|Small and Medium enterprises encompass a broad range of businesses going by their definition. But that too vary from region to region based on size of revenues earned, work force employed, investments in plant & machinery etc. This article largely deliberates over businesses which include early-stage & established start-ups and growing or stagnant medium-size companies. (Referred broadly as SME’s)|
What Makes SME business special:
Small and Medium businesses are created out of dreams realised by entrepreneurs who put their hard earned money and efforts relentlessly over a period of time. Their passion to create and grow contributes to nearly 1/3rd of country’s GDP and employs 40% of the workforce.
India has about 63 million Small and Medium Enterprises (SMEs), and they are one of the largest employment providers in India. Contributing 45% of the country’s industrial output and 40 % of the total exports, this sector is rightly called as the ‘Backbone of the Indian economy”.
From manufacturing matchboxes to specialised components they are catering to numerous industries and consumers across the globe. This sector comprises of a diverse & dynamic set of entrepreneurs who are breaking new boundaries each day, all by themselves.
SME’s are not big enough to move markets and grab headlines, but they have a story of their own to be told. What fascinates each of us is the phenomenal potential and opportunities they possesses besides having a highly experienced and dynamic leadership.
SME’s are led by a highly experienced, self-motivated, hardworking leaders who take enormous risk to sustain business in a fast changing world of business.
While size is considered a constraint for SME’s but they have much more to them besides the advantage of small size that makes them special:
Leadership is an essential element in the management of any organisation and it is no different when it comes to small and medium enterprises.
|Have we not heard or seen such stories?
-ARC’s taking over Bank debt and the business standing on its feet even after paying high rate of interest?
-A family division taking place and one of the member starting afresh and subsequently going on to make his/her name in the industry.
– A senior professional quitting job and establishing a business which goes on to with become a group with diversified interest.
Unlike their counterparts’ at large corporations, SME leaders exhibit hands-on involvement across business functions including running the business operations, making strategic decision, financial management, and managing the work force.
They have to deal with issues like replying to tax notices, getting pollution clearances, managing employee conflicts, legal proceedings, and debt recoveries etc. which are both time & energy sapping. At the same they need to oversee the financial planning, fund management, identifying new markets, future expansion plan etc.
Thus they wear two hats at the same time -that of a manager and a visionary leader.
The challenge that each stage of an organisation’s lifecycle brings forces these leaders to adopt an evolving style of leadership. There are umpteen instances where SME leaders have emerge victorious with limited resources and scant internal support. (See box below)
SME’s are known for having strong relationships with their customers, so much so that even the top management is engaged in routine transactions on a regular basis.
With an ear always to the ground, SME management understand the changing demands and evolving needs of their customers.
|Have we not heard or seen such stories?
– A SME promoter travelling all the way to the buyer’s manufacturing facility to understand the minor defects in his products and rectifying the issue.
-Running the plant overtime to make up for an urgent order from the buyer.
– Supplying goods at the original price even after sudden price hike of the material in lieu of a long relationship
Customers also understand that SMEs are more likely to provide a customized service. They value having a singular point of contact, instead of engaging with a “faceless” entity in a large organisation.
Large corporations who have a huge customer base find it very difficult to focus on a particular customer because it impacts their workflow and profitability.
|Recall the numerous stories during the pandemic
-Unrelated Industries taking up the manufacturing of Masks, PPE Kits and sanitizers.
-Large corporates fail to compete with SME’s in businesses which run on flexible pricing model, because of pricing rigidity
-A survey conducted by Dun & Bradstreet India reveals that 82% of surveyed Small Businesses have digitized their daily operations during this pandemic, which helped them in Reduction in Cost (54%) and Enhancing Competitiveness (51%),” A clear example of flexibility delivering in tough situations.
