This article was first published in the March 2013 International edition of Accounting and Business magazine.
Comprehensive and precise financial reporting is critical to the success of multinational businesses – and every bit as important for small companies in emerging markets.
Last year, the World Bank’s International Finance Corporation (IFC) released a report, Being the Change: Inspiring the Next Generation of Inclusive Business Entrepreneurs Impacting the Base of the Pyramid, which highlights IFC’s ‘inclusive business models’ strategy. It says companies are a key tool in tackling poverty through creating jobs and improving access to goods and services. Without effective financial reporting, these companies simply cannot deliver.
In Being the Change, IFC profiles 14 industry leaders who have found a way to balance financial returns and long-term development impact through inclusive business models, bringing low-income producers and consumers into their supply chains.
Nigerian fast food
Food Concepts, for instance, is a leading West African quick service restaurant and bakery operator headquartered in Nigeria that works closely with small-scale suppliers and distributors, providing them with inputs and training to improve their livelihoods. Food Concepts’ partners include Butterfield Bakery Nigeria (which has nine bakeries) and poultry restaurant chain Chicken Republic, which has opened 65 outlets in Nigeria and Ghana since 2004.
The fact that 90% of the food that Nigerians consume is imported – even though 70% of Nigerians work in agriculture – is what gave Nigerian-born Food Concepts CEO Deji Akinyanju the idea to develop home-grown food and restaurant brands in Africa. IFC praised how the company was meeting its real-world business challenges through a comprehensive supply and distribution chain: ‘Current demand is outstripping supply because of underdevelopment in the agricultural sector and strict import controls on chicken,’ it noted.
One way to improve reporting and financial management in emerging markets facing such growing pangs is to exploit e-commerce and internet trading. Ireland-based wireless network solutions provider Altobridge has also been highlighted by IFC for its attempts to remove the technical and commercial barriers that deny remote and rural communities access to internet connectivity and affordable mobile voice services.
Altobridge has designed, patented and commercially deployed technological solutions since 2002 to help bridge the digital divide. Its services enable mobile network operators to affordably connect remote communities (with between 100 to 1,500 subscribers) in countries such as Malaysia, Indonesia, Ghana, Niger and Papua New Guinea.
M-payments in India
Such networks can link businesses to emerging market consumers in remote areas. In India, Paresh Rajde, CEO of Suvidhaa Infoserve, has been using a web-based platform to expand access to online services in the country. It offers individuals the means to make payments online and over their mobile phones for a variety of different products and services.
Indians can now transact with 300 businesses in a variety of sectors (transport, utilities, telecoms, etc) over Suvidhaa’s e-platform for payments, purchases, transfers, ticketing and more. Suvidhaa’s physical network currently totals about 55,000 retail points across India.
‘Suvidhaa’s highly inclusive business model brings the convenience of electronic payments to a population that still transacts largely in cash and has relatively little access to payment cards or the internet,’ according to Being the Change.
‘In India currently only about 8% of the population is able to transact online, so clearly there is a huge gap,’ Rajde says. There are a few reasons for this disconnect with online transactions. ‘One is access to the internet,’ he explains. ‘The second has to do with lack of payment options, and the third is the educational level of consumers – their computer literacy, for example.’
Trained as a professional accountant, Rajde says that all Suvidhaa’s financial reporting, accounting standards, legal requirements and auditing practices are ‘very standardised and the company is highly compliant’. He adds: ‘Proper controls and financial reporting are a prerequisite for any organisation, whether it is an inclusive business model or not.’
Integrating good accounting practices is crucial for any business at the very beginning of development, Rajde says, in order to attract investment in the first place. ‘If there were not proper controls, accounting procedures and reporting structure, we might become discredited as a business itself. These practices are essential for this business to succeed.’ He adds that accounting controls are not put into place solely for the comfort of investors, but are the ‘prerequisites of the business itself’.
