retirement policies

• Turnover rates

• The nature of operations involved the kind of personnel required

 • The level and seasonality of operations in question

• Future expansion and reduction programmes

• Recruiting policy of the organization

• Size of the organisation and the number of employees employed;

• Cost involved in recruiting employees

The external factors are:

• Supply and demand of specific skills in the labour market

• Company’s image perception of the job seekers about the company

• External cultural factors. For instance, example, women may not be recruited in certain

jobs in the industry

• Economic factors: such as a tight or loose labour market, the reputation of the enterprise

in the community as a good pay master or otherwise and such allied issues which

determine the quality and quantity of manpower submitting itself for recruitment

• Political and legal factors also exert restraints in respect of nature and hours of work for

women and children, and allied employment practices.

8.5 Performance Appraisal and Compensation

Definition of Performance Appraisal

Employee’s appraisal system may be considered one of the indicators of the quality of Human

Resource Management in an organisation. Properly designed and realised process of

employees‟ appraisal is not only the necessary basis of successful employee performance
management, but also provides valuable information for other human resource management

functions (Blstakova 2010). Performance Appraisal is important because it helps in

Performance Feedback, Employee Training and Development Decisions, Validation of

Selection process, Promotions & Transfers, Layoff Decisions, Compensation Decisions,

Human Resource Planning (HRP), Career Development and Develop Interpersonal

Relationship.

Objectives of Performance Appraisal

1. Salary Increase: Performance appraisal plays an important role in making decision

about increase in salary. Increase in salary of an employee depends on how he is

performing his job.

2. Promotion: Performance appraisal gives an idea about how an employee is working in

his present job and what his strong and weak points are.

3. Training and Development: Performance appraisal gives an idea about strengths and

weaknesses of an employee on his present job.

4. Feedback: Performance appraisal gives an idea to each employee where they are, how

they are working, and how are they contributing towards achievement of organisational

objectives.

5. Pressure on Employees: Performance appraisal puts a sort of stress on employees for

better performance.
8.6 Training and Development

Definition

According to Obisi (2001) training is a process through which the skills, talent and knowledge

of an employee is enhanced and increased. He argues that training should take place only when

the need and objectives for such training have been identified

Types of Training

There are two major types of training, on-the -job training and off- the -job training

On-the-job training – This is normally handled by colleagues, supervisors, managers,

mentors' to help employees adjust to their work and to equip them with appropriate job related

skills Armstrong (1995) argues that on-the-job training may consist of teaching or coaching

by more experienced people or trainers at the desk or at the bench.

Off-the-job Training - According to Ejiogu (2000) off-the-job training would include lecture,

vestibule training, role playing, case study, discussion and simulation Armstrong (1995) listed

group exercises, team building, distance learning, outdoor and workshops as part of off-the-

job training.

8.7 Succession Planning

Definition

Succession planning assesses the likely turnover in key posts, identifies suitable candidates to

fill these posts in future, and ensures that they have the right training and exposure for their
future work. Given the effort and support required for undertaking succession planning, it is

normally confined to the directorate and those ranks immediately below, plus any grades with

high turnover or anticipated expansion.

Succession planning is a very important exercise because it minimizes the impact of turnover

in these key ranks and gives a branch or department early warning of any skill shortages or

likely difficulties in finding suitable candidates. Ideally a succession plan should cover 3 to 5

years. The succession plan should identify:

• key posts and possible successors

• causes of turnover

• competencies of successors and the training required for them

• posts for which no apparent successor exists and the remedial action planned
9.0 Marketing Management for SMEs

9.1 DEFINITION OF MARKETING

Marketing can be defined as internal and external, individual and corporate, goal directed

activities in which businesses engage in with the aim of satisfying customers’ wants and needs.