SME leaders are not only experts of creating and marketing their products but they are also the masters of adaptation. Their 24×7 access to business demands cutting across hierarchies, ability to take quick decisions and lean processes make their organisations nimble footed. This is why these organisations have been able to adapt to the changing environment in the wake of the Covid-19 pandemic. Also the development of new products is quite swift in SME as compared to their peers in large corporates owing to fast decision making, flexibility & lean structures.
Those of you who say small & medium business lack innovation are actually missing the woods for the trees. SME leader’s understanding of their product, market, & customer’s augers well for the innovations required to sustain and thrive in the changing environment. The only difference is that these innovations are largely interventions in design & delivery and not innovations based on extensive R&D.
|Have we not heard or seen such stories?
-A manufacturer improvising the existing manufacturing process to cater to a specific customer need without investments.
Despite consistent contribution to the economy and above strengths, these privately-owned and domestically nurtured enterprises face numerous challenges. The inherent business issues have time and again been discussed and deliberated at all forums which have anything to do with SME businesses. The common challenges for small enterprises are enumerated in the box below (See Box)
|Small businesses face numerous challenges by virtue of their size and resource constraint:
Lack of resources (finance, technology, skilled labour, market access, and market information); lack of economies of scale and scope; higher transaction costs relative to large enterprises; lack of networks, know-how, and experience of domestic and international markets; increased market competition from large multinational due to globalization; inability to compete against larger firms in terms of R&D expenditure and innovation (product, process, and organization)
According to the MSME Ministry’s FY20-21 annual report, the MSME sector is dominated by micro-enterprises and only about 1% of them are small and medium enterprises. The challenges faced by the Small and medium enterprises are different to what micro enterprises face.
The above challenges have remained constant for so many years but as the business grow these get elevated and more complex over a period of time. Thus the story of growing medium size businesses is slightly complex as they are neither too small to face limitations of resources & capabilities nor too large to match the deep pockets and resources of large corporates.
Their challenges lie somewhere in between these two segments as enumerated below:
Besides availability of the funds, a sound financial management is largely missing in the growing businesses. Most of the business leaders are highly skilled at marketing, production and people management but lack sound knowledge of accounting & financial principles. Hence the finance function is not given the due priority leading to erroneous financial decisions.
With banks and NBFC’s as major institutional credit providers- Limited capital, ordinary balance sheet and fluctuating cash flows leads to difficulty in obtaining timely credit from these lenders. Moreover, the management face situations of complex sanction terms and high collateral requirements by the Banks/NBFC’s.
A key finding from a SME survey by a consulting company revealed that 20% of SMEs find it difficult to manage working capital. Failure to manage sufficient liquidity and utilising short term funds for long term purposes remain major reasons for SME’s financial crisis.
Marketing is one function which is largely controlled and led by promoters themselves across the segment. However, in absence of a well laid out structure & process they are not able to leverage their marketing abilities. A recently concluded survey by Dun & Bradstreet revealed that 42% SME participants found market access as a key constraint in scaling up. Sales is a critical outcome of marketing activities and the sources of revenue for the business. However there are several factors which impede the firm’s capability to increase their sales. These include Product quality, selecting the right market & ensuring reach to the customers, flow of funds and marketing efforts besides other factors. Large no of SME’s do not have an established sales & marketing structure and where they do, it has no formal sales processes. Additionally, the pandemic has made drastic changes to the marketing landscape, thus altering the way SME’s need to reach both their B2B and B2C customers.
As per CRISIL Quantix, CRISIL Research SME Report, the average debtor collection days for a business with Annual Turnover of Rs 0-250 cr is 64 days. This is on a higher side given that market credit is available for an average period of 47 days for the same category of businesses.
This is the prime reason why SME leaders face liquidity issues, owing to an elongated working capital cycle. SME’s are big suppliers to PSU’s and large corporates where the supply terms are time bound and quality sensitive. However when it comes to payments for the goods or services supplied the terms gets skewed towards the buyers. Moreover absence of written contracts and inefficient accounting team make sales realisation an ordeal in itself. There have been instances where the buyer happily enjoys free credit for days just because the accounts team is not able to reconcile the bills or clarify a query on time.Though there are legal remedies and regulatory guidelines on the payments to SME’s, but SME’s seem reluctant to take the legal route due to their limited bargaining power and fear of retaliation from both old & large buyers.
