Oman Governments Contributions On SMEs

Challenges faced by SMEs in Oman

Discuss about the Oman Governments Contributions on SMEs.

"The sooner that SMEs are created, the better for the economy. I don't think we can sustain the surplus situation for too long," said Abdulwahid Al Heraki, an independent economist (The National, 2017)

Mr. Abdulwahid forcasted back in early of 2013 that the economy of oman will go down in the near futur and clearly stated to focus on SMEs. As GDP Of Oman was at the highest back in 2014 (81.034 Billion USD) but it was decreasing to in the following two years and reached to 66.293 Billion USD According to World Bank Statements (Data.worldbank.org, 2017). The reason behind this reduction is the falling of Oil Prices in the world and oman was mostly depending on Oil for it's income and that what lead Oman economy to fall with the oil prices.

Oman needs to focus on other sources of income, one of the best and the strongest source is SME Sector. The SME influence every party involves in this sector (Government, Business Owners and consumers). That’s why it is the best solution to energize the economy in Oman.

In the other hand, SMEs needs the support to be initiated and also successfully operated, such as support of financing and also Working Capital Management.

There is a big decline in the SMEs operating Oman from last year. As SMEs Declined by 31.2% in first quarter of 2017 National Centre for Statistics and information (Report, 2017). There are many factors that causes the loss of theses SMEs and the of the biggest influences is Working Capital Management.

The working capital management is a Prime reason for success of any business. As it insures the money loops inside the firm without any liquidity crunches. WCM involves the  management of five important aspects in every firm, Account Receivable, Account Payable, Cash in hand, Inventory and Overdraft. I will explain below in details the Importance of working Capital Management:

WCM helps the business owner to minimize the Credit period that is given to the company's customers (account receivables) and on the other hand it will maximize the Account payable period to the supplier. This will help to equalize the payable and receivable period so the business owner will be able to collect the money fast and pay the debts without any delays.

The business operation will be healthy without any crunches, receivables will be early in, and the payables will be early out. Stocks will be bought based on demand with no overstocking and will be sold at the earliest. This kind of situation is caused of good WCM and will lead to success and profitable smooth business.

Importance of working capital management for SMEs

Breakeven means when the business covers it costs with the revenue. It is always known to be 1:1 ratio. Business owners should cover the costs without over drafting or taking loans from banks to insure the success of the business. WCM ratios tells the business owner the ideal purchase amount to cover the revenue, so there won't by overstocking the business which will eventually lead to extra expenses in purchases and storing. If the expenses reduced and revenue is still intact, the breakeven will be achieved sooner.

Good money liquidity in the company is an outcome from a good Working capital management. In this situation, taking loans and overdrafts from banks to cover up the costs and expenses won't be necessary. The reasons of going bankrupted is the inability to pay debts to the suppliers and to the bank.

To avoid debts and overdraft which always comes with bank interests, it is cheaper and better to go for the personal financing (using self-funds) to cover the expenses sometimes or expanding the business. This also avoids the risks of delaying debts payments or even bankruptcy.

The capacity to get to fund is a main consideration influencing the development and accomplishment of SMEs. In this manner, the accessibility of adequate access to fund guarantees the capacity of SMEs commitment to the financial development of Economy. Numerous organizations confront a great deal of difficulties securing advances from banks and SMEs are the most influenced. (Moro, Fink and Kautonen, 2014)

Banks and finance companies is a gate way for the people who wants to open a business or finance day to day operation. But the finances won't be given easily due to the high-risk of the investment. The SMEs lacks Security to be given to the bank, the banks are usually asking for high securities to be ceased if the business is unable to pay to the bank.

The banks will give a difficult or expensive scheduled compulsory payment to the SMEs that they are funding, so it will be very difficult for the business to pay the compulsory expense to the bank, it will paralyse the business and lead it to bankruptcy.

Most of the SMEs who starts their business not have a proper Financial Statement, due to the fact that they do not need one when they start their business. The assets that they receive in the beginning is very minimal and they usually use basic Accounting to calculate the income, and when the Business owner approach the bank to request for a loan or overdraft, the bank will ask for the Financial statements to check the cash flow of the business and whether it's profitable or not to invest in.  and also, most of the SMEs lack professional management which even scares the financial institutions and the banks to give the funding to unprofessional managed business.