Marketing creates time, place and possessions, it arranges for production and making goods

available at the right time, in the right place and form

9.2 Marketing Concept

Marketing Concept is the idea or belief that consumers/customers should be treated as

‘’Kings’’. The interest and desires of consumers must always be taken into consideration in

bringing out product or any business activities. The basic idea behind marketing concept is

consumer orientation. The planning and operation of the organisation must be consumer

oriented i.e. having the consumers at the centre of the mind while planning. It is assumed that

consumers are always right i.e. consumer sovereignty

9.2.1 Fundamental Proposition of Marketing Concept

Consumer Needs: Ask the consumer about their needs

Product Development: This must suit the needs and preferences of the consumers

Planning and Organisation: Plan and organise a marketing programme before offering

products to the customers

Post Sales Activities: Always carry out post- sales activities that will ensure that the products

are satisfactory to the consumers.

Consumer Orientation: This is the concept of marketing which begins and ends with the

needs and wants of the consumers rather than that of the organisation.

Consumer satisfaction is the major aim of being in business.

Consumer Sovereignty

This concept states that consumers are always right. This is the supremacy the consumers have

in determining what a firm has to produce. A firm can only determine the needs and wants of

the consumers through research.

9.3 Marketing Mix for Small and Medium Enterprises

Product Price

Place Promotion

9.3.1 MEANING OF A PRODUCT

A product can be described as anything that satisfies the needs of a target client. The term is

generally used to describe all the goods and services offered in exchange for monetary value.

Products therefore, are bundles of attributes, features, functions, benefits, delivery and services
that can be either tangible (physical goods) or intangible (service benefits) or a combination

of both

9.3.2 PARTS OF A PRODUCT

A product consists, in the main, of three parts namely

CORE: This is the reason why the client wants to pay for the product. This also refers to the

ability to satisfy the intrinsic need of the client. It reflects the client’s perception of importance

in this regard.

ACTUAL: This refers to the specific features that characterize what the client is buying.

AUGMENTED: This refers to how the client receives the product-the packaging. This also

includes branding and placement.

To illustrate the three components, as mentioned above in ‘’Bottled Water’’ as a product, the

description will appear as follows.

CORE: Provision of chilled water to quench thirst. This will eventually restore someone to

normalcy

ACTUAL: this refers to the terms and conditions of the purchase. This refers to the price of

the commodity

AUGMENTED: This refers to how the client receives the product, the packaging. This also

includes branding and placement.

9.4 PRODUCT DEVELOPMENT

Product Development is seen as the process of improving existing products or developing new

products either for the banks’ existing clients or for new types of clients.

9.4.1 SOURCES OF NEW PRODUCT IDEAS

• CUSTOMERS’ SUGGESTIONS: Many good ideas originate from customers. A

complaint and suggestion database can capture and process these ideas.

• CUSTOMERS’ BEHAVIOUR: Dropouts provide a wealth of valuable product

information. Because former clients have less to lose than existing costumers, their

responses are often more candid.

• INSIDERS: Observation and intuition can be generators of product ideas. Field staff

have ample opportunity to observe customers and prospective customers; the insight of

field staff should be heeded.

• OUTSIDERS: Consultants, donors, researchers and other visitors may generate good

ideas, especially if they have spent time working with other banks. The fresh perspective

of visitors should be welcomed.

9.5 PRICING

A price is the value or sum of amount at which a supplier of product or service and a buyer

agree to carry out an exchange transaction. The price of a product of a given quantity is the

amount of money a buyer must give the seller for a specific quantity of the product. It must be

stated that price is the only element in the marketing mix that yields revenue, others produce
costs. Price can be described as the amount for which a product or service is exchanged, or

offered for sale to potential purchases irrespective of value or worth.

9.5.1 PRICING POLICIES

Loss Leader Policy: This is a type of pricing in which the business deliberately sells one of

its products at a price that is below cost in order to attract customer to buy their products.

Fixed Margin Policy: This is the type of pricing policy whereby the business add a constant

mark- up percentage to its cost or fix its gross profit at a constant margin of its selling price.

Composite pricing policy: This is the pricing policy in which business uses a combination of

its own cost and the prices charged by its competitors to fix price. e.g. a business may say its

profit must be fixed at 5% below that of a major competitors.

One price policy: This is a pricing policy in which the business resolves to sell its products to

all buyers at the same price irrespective of the purchasing power of the buyer.

