Challenges That SMEs Face

The Concept

Starting a business may be an achievement but making it a sustainable proposition is a big challenge in a growing economy like India.

Small and medium entrepreneurs in India face a larger challenge – that is of finance.

Finance is the lifeblood of entrepreneurship and job creation. SMEs are the true engines of growth and play a pivotal role in building up a robust social milieu by connecting job-seekers and poor people with the businesses and helping them come into the mainstream economic activity of a nation.

Therefore, SMEs must have free access to credit, savings, payment systems, and insurance to help them weather crises and take advantage of opportunities. The challenge today is to identify new ways to connect small- and medium-sized enterprises (SMEs) with finance.

There are many standard challenges that face every business whether they are large or small. However, small businesses have always disadvantages over large ones. These include things like hiring the right people, building a brand and so on. However, there are some that are unique to small businesses – the ones most large companies have grown out of, long ago.

What are the broad challenges facing SMEs in India?

SMEs are described as the engines of growth. Despite the sector’s commendable contribution to the national development and economy, the Sector fails generate the required support from the Government, Banks, Financial Institutions and Corporate, which makes the sector vulnerable and remains isolated and fails to become more competitive in the National and International Markets.

SMEs in India face a number of challenges such as adequate and timely banking finance, inadequate capital and limited knowledge, non-availability of suitable technology, low production capacity, ineffective marketing strategy, identification of new markets, constraints on modernization and expansions, non availability of highly skilled labour at affordable cost, follow up with various government agencies to resolve problems etc.

Challenges in a nutshell

• Seed Capital (Owner’s Equity only source).

• Credit period from buyers (Late payment).

• Bank interest rates and compliance issues.

• Inefficient and Inaccurate management of funds by the company thus increasing cost of capital.

• Low inventory turn which further eats into the margins.

• High cost of operation

• Low cash reserve so more dependent on external finance which is again high cost.
• Not following cash flow religiously
• Poor management control of payables and receivables.

• Poor Corporate Governance

• Poor Marketing back back-up

• Non availability of Skilled manpower

• Non availability of suitable technology

• No handholding by large enterprises, authorities and financial institutions

• Highly fragmented and unorganised Sector

Weak Customer Base

SMEs in India tend to depend on few customers. If a single client makes up more than half of your income, you become more of an ‘independent contractor’ than a business owner. There is little effort to diversifying the client base which is very vital to growing a business. With the result, you are mostly dependent on the payments only from established customers. More often than, the payments get struck or unreasonably delayed. With the result you feel handicapped owing to irregular cash flow affecting your entire business operations. So it is of utmost importance for a business to have a diversified client base to pick up the slack when any single client quits paying.

Finance Management

Regular cash flow in a small business enterprise is most desirable. SMEs owners are not generally capital- conscious and cannot foresee the risks. In the absence of cash reserves, the business runs the risk of going astray. So it desirable for small business owners to keep reasonable cash reserves to withstand any shocks which are normal in a business. Cash crunch, in fact, becomes a stumbling block for growing your business.

Finance management, therefore, becomes even more important when cash is flowing into the business and to the owner. Professional finance management companies can help small business owners consolidate and manage their finances.

Seed Capital

In India, an SME is more often is the financer himself. He is the only source since bank finance is not easily available or available only against collaterals and remains outside the ambit of institutional finance. Although efforts have been made by SIDBI to promote micro finance across the country to enable the unemployed persons to set up their own ventures by setting up more than 100 Micro Finance Institutions (MFIs) supposed to be engaged in implementation of its micro finance programme, the actual results is a different story.

At the State level also, State Financial Corporations (SFCs) along with the State Industrial Development Corporations (SIDCs) supposed to be the main sources of long-term finance for the sector have hardly played an important role in the development of small and medium enterprises in their respective states. Thse corporations have failed to meet the objectives of financing and promoting these enterprises for achieving balanced regional growth, catalyse investment, generate employment and widen the ownership base of industry.

Although, we have schemes like Credit Guarantee Scheme for Micro and Small Enterprises (MSE) (CGTMSE) launched jointly by the Government of India and SIDBI (on a 4:1 contribution basis) in August 2000, with a view to ensure greater flow of credit to the sector without collateral security. It has failed to pick up.

With the result, finance for the micro and small sector businesses remains a very big challenge in India. Under the scheme, any entrepreneur in the MSE segment can avail loan upto Rs. One Croce without any collateral. SIDBI has nominated more than 100 MLIs (Member Lending Institutions) which are mostly banks including all public sector banks. These MLIs are given power to approve loans under the scheme and recommend suitable entrepreneurs to CGTMSE.

The CGTMSE has made little headway for various reasons like:

• Lack of Awareness.

• Cost of availing loan i.e. 1.5% which is very high and discourages laon seekers from availing the scheme.

• Unfavourable attitude of the MLIs.

So, in the absence of any avenues, many SMEs use their own savings and freely raise capital from open markets (money lenders), relatives, friends and Non banking financial institutions at a very high cost. With the result, the beginning is made with no sustainable plan to grow.