Components of working capital management

This factors all create a disconcerting situation to the banks and financial institution to fund the business and sometimes give the idea that the firm won't be able to repay the funded amount on the scheduled time.

There are other reasons that also make it discouraging for the SMEs to take loans from banks due to the long procedures that takes just to process the loan plus the high interest rates that is offered by the banks.

Working Capital Management as mentioned before depends on Five Components within the current assets and current liabilities and in order to improve the business and lead it to healthy operated firm, the business owner need to focus and improve these five components.

For effective WCM, it is very essential to do proper Forecast Cashflow. Forecasting considers the effect of fundamental elements like activities by your rivals, unexpected occasions, loss of prime client and market cycles. Income anticipating will enable your firm to reinforce and balance out your money related state and Strengthen your balance sheet. This outcomes in picking up control and adaptability that gives a focused edge.

Organizations that make their instalments on time have a tendency to have a superior association with Suppliers. This further encourages customers to arrange better contracts (for instance, secure good and better terms in credit facilities with suppliers). And when the time comes when the need of extending the credit period between the supplier and the firm, the trusted relationship benefits this kind of situations and helps in gaining the adjustment deal.

The operating cycle Starts when buying the inventory and end with the change of your Account payable into Money or Cash in hand. The longer operating cycle in the business, the bigger amount of unusable Credit in it. Of course, the best solution is to shorten the operating cycle by selling fast, collecting money from clients faster. This will improve the short-term liquidity of the company and will free up more cash.

There are many methods that helps the firm to reducing stocking inventory and lock up assets. There are softwares used that keeps count of the inventory available in the business, this helps to measure whether to order more stock or not based on the sales volume on that time, this software also helps so use the method First in, First out, which also means that the first item that came in to your inventory is the first thing to be sold, this method is used to clear out the stocks faster without neglecting old stocks. Other methods can be used like Just In Time (JIT) this actually eliminate the inventory and order stock needed just in time for manufacturing or reselling on exact demand without keeping anything in inventory.

Conclusion

Bank Loans can frequently be precarious SMEs owners. Business owners can find better alternatives in financing, such as Overdrafts or Invoice factoring, these options help to get the cash faster for avoiding any liquidity crunches and increase the cash flow in the business itself. Overdraft preferably should be paid back as early as possible to avoid any extra interests from banks.

His Majesty Sultan Qaboos establish "Al Raffd Fund" back in 2013 which was Sanad before that year. Al Raffd Fund is a government based organisation that helps the community to start their own business by funding and give a proper guidance in opening and managing established business. And based on the statistical reports, Al Raffd Fund financed 1730 up until the end of 2016 spending almost 69 Million Omani Rials on SME Funds (Alraffd.gov.om, 2017), this also helped the employment numbers increases open more job opportunities.

Other Financial institution that helps to develop the SMEs like Oman Development Bank. As the bank won an award for Best bank of supporting SMEs in early 2017, this also a proof strong funds that was by the ODB. All the above measurements estate that Oman Government Support SMEs with the maximum effort and dedication, because in return the SMEs will benefit the country's economy.

Private sector companies support SMEs not only in financing, but also supporting the SMEs with Training and development (like Zubair SEC, Aramex, Al Wathba Bank Muscat, AL- Namaa, Sell- Live wire, etc). Big companies and banks in Oman Sought for Social Responsibilities in which they established a big variety of SME Funds organisation which funds and develop the business owners with different kind of training courses on Business management and also Working Capital Managements. This indicates the big help and support that the SMEs can get from the private sector and got a big variety of doors to enter an investment in the SME sector.

Conclusion:

In conclusion, SME sector is very important to invest in. As the above assignment clearly shows how the government and private sector support the SME with a clear guidance from first step of starting the business till the operation starts, and Working Capital Management plays an important role of SME success. If the Omani youth sought for the opportunity that they have to open the business, multiple doors will open in front of them to demonstrate their creativity in their business and benefiting all the society.