All About Small & Medium-Sized Enterprises (SMEs)

What Are SMEs?

SMEs or Small and Medium-Sized Enterprises are businesses characterised by specific parameters lying below certain limits. These parameters are essentially numbers such as annual sales, number of employees, the number of assets owned by the company, market capitalisation, or any combination of these features that can be used to gauge the size of the company.

While SMEs are also often defined differently depending on the industry of their expertise, generally they include companies with an employee strength below 250 people. However, though the definition of an SME may vary from country to country, SMEs greatly outnumber the number of large-scale companies operating in that country. They are regarded as the key drivers of the economy in both, developing as well as developed national economies, with economies like Australia being dominated by SMEs to as much as 98%, with a one-third contribution to the GDP of the country.

The World Bank states that SMEs represent about 90% of the businesses and contribute more than 50% to employment worldwide.

The Indian Definition of SMEs

India defines Micro, Small, and Medium Enterprises (MSMEs) based on the criteria of Investment and Turnover. The updated criteria for a business to be defined as an MSME in India, as of June 2020, is as follows:

Source: Wikipedia

Structural Organisation of SMEs

The following traits characterise SMEs:

The CEO is the most important person in the room

SMEs are heavily driven by the CEO (Chief Executive Officer) of the enterprise. In most SMEs, the CEO is the founder, owner and manager of the company. SMEs are generally owned and funded by a single person or family, with very few being owned by multiple entities.

SMEs are labour-intensive businesses

SMEs are also regarded as a labour-intensive enterprise and are thus, often affected by a shortage of skilled labour.

Lack of an R&D department

Most SMEs do not have an R&D department since a single entity funds them, and funds need to be utilised conservatively. The CEO is usually the person who charts the future course of the enterprise.

Operational efficiency greatly affects the fate of the business

Since SMEs are generally founder-financed enterprises, they need to be extremely clinical when utilising funds for funding their operations. SMEs with high operational efficiency are known to turn into successful ventures, whereas those with poor operational efficiency tend to go extinct in the long run.

Low or negative free cash flow

Most small enterprises do not have substantial reserves of cash as most of the revenues generated from operations are utilised towards driving growth of the company by funding new ventures.

Importance of SMEs for the Growth of a Country

SMEs promote a culture of flexibility and innovation

Most processes, innovations, and industrial upheavals are attributed to small and mid-size enterprises. Since large companies are answerable to multiple stakeholders, ranging from retail investors to venture capital institutions, they are often unable to drive innovation as they favour low-risk strategies in operations. Large enterprises generally look to produce high volumes of a product of mass consumption and focus on improvising old products rather than building new and disruptive ones. SMEs, however, focus on creating new products or services from scratch in the quest of being disruptive and successful; and thus, adapt faster to the changing requirements of the market. They are considered to be an attractive and innovative system that often sets the trend for the rest of the sector to follow.

An example of the same includes a comparison of two broking companies in India-Zerodha and Motilal Oswal Financial Services. While Motilal Oswal, a large-scale enterprise, has been a premier brokerage in the country since 1987, it hasn’t brought about a major innovation in its product ever since because it is an IPO responsible to multiple stakeholders. However, Zerodha, which began as a small enterprise funded by its founders Nikhil and Nithin Kamath in 2010, soon grew to be the largest brokerage in the country owing to its disruptive products, viz. a free-of-cost learning platform for retail investors to learn about the markets, as well as a software interface that makes it easy for retail investors to access and trade the markets from the comfort of their smartphones. Zerodha set the path for other brokerages to follow, and as of 2020, several brokerages in India have user-friendly interfaces to access the markets.

SMEs create a more competitive, healthier, and open-ended economy

Through products that disrupt the sector, small and mid-sized enterprises often act as path-breakers and stimulate competition for the design, execution, pricing, and efficiency of products. Products offered by SMEs are usually priced lower than their large enterprise counterparts and are thus touted to be more consumer-friendly.

SMEs prohibit large enterprises from exercising a monopoly in a particular activity area. The monopoly of a company in any industry is generally regarded as an unhealthy characteristic.

SMEs assist large enterprises

Small and Medium-sized enterprises often serve as a valuable support system for large companies by helping them in certain areas of operations. This allows large companies to conserve their operating costs or utilise them for R&D or growth instead of funding side-operations, thereby increasing the efficiency of the enterprise. Activities such as supplying raw materials and distributing the finished goods created by large enterprises are performed more efficiently by SMEs. SMEs also serve as a boon in disguise by testing new and innovative products that can be incorporated by large enterprises in their product portfolio once it is seen that such products are in good demand.

Economic significance

SMEs generate a major share of jobs in a country. In developing countries, their contribution is even more significant, generating over 50% of the employment and close to 33% of the national income. In India alone, SMEs contribute 48% in India’s total export.

Governments and SMEs:

Governments recognise the contribution of SMEs, and thus, each government unleashes regular reforms to promote their growth. Governments often offer incentives such as easier access to loans and better tax treatment to promote the growth of SMEs and encourage budding entrepreneurs to take the plunge.

Some of the key steps taken by the Indian Government to help SMEs thrive are as follows:

1. Easier access to credit

The Modi Government launched a 59-minute loan portal to enable easy access to credit for MSMEs (Micro, Small and Medium Enterprises). Under this scheme loans up to INR 1 crore can now be granted in-principle approval through a dedicated portal launched for this purpose.

Bringing relief to GST compliant MSMEs, PM Modi had further announced a two per cent interest subvention for all GST registered MSMEs, on fresh or incremental loans. To help ease working capital woes of the exporting fraternity, PM Modi also announced an increase in interest rebate from three per cent to five per cent for exporters who receive loans in the pre-shipment and post-shipment period.

2. Access to markets

Another significant measure to help SMEs in India generate revenue, Public Sector Companies in India have now been asked to compulsorily procure 25 % of their total purchases from MSMEs, as against the earlier number of 20%.

3. Ease of practising business

As a step towards making a more conducive environment for SMEs to carry out their businesses, the return under eight labour laws and 10 Union Regulations must now be filed only once a year.

Also, concerning minor violations under the Companies Act, an ordinance has now been introduced by the government; under this, entrepreneurs will no longer have to approach the courts. Instead, they can take remedial measures themselves through simple procedures.

Thus, it can be seen that Small and Medium-Sized Enterprises are a valuable sector of a country’s economy, and their value is recognised by Governments and stakeholders alike. An investment in this sector or a desire to build something and begin as a small-sized enterprise should be encouraged, and followed up with perseverance.

Also read:
MSME – Industries that form a Foundation for a Robust Economy
How is the Government helping Small Businesses & Startups fight the financial crisis?
Business Success Tips Every Business Owner Should Know
The impact of Covid-19 on Small Businesses. How bad this has been?

FAQs

Q. What is the formal definition of a large-scale enterprise?

Ans: In India, large-scale enterprises are industries with a fixed asset of more than one hundred million rupees or Rs. 10 crores. Many of these have multiple stakeholders and are often owned by retail investors through IPO listings.

Q. What is meant by an IPO?

Ans: IPO or Initial Public Offering is a method of fundraising in which shares of a company are sold to institutional investors and usually also retail investors.

Q. What is meant by market capitalisation?

Ans: The market capitalisation of a company is the total value of its shares/stock.

Q. What are the cash flow statements?

Ans: A cash flow statement is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.

Q. What is the full form of GDP, and why is it a significant number?

Ans: GDP is short for Gross Domestic Product. It is a monetary measure of the market value added through the production of goods and services in a country during a certain period.