Differential pricing Policy: This is the opposite of one price policy. It involves charging

different grade of customers different prices. These differentials can be as a result of graduated

discounts to certain categories of customers.

Follow the Leader: This is the pricing policy in which the business do not fix its own prices

but responds to whatever prices that may be dictated by the market.

Adaptive pricing policy: This is the pricing policy takes all variables into consideration, these

variables include the followings:

Cost of production

Prices charged by competitors

Business mission and objectives

Quality of the product

Quality of substitutes

Changes in legislation

Response to competitors’ actions

Reactions of consumers to price changes

Penetration pricing policy: This is the pricing policy used to enable a new product just

introduced into the market to gain wide spread acceptance. It is very useful when the product

faces equally powerful substitutes in the market and customers can only patronize it if a lower

price is charged. For this policy to be effective, it must be possible to achieve cost reduction

through economies of scale.

9.5.2 DETERMINANTS OF PRICING DECISION

Cost of production: The cost of manufacturing a product or rendering of a service is a major

determinant of pricing decision. The most common approach is referred to as full cost- plus

pricing.
Product Position: The manner in which a business positions its product determines its pricing

decision.

It will be paradoxical for business to tag its product as high quality and the place a low price

on it.

Product Life Cycle: The stage a product has attained in its life cycle is a major determinants

of pricing decision. For example, it is rational to price a young product at low in order to

expand its market share while a product at decline stage should be at a high price to so as to

maximize profit.

Corporate policy and objectives: Organizations corporate and marketing objectives plays a

major role in its pricing policy. For example, a business that has a policy of high- quality

product would reflect it in its pricing policy or a policy for effective market strategy.

Government policy: Government and regulatory agencies sometimes intervene in pricing of

goods and services in order to achieve a national economic agenda.

Aggregate Demand: This means the total sum of goods and services demanded by

individuals. The higher the demand for goods and services, the higher the price and vice versa.

Price of Competing Brands: In determining the price of goods and services, organizations

normally consider the price of competing brands. This factor is mostly considered by

businesses in order to maximum its market share.

9.5.3 IMPORTANCE OF PRICING TO A BUSINESS

• Price plays an important role in the marketing mix of a service because pricing attracts

revenue to the business which has a direct impact on the profitability of the business.

• Price affects the volume of sales to a greater or lesser extent.

• Pricing decisions are significant in determining the value for the customer.

• Pricing plays a role in the building of an image for the services.

• Pricing gives a perception of quality i.e. the price charged for service signals to

customers the quality of the service they are likely to receive.

9.5.4 FACTORS THAT MAKE SME TO INITIATE A PRICE CHANGE

• If the prices are too low that it is attracting undesirable kinds of customers who have no

loyalty to any seller.

• If customers are being confused as a result of too many price choices.

• If price differentials among items are objectionable or untenable.

• If customer perceives the business as exploitative

• If there is a decline in sales

• If prices are two high compared to those charged by competitors and relative to the

benefits of the product

• If prices are too low compared to cost or heavy demand

• If the SME price is reflecting negatively on the business image and its product
9.6 DELIVERY SYSTEM (PLACE)

9.6.1 Definition

This is defined as various elements, including channels, procedures and processes businesses

use to deliver product and services to customers.

9.6.2 TYPES OF CHANNELS USED BY BANKS TO DELIVER FINANCIAL

SERVICES TO CUSTOMERS

Direct Marketing

• Establishment of network of branches in different locations to reach customers

effectively

• Personal selling of bank services and other financial products to customers

• Use of courier services to deliver mails

INDIRECT MARKETING

• Direct response advertising to pass vital information to customers

• E-marketing tools such as the internet and other ICT devices

• Social responsibility programmes

• Newspapers, Billboards, Magazines, posters, brochure leaflets, and annual financial

reports
9.6.3 CHANNELS OF DISTRIBUTION

Channel 1: Producer ----------Consumer

Channel 2: Producer-----Agent-----Consumer

Channel 3: Producer—Wholesaler—Retailer---

Consumer

Channel 4: Producer—Agents—Wholesaler—

Retailer—Consumer

9.6.4 DETERMINANTS OF CHOICE OF THE CHANNEL

Nature of the Product: Consumer goods that are of low value would probably have longer

channels of distribution while industrial or durable goods are likely to have direct channels of

distribution.

