what are sme

8/12/2019 What Are SME

1/13


2/13

What are SME's:

SME's are basically small and medium enterprise. For a company or firm to qualify

as an SME the factors taken into consideration are number of employees it's

turnover or balance sheet total. As per the European Union (EU an SME is

defined as '!he cate"ory of micro # small # and medium si$ed enterprises # is made

up of enterprises %hich employ fe%er than & persons and have an annual

turnover not e)ceedin" million euros and*or a balance sheet not e)ceedin" +,

million euro. !he European -ommission set up , broad parameters in &&

%hereby companies comprisin" up to employees %ere classified as Micro/

entities # up to employees %ere classified as Small companies and up to &

employees %ere classified as medium si$ed enterprises.

!he United States on the other hand takes into account 'Small business criterion'

comprisin" type of industry o%nership structure# revenue and number of

employees %hich is normally up to . For units consistin" of less than employees the small business administration S0A uses the term S121 meanin"

Small 1ffice 2ome 1ffice .

3n 3ndia %hich is a developin" country# the 4overnment of 3ndia in &5 passed an

act called the Micro # Small and Medium Enterprise 6evelopment (MSME6 act .

As per the act # the main parameter considered is type of enterprise %hich is then

further scrutini$ed for various aspects . 7e first talk of enterprises %hich are

involved in manufacture * production * processin" of "oods. 7hen investment in

plant and machinery is limited to 8s & lac it is considered a micro enterprise.


3/13


4/13

or international to increase efficiency and competitiveness . !his sector is said to

be the bi""est provider of ;obs# in most countries # developin" as %ell as

developed . 3t is said to be a ma;or source of innovations and ne% start/ups .

4oo"le bein" a classic e)ample . SME's play a key role in maintainin" re"ional

and sectoral balance in an economy . !his in turn makes economics especially for

developin" countries more fle)ible and adaptable . SME's tend to be more active in

rural areas %here they are a source of employment to unskilled %orkers of lo%

income "roups # thus contributin" to reduction in poverty as also development of

rural economy . SME's "ive rise to ne% entrepreneurs and plays a crucial role in

the checkin" of income distribution .

8eference9%%%.info.%orldbank.or"*...tools*docs*library*+?&5*fan.pdf

Chae#es +"r SME's I# Dee"!# C"*#tres

SME's have al%ays played an important role in the development of a country .

!hey are in a %ay the backbone of the country's economy yet there are numerous

problems faced by SME's in most countries # more so in developin" countries .

Mentioned belo% are some of the issues that pose a challen"e to most SME's 9

,) La$- "% +#a#$a Res"*r$es:

Most SME's are faced %ith the recurrin" problem of shorta"e of finance . !here is

a problem of securin" loans from banks or other lenders . Some do not even have

access to local banks . A number of enterprises fail to provide bank "uarantees

%hich prevent them from "ettin" any or lo% financial aid. !he rate of interest for

acquirin" loans is also much hi"her for SME's as is the duration of loan . !hey are

considered hi"h risk borro%ers and are vulnerable to market fluctuations . 1n the


5/13

other hand # in some developin" countries banks lack sufficient kno%led"e on

procedures to lend or financially support SME's . !he current "lobal financial

slo%do%n has also contributed to the constraints faced by SME's . !he financial

crunch often pushes an SME to function belo% it's normal %orkin" capacity and in

some cases may result in shutdo%n . 3nsufficient capital adds to cost of operation

and production * services provided . A ??? study by -ollier @ 4unnin" in enya

linked lack of financial support to e)portin" . Shorta"e of fund proved to be a hu"e

barrier for SME's %ho %ant to promote their product * services . !hese conditions

block the "ro%th as %ell as functionin" of most SME's in developin" countries.

8eference9 %%%.delhibusinessrevie%.or"*e.pdf

%%%.indianfaculty.com*...ulty:articles*fa

.) A$$ess t" Mar-ets:

0ud"ets of numerous SME's are limited @ thus their reach to a la"er market is

much smaller . !he consumer base is restricted because they are not able to

promote or advertise their services on a much %ider scale . 0esides this in certain

developin" countries SME's are out of sync %ith the current business practices and

are una%are of the latest business trends . Access to "lobal markets in times of

tou"h competition also proves to be a hindrance to the "ro%th and e)pansion of

SME's ( 1f course one must mention here that %ith the advent of the 3

this issue has some%hat been resolved . 0ut in many developin" countries # the

inland and remote areas are still not easily accessible . Accordin" to 1E-6

(1r"ani$ation for Economic -o/operation and 6evelopment report# SME's


6/13

account for almost ? percent of "lobal businesses . !hey makeup percent of

46= and 5 percent employment . 3n spite of the above fi"ure representation of

SME's of developin" countries is considerably lo% %hen it comes to international

trade . 3n 3ndonesia for instance # only &/, percent of SME's are into e)portin" .