New age technology has been a great leveller in bridging gap between large & small players in the recent years. Web enabled SME’s in general make higher profits and have more customer reach. AI-based machinery and tools, Enterprise Resource Planning (ERP) technologies, and inventory management software based programs can make businesses more organized and efficient. But aversion to the use of the latest technology and reluctance to invest in IT has rendered SME’s uncompetitive and less productive in the fast changing market. Most small enterprises do not have their own websites and only about 45% of the SME’s participate in online sales. Thus most businesses fail to reap the benefits of the latest technological developments in their sector due to a lack of either expertise or awareness.
The regulatory environment is changing at a brisk pace. Last few years have seen reforms like introduction of GST, insolvency resolution, amendment of company’s act, E-way bills and many more. It is becoming challenging for even professionals to keep abreast with the new regulations and laws. Thus SME’s are facing operational and financial issues in complying with these regulations. Penalties on late ESI/PF payments, TDS deposition, GST remittance etc. along with frequent notices from the Tax / other authorities are becoming the order of the day.
To Recruit and retain talent has emerged as a key challenge for SMEs on their journey towards growth. SME’s largely outsource their HR activities and it increases their cost of hiring. Hence recruitment processes are too weak to on board people with right skill set and suitable fit for the role. Moreover, lack of proper HR practices like Performance appraisals, career planning, training etc. do not help in attracting and retaining young professionals and tech-savvy talent. Employees leaving within 3 months is common phenomenon and retaining trained employees is becoming difficult in a well-connected job market with plenty of options.
As per World Bank, SMEs represent about 90% of businesses and more than 50% of employment worldwide. Formal SMEs contribute up to 40% GDP in emerging economies. Indian SME contribute nearly 30% to the GDP and the fact that SME’s contribute 55 % and 60 % to the GDP of Germany and China respectively is a clear indication that SME sector in India still have a lot to achieve.
SMEs now can make their presence in the online world by going digital. For many years, the SME sector was struggling with the intense competition, but going digital can grow their profits up to two times faster than offline SMEs, according to a study by KPMG and Google.
Adopting right technology can help SMEs focus on the core business by avoiding manual and repetitive tasks using automated technology. Embedding the social and cloud platform will open up vast opportunities for revenue growth and operational efficiency besides increasing reach to their customers.
India is expected to emerge as one of the leading economies in the world over the next decade. What’s heartening to know is that SME sector shall act as a catalyst to bring about the much needed socio-economic transformation. Hence SME’s are gaining importance in India through government initiatives including Vocal for Local mission, Aatmanirbhar Bharat, Make in India and the Digital India campaign. The government has made a few positive steps in helping the small businesses to recover and be competitive in national and global markets .The sector shall remain a focus for the government in the years to come and it is incumbent on the sector to take full advantage.
What can be the way forward?
The limited size of SMEs is an inherent constraint, but then there exists inherent strengths which can be leveraged. There are inherent challenges besides fast changing market dynamics, technological disruptions and ever increasing competition. But then there is a world of opportunities open to be explored both domestically and globally.
Being a SME business leader you have two options; either continue to survive and follow what worked for you this far,
Embrace the change – work differently with a new approach and think like a visionary leader.
The latter should be a deemed choice as SME business leaders cannot continue with business as usual approach but need to adapt and keep pace with new age innovations and disruptions.
They can learn from their peers who have successfully graduated to become structurally resilient entities by keeping focus on products, willingness to experiment with new technology, commitment to change organisational structures, incorporating business processes & control and resolve to change & grow as leaders of the business.