Nature of the market: A market with many existing and potential customers would require

the use of intermediaries to reach the customers while a market with few customers would

require direct approach.

Resource Availability: A firm with adequate financial and human resources would prefer to

deal directly with final customers while the one with inadequate financial resource would

employ the services of middlemen or intermediaries

Market of Location: The geographical location of the market determines to large extent the

channel of distribution. A market in an unfriendly environment would require other channel

instead of personal selling.

Cost of the channel: In choosing the channel of distribution, a firm must consider the cost

implication vis-à-vis other channels available

9.7 Promotional Mix

9.7.1 Definition

Promotional Mix comprises personal and non- personal forms of communication used by

organizations to create awareness of their products and services. It consists of the specific

blend of advertising personal selling, sales promotion and public relations tools, that the

marketer uses to pursue its marketing objectives.

➢ Advertising

➢ Personal Selling

➢ Sales Promotion

➢ Public relations

➢ Publicity

➢ Branding

9.7.2 Advertising

This can be defined as any paid form of non- personal communication which is directed to the

customers or target audience through various media in order to present and promote products,
services and ideas. Advertising informs, educates and persuades people to buy the advertised

goods and services.

ADVERTISING MEDIA

Advertising media are means through which information concerning goods and services are

conveyed to the audience, target market or the general public.

The various advertising media available are:

-The press (Newspapers, magazines/Journals and books)

-Television

-Radio

-Cinema

-Billboards

-Catalogues

-Exhibitions and Trade Fairs

9.7.3 PERSONAL SELLING

Personal selling involves the direct personal contact of sellers with the potential buyers with

view to making sales. It can also be referred to as face-to-face meeting of the salesman with
the potential buyers in their houses, officers or market place e.g. door-to-door selling. It is

good for industrial goods or specialized goods.

9.7.4 SALES PROMOTION

Sales promotion can be defined as any activity that is used to stimulate sales of a product. It is

a special promotion technique designed to encourage brand patronage. Sales promotion may

be directed at customers in the form of consumer promotion or to middle way as trade

promotion. It usually lists for a period of time.

REASONS FOR THE USE OF SALES PROMOTION

• To encourage slow selling lines

• To create dealers’ interest and encourage stocking

• To encourage more frequent use of a product

• To stimulate off peak period sales

• To introduce a new product

• To boost sales in a particular geographical area

• To offset price competition

FORMS OF SALES PROMOTION

• Consumer promotions

• Trade promotions
The following are examples of consumer promotions.

-Free Sample Distribution

-Special Price Sales

-Premium Offer

-Competitions

-Trade Fairs

Trade Promotions

• Free Goods

• Special discounts

• Co-operative Advert

9.7.5 PUBLICITY

Publicity can be defined as news about products or companies, appearing in the form of

editorial material with cost to the sponsor in the press, on radio or television.

USES OF PUBLICITY

• Publicity accords credibility to a company

• It dramatizes a company and its products or services

• It secures a favorable public image for the firm

• It creates awareness for a company and its products or service

 FORMS OF PUBLICITY

• Photographs

• Feature stories

• News conference

• Work visits

• Press release or News items

9.7.6 Branding

Branding is a general term covering brand names, designs, trademarks, symbols which may

be used to distinguish one firms’ product from that of another. Branding is the act of giving a

distinctive label or name to a product. The brand name may be registered as a trade mark, thus

protecting it from competitors. The main aim of branding is to distinguish one manufacturer’s

product form similar product of other company.

10.0 Problems of Small and Medium Enterprises in Nigeria

The fact that SMEs have not made the desired impact on the Nigerian economy in spite of all

the efforts and support of succeeding administrations and governments gives a cause for

concern. It underscores the belief that there exists fundamental issues or problems, which

confront SMEs but which hitherto have either not been addressed at all or have not been

wholesomely tackled.
1. Inadequate, inefficient, and at times, non-functional infrastructural facilities, which tend to

escalate costs of operation as SMEs are forced to resort to private provisioning of utilities such

as road, water, electricity, transportation, communication, etc.

