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Access to finance


This paper explores the evolution of the finance function from an informal process to a formal team and highlights the critical events and concerns that drive its development.

This report uses a large sample of data from BDRC’s SME Finance Monitor, the definitive record of UK SMEs’ access to finance, to demonstrate the strong but complex link between the early development of the finance function and SME growth. It also uses insights from the international academic literature to consider the business needs that drive the formalisation and growth of the finance function, as well as the synergies that develop between business planning, management reporting, and the use of financially trained staff.

The core finding is that the development of the finance function is not the result of business growth, but one of its causes. The combination of formal business planning, regular management reporting and the use of financially trained staff is a prerequisite to a mode of rapid growth that does not jeopardise the survival and longevity of the business.

Although a significant minority of enterprises begin life with a rudimentary finance function and continue to build on this as they grow, the majority are forced to develop their finance functions on an ad hoc basis according to pressing business needs. At any given time, the bulk of the SME population is made up of very small enterprises – most of them with no members of staff other than the founder. This often gives the impression of extremely low financial capability among SMEs, but among those businesses where there is the intention to grow the reality is much more promising and fluid.

The first hint of formalisation appears pre-start-up, with the development of business plans. Only those entrepreneurs who continuously update their plans and verify them against actual performance are truly performing a finance function – and only those see any benefits from formal planning. In particular, this process gives them an edge by helping leverage their human capital.

The second stage in finance function development addresses the need for focused growth by enabling standardisation and monitoring of business processes. During this time the finance function grows in order to enable the monitoring of cash flow and business improvements – quality management and e-commerce are two such improvements particularly associated with higher levels of finance development.

The final stage of finance function development in SMEs addresses the need for responsive growth by enabling businesses to access finance, assess the case for new products and services, monitor their supply chains and manage their headcount.
Finally, the findings suggest that the finance function in SMEs has a value-added role independent of statutory reporting requirements – policymakers would do well to take note of this. But we also show that financial capability is an experience ‘good’ and that complacent business owner/managers can overlook it under benign economic conditions. It is up to the profession to argue the case for SMEs’ continuous investment in finance.

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Published: 14 Jun 2012