CMA with support from KPMG, Stanbic Bank, ICEA and ICPAU organized a top 100 SME’s seminar on Building sustainable and competitive Businesses in Africa. The seminar brought together different business owners across various industries. The seminar proceedings were held at Serena Hotel on 25th September, 2014 and sponsored by Capital Markets Authority (CMA).
The specific objectives of seminar were; to discuss the road to listing on the Growth Enterprise Market Segment (GEMS) and to discuss Financial Reporting as driver of business.
Debt Vs. Equity
CMA brought to table the two major sources of financing for Small and Medium Entrprises (SME’s) i.e. debt and equity. Where “Debt Financing” involves borrowing money, typically in the form of a loan from a bank or other financial institution to fund a business and “Equity Financing” involves bringing in investors or partners to provide capital in exchange for a share of ownership of the business.
Generally it was emphasized that for business seeking growth, they required long-term capital through equity financing. However this type of financing comes with it’s shortfalls namely; reduction in direct management control, formalization and visibility where there has to be formality in everything and the company needs to develop a budget and a strategic plan and an increase in business complexity i.e.the business is exposed to more risks.
The Uganda Security Exchange (USE) focused on its role and prospectus requirements for listing. Their presentation covered the different investment marketing segments for businesses which include;
- Main Investment Market Segment (MIMS) for companies relatively established with a minimum authorized, issued and fully paid up capital of 1 billion Ushs.
- Growth Enterprise Markets Segment suitable for medium sized companies.
- Fixed income Market Segment (FMS) for companies limited by shares, minimum net assets of Ushs 2billion, positive profits in at least 2 of the last 3 years preceding issue etc.
The seminar was wrapped up with Institute of Certified Public Accountants (ICPAU) addressing financial reporting as a driver for (of) a Business. Financial reporting involves preparing accounting records in accordance with applicable accounting framework which in our case are the IFRS’s for SME’s and IAS.
The purpose of financial reporting is to deliver this information to the lenders and share-owners (the stakeholders) of the business. If someone else is supporting part of your business, financial reporting must be part of the essential contract between you and them. So business owners should ensure that their business transactions are fairly stated to enable share holders make informed decisions. It also helps in resolving disputes with tax authorities like Uganda Revenue Authority (URA).
In conclusion, business owners need to acknowledge that in order for the business to grow, they should adopt equity over debt financing as the former does not have to be repaid, risks and liabilities are shared with new investors and the cash flow generated can be used for diversification. More to the same, a low debt-to-equity ratio puts owners in a better position to get a loan in the future when the need arises.
Written by Emmanuel Mambo