!aken in totality # a minuscule / percent of SME's in developin" countries are

actively en"a"ed in "lobal markets .

8eference9%%%.icmis.net*ictbm*ictl

%%%.unido.or"*fileadmin

/) Pr"$ess "% Dstr0*t"#:

Failure to establish proper marketin" net%orks is another challen"e faced by

SME's of developin" countries . !heir kno%led"e of distribution channels is

limited and they fail to identify proper routes of profitable options available to

them . SME's that utili$e correct information at the ri"ht time # only are capable of

tacklin" this problem . An avera"e %ould perhaps find it difficult to "et into minute

details as they lack the internal resources to even develop a concrete supply chain .

4ereffi (??& in his study spoke of !ai%an %here the SME's lacked concrete

distribution net%orks thereby hinderin" there operational and marketin"

capabilities .

8eference9%%%.delhibusinessrevie%.or"*e.pdf


7/13

1) Pr$# Strate2 :

SME's in developin" countries find it difficult to set the ri"ht price for their

product . !he main reason bein" i"norance or not havin" a proper idea of the

prevailin" market prices . !his problem not only curtails e)ports # in fact it

prevents SME's from securin" competitive prices in the domestic*international

markets . Settin" the achievable tar"ets as %ell as prices %hich are at par %ith the

prevalent prices to ma)imi$e the enterprise profit is most of the time a difficult

task for SME's in developin" countries . !here is also the burden of maintainin" a

stron" position financially . !his in turn directly impacts securin" any kind of price

advanta"e . A study in ?B> of > e)port manufacturers ( SME's of Cene$uela by

Frances %as proof of this fact .


3) 4*at2 C"#tr":

=roduct desi"n # brand ima"e # suitable packa"in" and a hi"h standard of the

product * service manufactured * provided are all features that describe quality .

!hou"h the standards of quality control are different in various developin"

countries # the problem remains the same across the board . Most of the time

quality is considered the main criterion for doin" business in the market and also

sustainin" it 3nsufficient kno%led"e %ith re"ards to characteristics of the product #

manufacturin" technolo"y # etc are the main problems afflictin" SME's in


8/13

developin" countries. !his impedes their quest in maintainin" quality. !his is

ma"nified by the fact that SME's are very often una%are of the

demands*requirements of the market. For them it is much simpler to

produce*e)port a standardi$ed product . 3t is also true that a product mi"ht sell %ell

in the domestic market but fail to make an impact internationally . Studies

conducted by Fi"ueirdo and Almeida in ?BB talk of sub/standard products bein"

manufactured by 0ra$ilian SME's %hich resulted in products bein" re;ected .

Carious SME's do not have the means to conduct the research for methods to

improve or maintain product*service quality . !his leads to competition from

similar firms %hich are providin" the same standard*quality of product at

competitive prices.


5) La$- "% S-e6 H*a# Res"*r$es :

!his is another challen"e SME's have to face. !his is a factor %hich may have an

impact # "ood*bad on the performance of the enterprise . =resence of educated and

skilled labour is a bi" asset to any business or"ani$ation . Unfortunately SME's in

developin" countries often lack this asset . SME's have a tedious task of attractin"

talented*skilled manpo%er as most of them may not offer pay packa"es %hich are

e)pected by the employees . Another problem further rises in retainin" the talented

lot and providin" them a conducive business climate for "ro%th . Employees in

most SME's are habituated to conventional methods of functionin" %hich are not

sufficient to take on professional level of conductin" business . Absence of such

skilled personnel tends to hamper creativity or uniqueness of the SME . Solvin" of


9/13

comple) business issues for initiatin" "ro%th oriented business policies becomes

cumbersome . SME's tend to avoid providin" trainin" to employees to cut do%n on

e)penses . !his further makes it difficult to retain employees %ho are not only

skilled but can also 'multitask' .

