Page 58 - IMDR MSME BOOK 2021

Managing Finance in Micro, Small & Medium Enterprises
To understand to awareness about and usage of Cost of
capital, respondents from MSME sector were asked “Do
you calculate and use cost of capital as a hurdle rate”
Figure No. 13 – Calculation and use of cost of capital

Yes,28%

No,37%

I don't know about Cost of Capital, 35%

It is found that 35% said they do not have knowledge
about using cost of capital as a hurdle rate, 28% said yes,
they calculate and use cost of capital as a hurdle rate,
37% said they do not calculate cost of capital and use it
as a hurdle rate.
The results are alarming. Calculation of Cost of Capital is
a sophisticated tool to choose between available ventures
of investment. Cost of Capital acts as a yardstick and
comparison using Cost of Capital prevents businesses
from investing their money into business which may
result in lesser returns than expected. Getting necessary
funds is a big challenge for the MSME sector and if that
gets invested into some ventures, which do not generate
expected returns, the businesses stand out to lose much
more than opportunity. When the majority of the
respondents either don't know about the cost of capital
or know about it, but do not calculate it, it is difcult to
imagine a large number of decisions taken with a correct
benchmark for minimum returns.
Necessary training programmes by nancial experts
need to be conducted for the business owners/ nance
staff working in MSME sector, so that an informed
decision can be taken with respect to utilization of the
fund.