The Challenges

Poor Project Planning

Most of the people keen to embrace entrepreneurship lack vision and plan for only short-term gains. They also lack clear planning. Lack of a plan worsens the cash problem by wasting cash chasing tempting diversions, and throwing money at avoidable problems.

The changing market trends tend to offset the planning and there is no modus oprendi or mechanism in place to revisit the plan or replan in the changing scenario. Often, while planning, the stress is on the positive side of the business and no consideration or safety measures are planned to survive in times of recession.

The Challenge of Effective Leadership

An SME owner is often faced with the problem of effective leadership. He is mostly dependent on his own abilities and egos. The owner of the company remains too much hands-on with too much focus on his primary role of a leader and fails to enlist the support of competent managers and staff behind him and avoids recruiting dedicated staff or outsourcing specialized jobs. This eventually causes the company to stop growing and eventually could lead to failure. The owner must always remember his core role a and responsibilities. The owner must keep improving his personal and professional effectiveness for the continued success of the business. Failure to lead the company with responsible attributes may lead to imminent financial failure which stunts not only the growth but the overall running of the enterprise.

Lack of Handholding

Despite the fact, that SMEs in India are a major contributors to the national development, they lack any handholding either by the government or the financial institutions. When it comes to availing finance, the SMEs are considered as a risky proposition by financial institutions. Although all banks have in place special SMEs schemes, the SME profile of most of the banks, especially the public sector banks is dismal. Moreover, the cost of finance is higher than those in the large sector.

There are a number of schemes floated by the government for the benefit of SMEs, few avail these schemes which are outdated and do not hold good in the present economic environment.

Despite the fact that most of the large enterprises depend on SMEs, there is no handholding whatsoever of the SMEs by the large ones. The regulation of paying up SMEs bills within 60 days is openly flouted with no check.

Cash Flow

The most important issue to any SME entrepreneur is free flow of cash. Small business owners often work with speculations. If your cash inwards are good this quarter, it may fall short in the next quarter. Better cash today is no guarantee of equally good future especially when your business is depending on the open markets. Your company often runs the risk of underperformance for various reasons such as machine breakdown, sudden recession, staff issues etc etc. In times when the going hits a slump, your cash flow is affected and you begin to look at other avenues to get going.

Good credit control helps to prevent this becoming a serious problem. According to credit rating surveys in India, eight out of ten of SMEs have a bad credit rating,

Strategies are made but not executed well

This is a very serious problem with most SMEs which are quick in making strategies for moving to the next level in their growth plan. Strategies often fail to make headway due to:

• Lack of proper execution

• Poorproject Management

• Lack of leadership qualities

• Lack of knowledge and poor communication with employees who don’t know their company’s strategy.

• Company’s fail to avail available technical expertise and professional advice.

Poor Financial Planning

Start-up entrepreneurs often run close to the bone and fail to envision expenses which are unplanned and never taken into account in unforeseen circumstances. A retail store which records a creditable net profit year on year may seem to be in good shape, until a slip-and-fall takes place due to major supply line or equipment failure leading to sudden stopping of production affecting supplies and the outflow into the market. Even smaller expenses, such as a one-time government levy on all businesses in a region, or a rise in the cost of goods, can cause a major change in the bottom line.

This is the time to use your available credit when you need to tide over your short-term cash crunch, but keep a close eye on your long-term profitability to ensure that your overall liquidity is not threatened by the change in costs.

Other Risks

A large enterprise may probably survive the loss of a key executive due to a serious injury or death, but such eventualities frequently close small businesses when that person represents a large chunk of the available labor force–especially when the entrepreneur himself is that person. Likewise, a natural disaster or other major disruption can close a business for weeks or months. Whenever possible, have cash on hand and business policies to ensure that you will be able to reopen as soon as possible, or withstand the temporary loss of a key employee, and then check your business plan to see if any of your prior assumptions have been changed by the new circumstances.

Disdavantage SMEs

No Professionals for SMEs

SMEs in India face a very peculiar problem as they fail attract trained and qualified professionals and manpower.

Unfortunately, in India, we do not any institutions -technical or B-schools which churn out professionals for the middle rung of industry. These institutions offer professional courses at a very high cost and attract only a creamy layer amongst the students. The courses in various streams like IT, Business Studies, multi-discipline Engineering run into 4 to 5 years. On completion, students who have spent huge amounts on their courses tend to look for greener postures with high salary packages and are attracted by large industry and corporate.

There are no institutions which offer shorter courses at cheaper costs to train students for the middle rung of industry i.e, the SMEs sector.

In view of the non-availability of professionals, SMEs remain insulated from the technical and professional influence which ultimately results in the stunted growth of the sector.

Skilled Manpower

SMEs sector remains at a loss to attract skilled manpower as the government has not come up with a tangible blueprint to raise an army of skilled workers. With the presence of very few, the cost of availing skilled manpower becomes unaffordane for many SMEs.

The government has set up national Skill Development Corporation which has failed to make any headway despite its declared agenda to train and skill 500 million people by 2020. Experts are of the view that the target is unrealistic and cannot be achieved in the absence of any declared planning.