8eference9%%%.iosr;ournals.or"*iosr/;bm*full/issue*vol&/issue5

The"res That I#%*e#$e SME's

!%o theories %hich are most relevant to the financial policies of the SME's are the

=eckin" 1rder !heory and the !rade 1ff !heory . 0oth strive to e)plain the capital

structure of the SME's .

=eckin" 1rder !heory9 3n ?B+ # Myers propounded a capital theory called a

=eckin" 1rder !heory . !his theory states # DA firm's capital structure is driven by

the firm's preference to finance %ith internally "enerated funds instead of %ithe)ternal financin".D Emperical evidence sho%s the main source of financin" of

SME's are their '3nternal 8esources' . !hey tend to refrain from utili$in" 'E)ternal

8esources' basically because of t%o factors / Asymmetric information and

transaction costs .

7hen SME's choose not to utilise e)ternal financial aid and in the process "ive up

a lucrative business investment there is a rise in asymmetric information cost .

!ransaction cost come into play %hen an SME chooses to accept e)ternal finance .

1n identifyin" a source # the SME %ill after usin" internal resources opt for

e)ternal 'debt financin"' and only later settle later for 'equity financin"' . Accordin"

to this theory 'SME's %ith a positive cash flo% use it to lo%er debt ratio' and


10/13

'SME's %ith a ne"ative cash flo% increase their debt ratio in response to lack of

internal resources' .

& !rade 1ff !heory 9 Accordin" to this theory of capital structure Dfirm's %ith a

debt ratio belo% the tar"et ratio ad;ust their debt up%ards to%ards the tar"et debt

ratioD and Dfirm's %ith a debt ratio above the tar"et ratio ad;ust their debt

do%n%ards to%ards the tar"et debt ratioD . SME's utili$e the principles of this

theory by usin" the 'ta"et/ad;ustment model'(!a""art #?>> and alilband @ 2arris#

?B+ . SME's have a set debt ratio %hich they tar"et and accordin"ly ad;ust

to%ards it . !his model helps SME's ad;ust 'tar"et debt ratios' by comparin" the

previous and future (!ar"et period's ratios . !he above theory helps ma)imise the

value of the enterprise . Si$e # a"e # "ro%th opportunities # internal resources all

tend to influence decision makin" process of SME's . !he de"ree of effect above

theories have on individual SME's depends lar"ely on these factors .

8eference9%%%.efmaefm.or"*efma&*papers*&/s%innen:paper.pdf


11/13

S"*t"#s t" Pr"0es +a$e6 72 SME's:

SME's are the very fabric of economic "ro%th in developin" countries . 3t is forthis very reason that it is important to discuss the viable solutions to the problems

encountered by them . 0riefly mentioned belo% are the same .

a Ease in the process of settin" up of SME's .

b Availability of finance on lon" term basis %ith lo% rate of interest .

c 0anks and 3nsurance companies reali$e the challen"es faced by SME's and

introduce rules @ re"ulations accordin"ly .

d Simplified system of re"istration and licensin" .

e !ransparent ta) system and ease in %ritin" of contracts .

f Fle)ible labour re"ulations for protection of ri"hts of both labour and enterprise .

" =rovision of 0usiness 6evelopment Services (06S by public institutions .


12/13

h Assistance by public institutions in obtainin" information about market and

distribution process .

i =rovision of macro/economic frame%ork allo%in" SME's to operate in a fair

manner .

; o"istics and Supply -hain Mana"ement pro"ramme like U


13/13

o Market assistance from E)port =romotion -ouncil to identify international

markets and assist in procedures of international trade .

8eference9%%%.oecd.or"*industry*smes*,??&>B.pdf

%%%.indianfaculty.com*...ulty:Articles*FA*fall.html

C"#$*s"#

Stron" SME sector can propel a developin" country for%ard by diversifyin" and

e)pandin" it's domestic economy . 3ncrease in SME "ro%th has a direct impact on

the 46= "ro%th of a nation due to it's increase in profits # value added services and

output . !hey are a "reat "enerator of employment and contribute tremendously to

income "eneration and e)port revenues . !hey are therefore a sector that should be

actively promoted and encoura"ed in all developin" countries .

8eference9 Self

what are sme

Documents