Retained earnings as growth strategy for businesses
The growth of any country depends largely on the contributions of all sectors of the economy, particularly the Small and Medium Scale Enterprises. However, in this part of the world, the idea of how to establish a business concern is not a major issue, as everybody seems to have that in abundance. However, what could be said to be lacking is the ingenuity to sustain it in such a way that the business will not only thrive but also expand.
Finance experts contend that one of the best ways to achieve business growth, most especially in this part of the world where conditions on loans for small business owners are too stringent to be met, through retained earnings.
Retained earnings, according to investopeadia-an online financial dictionary, is the percentage of net earnings not paid out as dividend but retained by the company to be re-invested in its care business or to pay debt.
It went on to explain that in most cases, companies retain their earnings in order to invest them in areas, where they can create growth opportunities, such as buying new machinery and opening new branches.
It can also be used for carrying out more research and development for the purpose of consumer satisfaction and market penetration.
However, experts point out that though the culture of ploughing back profit holds the light for the survival of small scale businesses, many operators in Nigeria have yet to adopt this strategy. This situation, according to them, is responsible for the collapse of small businesses shortly after their take off.
SMEs provide employment for an estimated 60 per cent of the Nigerian workforce, thus making the sector the highest employer of labour. The sector has not succeeded in only creating employment, it has also been performing other vital roles, including adding value to the economy; accelerating rural development; stimulating entrepreneurship; mobilizing private savings; harnessing them for productive purposes; and contributint to domestic capital formation.
The importance of this sector made successive administrations put in place various policies with a view to fast-tracking development. The policies had been targeted at achieving some ends, including creating a platform for industrialization; increasing access to credit; and creating employment opportunities. Most of these objectives, according to finance experts, have not been achieved. There is much to learn on how to utilize the capability of retained earnings for business growth.
Nigerian small business owners have yet to explore the economic benefits of retained profits. This ignorance has led to the voluntary winding up of many businesses and has also retarded the transformation of others into big businesses.
Since capital is the soul of any business, entrepreneurs need to consider how to increase it while setting up or expanding existing ones. Apart from the fact that small scale business owners may not be able to meet the loan conditions set by banks, the associated cost attached to banking loans readily make the option unpopular to small scale entrepreneurs.
This explains why internal source of funding is prominent among small scale business owners in Nigeria. The culture of ploughing back profit as a means of engendering business growth is the easiest and most reliable form of sourcing for funds internally. To achieve this, business owners must adopt a principle known in accounting as the entity concept. This concept stipulates that a business is separate and distinct from its owners.
It is this principle that will enable a businessman to reinvest part of his profit for growth and expansion, rather than consume it. The case where business owners have refused to detach themselves from their business is responsible for the collapse of a large number of SMEs. Aslo most people go into businesses for their daily survival, rather than with the intent to grow the business into an icon in its chosen sector.
A common trend among SMEs is that their level of consumption is very high, in relation to their savings. Most entrepreneurs depend on their business earnings for their daily survival rather than their own earnings in the business in form of wages and salaries. With the kind of business concept, the chances of expansion are usually limited.
- It is often difficult for SMEs to meet banks’ loan conditions
- Profit plough-back is the easiest growth funding strategy
- SME operators need to imbibe culture of growth focus
- Adoption of sound accounting principle will help