Fraud in Small Businesses

Small business fraud is common yet not understood well. This is not small businesses committing fraud, I am talking about small businesses being the victims of fraud. Its hard for small businesses to recover from fraud, many owners simply don't have the resources (i.e. cash flow) to recover and those who do find it extremely difficult to regain the trust and confidence of customers. Recently I read an article by Dr. Bonita Kramer in the Journal of Small Business and Enterprise development (find the article here) in which she explains the fraud triangle: unsharable pressure, perceived opportunity and rationalization. The triangle is in relation to the pressure employees are subject to and how that pressure leads to some committing fraud. The main point is this, the best way to avoid fraud is to make clear to employees that fraud will be detected. The best way to detect fraud is to be actively involved in the management of your small business and have proper internal controls, don't place employees in a position where temptation to commit fraud is too great!

What are your thoughts on the fraud triangle?

Limited Strategic Potential for Small Businesses?

I read an article in a journal today (find link here) that focused on the challenges of small businesses in making strategic decisions. The author states that small independent businesses are limited, contrary to big business, in how strategic they can be in making decisions. They can basically select a strategy of growth, retention or harvesting (reducing business functions that lose money) while big businesses can do all three.

What was interesting to me is that the author presented two different ways of making decisions. By time (long, medium and short term) and by importance (strategic, operational and tactical) Now I have been part of an organization that tends to use the second way to classify decisions for almost 15 years, however once classified as such they are immediately arranged from long to short range time frame decisions. I don't see why the two ways should be exclusive.

Do small business owners have as much time to think strategically as big business CEOs? I think that's the more pressing question. If time permitted they probably would but with multiple functions and a very short staff to carry all the tasks needed most small business owners don't. A "break" even for a day or two to think about the business, where it is and where it’s going, is essential.

Thoughts?

Financing Small Business projects

A short article on small business financing caught my attention today. A study conducted in Spain, you can find it here, attempted to test the hypothesis that small business with a lower risk profile will self-select financing options that trade collateral for a lower interest rate while business with a higher default risk will self-select for financing options that have a high interest rate but no collateral. The study is very interesting, and although definitely on the academic side, it poses serious questions for young entrepreneurs.

1. If I believe my idea is sound and profitable (almost everyone does) do I raise the necessary collateral to have access to a lower interest in a loan?

2. Instead of using the collateral in the loan should I invest the money in my company?

3. If I have no collateral, is my business ever going to receive funding?

Financing for small business is a touchy subject. The link between collateral and riskiness of the business can be argued both way. The bank might be trying to diminish its risk by asking for a higher collateral. On the other hand the higher collateral might be the result of conditions within the bank itself or macro-economic conditions outside of the control of the small business. My advice to small business owners is to carefully evaluate the need for financing to begin with. Everyone will push financing, from small banks to venture capitalists, but they have their own interests. The bank needs a client, the venture capitalist wants a piece of your company if successful. If you don't have a plan as to what you are going to do with that money, detailed plan, then seriously reconsidered asking for it to begin with. Slow, steady, internally financed growth expansion might be a better option.

Thoughts?

Intangible Assets Valuation

I read an interesting article on Intangible Assets valuations today. The article was published in the Engineering Management Journal, http://www.asem.org/asemweb-emj.html (you have to pay to get access).  The authors explain how they develop a tool to help SMEs in Italy asses the value of their intangible assets. You can read the article for the full story and methodology but what interested me is that they defined intangible assets as:

Human Capital(i.e. the skills of the employees)
Internal Structural Capital( i.e organizational knowledge that belongs to the Company)
Relational Capital (the relationship between companies)

Placing a value on this can be quite difficult but essential for SMEs as it is usually these assets that are the most valuable for small businesses that do not have huge financial assets. I am curious about the small business owners themselves. How many small business have you encountered that have even attempted to place a value on this, should this be taken into consideration when looking at financing options? If so by whom the bank or the small business owner?

Relational Capital in particular is interesting. Its the "Who do you know?" concept. A business might be small but if the owners are well connected, say with city hall or the city procurement officer, this is a huge asset with potential value. I understand that the ethical considerations are there but to believe that a small business owner will not exploit such a relationship is naive at best.

Thoughts?

Market Research Lessons from the Czech Republic

I read a good article today in the International Journal of Management Cases, you can find the complete article here http://ijmc.org/IJMC/Vol_16.4.html . If you want to read about the methodology and actual research study more in depth please visit the site. The authors basically surveyed Czech Republic small businesses to determine what did they consider to be barriers to exporting and what are the actual barriers to exporting based on data. They found that many small business believe that the following are their main barriers:

1. Lack of language skills
2. Lack of experience with foreign markets
3. High costs of promotion
4. Lack of public support
5. Lack of information about foreign markets

The findings suggest that the main barrier to exporting is actually:

1. Lack of information or experience in foreign markets.

Those companies that either searched for information about foreign markets or had key employees with experience in foreign markets actually had decent volumes of export sales (as a ratio of total sales). Although the first list is intuitive and i think almost every business owner that has not exported will list the same reasons, I wonder if small business owners in the US have the exact same concerns?

Thoughts.

Small business valuation

I read an intetesting piece on small business valuations today. It was mainly focused on Succession planning and how valuations are essential at the time of selling or transition the business to new owners. This is a very essential service for SMEs yet its in short supply. Maybe a possible business opportunity?

Financial tools for SME

What financial tools do you use in your small business? I have mostly stuck with either Quicken or QuickBooks.  I must say that after going thru numerous versions of both software packages the differences are starting to blur.Yes, Quickbooks is better for invoicing and P/L reports but Quicken is not far behind in the reporting arena and frankly even Excel can create fairly decent invoices. My point is that Small Busineses might have to start thinking about these tools, and their characteristics,  as commoditized.  Having them will not give your company a competitive advantage, its just the price to pay to stay competitive.