Financial disclosure and regular shareholder communication are requirements for large enterprises.  The customary glossy annual reports and quarterly statements give the impression that such practices are reserved for capital corporations only. Small, and in particular medium-sized companies generally believe that such practices do not apply to them.  To the contrary, small and medium size enterprises should adopt disclosure and communications policies for their own good.

Today the biggest issue for small and medium-sized companies is the lack of access to finance.  Inadequate financing of such enterprises not only stifles individual company growth, but economic growth as well.  The culprit for the lack of finance can be found in the asymmetry of information.  In other words, lenders do not have sufficient information for risk assessment.  The cause of asymmetries of information are generally the absence of timely, adequate and consistent financial statements and business plans.

Small and medium size enterprises need to recognize that transparency is one of the most important factors in obtaining access to finance.  Companies who are on a solid financial footing should also communicate their strengths.  Those who are not, are called upon to discuss their particular situation.  A clear and transparent handling of, hopefully only temporary, bottlenecks creates trust for trade credit grantors, lenders and investors.

This is not self-evident in Germany. The opposition to public filings of financial statements was only overcome through tough European Union demands for compliance.   Eventually the threat (and implementation) of punishment resulted in compliance and thus better transparency.  German businesses usually resent others having access to their financial statements.  However it can be safely assumed that such secrecy is not helpful in obtaining trade credit on more favorable terms and access to finance.   Only transparency will attract creditors to assist in financing future growth.

Credit information companies, credit bureaus and rating agencies play a significant role in providing transparency and thus assist in the process of obtaining access to finance. A rating may not be appropriate in every case, however credit information companies have a range of products and services that provide a neutral, fair and qualitative basis for risk assessment.

This posting was provided courtesy of Creditreform, a BIIA member.  Creditreform has created a brochure on this subject.  This brochure can be downloaded from Verband der Vereine Creditreform (only in German Language)
Posted on September 26, 2011 on the website of Verband der Vereine Creditreform Germany – Translated by BIIA