Member Article

New model for SMEs to aid investment decisions

Two academics from the University of Leicester’s Institute of Finance have developed a new mathematical model to help SMEs with investment decisions.

The idea has been developed by Dr. Andrea Moro and Dr. Sandra Nolte and allows Small and Medium businesses (SMEs) to financially evaluate their business opportunities. While a standard financial investment model considers any risks when investing in a diverse portfolio of businesses, in SMEs the entrepreneur is invested in their own business and as a result, it is often more meaningful than a standard investment.

Dr Nolte said: “This fairly simple model uses information widely accessible to those wishing to invest in SMEs and the entrepreneurs themselves, making their work easily applicable to small enterprises and readily available to investors.”

In the new model, the three major determinants of the risk which may be incurred by the entrepreneur have been identified as; the survival rate of SMEs in the appropriate ‘business cluster’, the history of the entrepreneur’s previous successes and the fact that the entrepreneurs are not diversified.

Dr Moro said: “The remuneration entrepreneurs have to ask has to compensate for these risks. Thus, by utilising these three factors, the formula allows SME entrepreneurs to calculate the minimum return entrepreneurs have to expect when they invest in a venture in order to be exactly compensated for the risk they incur.”

A white paper entitled ‘Industry Survival Rate, Entrepreneur Historical Performance and Personal Wealth: A Probabilistic Model for Optimising SMEs Capital Structure’ is due to be presented a the European Financial Management Association Meeting in Barcelona at the end of the month.

This was posted in Bdaily's Members' News section by Francesca Dent .