Business is influenced both by internal and external factors and SME leaders need to focus on what lies in their control. Focusing on the below five key areas can lead your business become structurally strong and resilient:
Each business irrespective of size needs a well organised management of finance including raising and effective utilisation of funds. This can be achieved by accessing low cost funds, managing working capital and observing financial discipline through proper budgeting & accounting practices.
Besides this having an effective sale collection and credit control can lead to timely realisation of sale proceeds and shorter cash cycle. Sustained & focussed efforts in decreasing average collection period by merely 10 days say, from 90 to 80 days can have a huge effect on your rotation of funds.
2- Human Resource Management:
The ability to recruit and retain best suited human resource is key to running a growing enterprise. It is difficult to find right talent and even more efforts are required in nurturing it and much more in retaining it over a period of time. Besides the tangible aspirations like salaries or the size of business and brand value of the employer, it is the intangible aspirations which are motivating the current generation. The only way to meet this challenge is to focus on recruitment, training, up skilling and creating a good working culture. Keeping employees happy means fulfilling their career aspirations, supported with commensurate remuneration and allowing freedom to apply their knowledge and skills.
This can only happen through establishing a dedicated HR department which can manage an employee life cycle through best HR practices.
3-Establishing Processes & Control mechanisms:
One key difference between an efficient and growing business and a stagnant or loss making business is the presence of processes & control mechanisms. Small size entities can afford to work with unwritten rules and old practices. But with growing size, laying down formal documented processes and assigning specific roles & responsibilities is vital for smooth operations. Creating effective management controls – including strategic objectives, operational policies and employee guidelines will help leaders to delegate operational tasks and monitor your employees periodically.
The traditional inefficient methods of operating business and the low rate of technology adoption is a key constraint in growth of SME businesses. A research by Google in collaboration with consultancy firm KPMG revealed that 68% of the 51 million SMEs are not connected to the internet. The study also found that digitization of SMEs could expand their contribution to India’s GDP by 10 percentage points, pushing it up to 46-48% by year end.
Adoption of new age technologies like cloud, AI, process automation, IoT and data analytics into business process like accounting, inventory management, sales, marketing, HR, customer service, etc. can transform SME’s into a more efficient and world class enterprise.
5- Willingness to Change:
Successful leaders respond to changes in the business environment by seizing opportunities, including discarding old models and finding new ways of doing business. They look ahead and seize opportunities by taking risk, building new products, attracting fresh customers, and achieving sustainable growth.
The bottom-line for SME businesses is to put their house in order by streamlining their day to day operations followed by a three pronged strategy of Invest-Leverage-Upgrade
Invest in People, Products, Processes and Technology
Leverage on Govt. Schemes, External Professional expertise and Digitalisation
Upgrade internal capabilities, technical know-how and Leadership skills.
There are immense opportunities for SME business to grow and thrive. All they need to do is to time & again adapt to the change happening around. Though challenging, this approach is what transform a family business into a robust and profitable enterprise.
Today, business across the globe face a choice: Direct their focus & energy on perusing change for securing success in the long terms or continue to function as usual and focus on short term returns.
The need of the hour is to take control of your business and lead the wave of change starting from the Business leader and flowing through the organisational culture. These changes require proper planning and can be gradual but incremental over a period of time.
The economic situation post the pandemic has thrown many challenges and opportunities to the SME business ecosystem. The larger enterprises and some better managed SME’s have weathered this storm better owing to their stronger balance sheets, stable cash flows and business continuity strategies. Meanwhile, SMEs in general appeared rather unprepared to tackle the severe supply chain disruptions brought out by the pandemic.
While a lot of focus is towards surviving in the situation, but from a futuristic perspective it is imperative for SME’s to transform into a structurally strong enterprise that shall continue to be resilient in the years to come.
The below famous quote aptly captures and summarizes the moot point in the current situation-
“Don’t be afraid to start over again. This time you’re not starting from scratch, you’re starting from experience.”