Small businesses and the case for safe savings

Writing in this blog last July, Anushka Thewarapperuma penned a favorable review of a new book by Daryl Collins and Jonathan Morduch on how people living on less than $2/day manage their financial lives. The authors discovered that the world's poor are quite good at managing their finances:

The poorest people on earth engage in the sort of sophisticated money management that would make Chuck Schwab proud.

Thewarapperuma ended her post by noting that Collins "will be coming out soon with a pilot study using the same methodology of financial diaries, this time for small businesses."

Flash-forward to today, and Collins is back with her new study, commissioned by FinMark Trust, which gathers cash flow and qualitative information for small businesses in South Africa. The report, which surveyes 26 businesses in Langa and Nyanga townships across a range of industries, makes some initial conclusions about the financial services and training needs of these small enterprises, including:

• Businesses do not only need capital loans – in fact, very few in this sample would be candidates for a capital loan. However, they do need a short term line of credit to weather short periods (sometimes overnight) of cash flow bridging.

• Because small businesses usually work on a cash basis, money is on hand all the time, making it more difficult to create disciplined savings behaviors than those who receive regular income from a job or a grant. Yet because business income is so irregular and partners are so unreliable, the need for a savings buffer is even more acute for businesses owners than regular income receivers.

• Many small businesses generate substantial amounts of cash on a daily basis, and many owners simply keep that cash on hand in their homes for periods of time. However, because small business owners are in the public eye, they are particularly vulnerable to theft. A very convenient transaction account would be particularly important for small business owner.

• Small business owners have sought, and some have received, training, but most continue to be unsure of how best to manage their debtor’s book, price their goods and services and manage their employees.

Yesterday I noted how Pakistan's poor are primarily interested in accessing finance as a safe means of channeling their savings. Judging from Collins' initial conclusions, this may hold true for the world's poorer entrepreneurs as well.

Update: A new link to the study has been uploaded.