Amsterdam-based Wim Bartels, global head of sustainability assurance at Big Four firm KPMG, agrees that financial reporting within inclusive business models in emerging markets is just as important as that within multinational enterprises. ‘Inclusive business models are no different from other business models in regard to controls and decent financial reporting,’ he says, adding that trust in a company is principally determined by its ability to properly manage and control the funds its business partners have provided.
‘Proper controls and decent financial reporting – internally and externally – ensure that the company can demonstrate one side of the inclusive business coin – financial viability and financial sustainability,’ he says. If a business of any size wants to grow sustainably, he says, ‘the financial side of the business as well as the social/inclusive side of business needs to be managed’.
To highlight the importance that financial reporting holds in emerging markets or economies, Veronica Poole, UK head of corporate reporting and global IFRS technical leader for Deloitte, says there are two levels that need to be considered – the macro and the micro.
On the macro level, accounting provides a ‘communications language’ to express the goals and role of businesses. Poole says: ‘Good communications and good accounting leads to reduced cost of capital – and the ability in the first place to access markets and raise that capital. As long as the trust in companies and markets is functioning well, the end result is that companies that communicate well pay less of a risk premium when they try to raise capital in the financial markets.’
She champions auditing as adding value. Auditors, she says, ‘create an environment of trust, and add to the credibility of information, oiling the whole financial market system’.
Everyone needs capital
On the micro side, inclusive business models are important because ‘everybody needs capital’. Poole explains: ‘As a sole trader, as you enter the business environment there is only so much leverage that you can get out of what you invest in your own business. You need the trust of lenders. You need a language in which you can communicate what your business does objectively, and that’s what accounting brings.’
At the micro level any small business startup has the same challenge: raising capital – and this is where accounting plays a key role, she says, ‘in creating the ability and language in which people can explain what their business does, what their business model is, what their business risks are, and what the financial returns are’.
She continues: ‘Small businesses entering the regulatory world for the first time are basically trying to explain themselves in order to raise capital at that very micro level.’
Obviously, there are differences between a small startup in Nigeria, for instance, and a European multinational. Poole says: ‘Looking at some African or Asian countries, you often have the huge [barrier] of education, along with the fact that you do not have the same financial markets or lending cultures as in the West, where there are well-established capital markets and well-established routes to raising capital. There may be no company house or educated accountants and the money may not be as easily available because there are fewer investors, and fewer sources of finance.’
Inclusive business models, however, are helping to change this situation. Poole says that the World Bank wants sustainable growth, where capital market lending can be credibly developed worldwide. ‘The goal is to have the same opportunities available for a businessman in a developing country versus one sitting comfortably in the UK or the US.’
Bartels adds that multinationals could have jam today and tomorrow too through inclusive business models. ‘The emerging countries of today might be the leading countries of tomorrow,’ he says. ‘China will overtake the US in terms of innovation, India will be much stronger in the near future, and this can be the same for other emerging countries as well.’
Elements of growth
International Finance Corporation imagines a world in which the four billion people at the base of the economic pyramid (BOP) have access to the products, services and economic opportunities they need.
By embracing this market segment, creative business leaders can find ways to offer it those goods, services and economic opportunities through scalable, ‘inclusive’ business models. Key elements of such models include balancing short-term returns with long-term goals, a local focus, considering the team to be as important as the leader, seeing good relationships as the key to success, and staying optimistic (crucial to growth).
A member of the World Bank group, International Finance Corporation (IFC) focuses on helping developing countries to achieve sustainable growth through leveraging private investments and mobilising capital in international financial markets.
In 2012, IFC investments totalled more than US$20bn. Over the past eight years, inclusive business models have accounted for between 7% and 10% of IFC’s annual US$7bn commitment, with the organisation working with over 300 inclusive business clients in 80 countries, where it has reached over 250 million people. These business models are important in a world where four billion people go without basic goods and services and have little hope of employment.
MJ Deschamps, journalist