2. Bureaucratic bottlenecks and inefficiency in the administration of incentives and support

facilities provided by the government. These discourage would-be entrepreneurs of SMEs

while stifling existing ones.

3. Lack of easy access to funding/credits, which can be traceable to the reluctance of banks to

extend credit to them owing, among others, to poor and inadequate documentation of business

proposals, lack of appropriate and adequate collateral, high cost of administration and

management of small loans as well as high interest rates.

4. Discrimination from banks, which are averse to the risk of lending to SMEs especially start-

ups

5. High cost of packaging appropriate business proposals

6. Uneven competition arising from import tariffs, which at times favour imported finished

products

7. Lack of access to appropriate technology as well as near absence of research and

development

8. High dependence on imported raw materials with the attendant high foreign exchange cost

and scarcity at times

9. Weak demand for products, arising from low and dwindling consumer purchasing power

aggravated by lack of patronage of locally produced goods by the general-public as well as

those in authority. 10.Unfair trade practices characterised by the dumping and importation of

substandard goods by unscrupulous businessmen. This situation is currently being aggravated

by the effect of globalisation and trade liberalization, which make it difficult for SMEs to

compete even in local/home markets. 11.Weakness in organisation, marketing, information-

usage, processing and retrieval, personnel management, accounting records and processing,

etc. arising from the dearth of such skills in most SMEs due to inadequate educational and

technical background on the part of the SME promoters and their staff.

12. High incidence of multiplicity of regulatory agencies, taxes and levies that result in high

cost of doing business and discourage entrepreneurs. This is due to the absence of a

harmonized and gazetted tax regime, which would enable manufacturers to build in recognized

and approved levies and taxes payable.

13. Widespread corruption and harassment of SMEs by some agencies of government over

unauthorised levies and charges

14. Absence of long-term finance to fund capital assets and equipment under project finance

for SMEs

15. The lack of scientific and technological knowledge and know-how, i.e. the prevalence of

poor intellectual capital resources, which manifest as:

i. Lack of equipment, which have to be imported most times at great cost (capital flight) and

which would require expatriate skills to be purchased at high costs.

ii. Lack of process technology, design, patents, etc., which may involve payment of royalties,

technology transfer fees, etc. and heavy capital outlay.

iii. Lack of technical skills in the form of technological and strategic capability

iv. Inability to meet stringent international quality standards, a subtle trade barrier set up by

some developed countries in the guise of environmental or health standards. A relevant

example is the impending ban of marine foods, vegetables, fruits and other agricultural

products from Africa into the United States of America markets.

v. The inability to penetrate and compete favorably in export markets either because of poor

quality of products, ignorance of export market strategies and networks or lack of appropriate

mechanism and technology to process, preserve and package the products for export.

16.Lack of initiative and administrative framework or linkage to support and sustain SMEs’

development, which to a large extent, is also a reflection of poor technological capability or

intellectual resource

17.Lack of appropriate and adequate managerial and entrepreneurial skills with the attendant

lack of strategic plan, business plan, succession plan, adequate organisational set-up,

transparent operational system, etc. on the part of many founders and managers of SMEs in

Nigeria. As a fallout of this, many of the SME promoters purchase obsolete and inefficient

equipment thereby setting the stage ab initio for lower-level productivity as well as
substandard product quality with dire repercussions on product output and market penetration

and acceptance.

18.Lack of suitable training and leadership development. In spite of the fact that training

institutions abound in Nigeria, they rarely address the relevant needs of SMEs especially in

the areas of Accounting, Marketing, Information Technology, Technological processes and

development, International trade, Administration and management of Small and Medium

Enterprises. Essentially, SMEs are left most often on their own to eke out success amidst the

avalanche of operational difficulties inherent in the Nigerian environment as well as the

operational shortcomings, which characterise institutions set up to facilitate SME businesses.