SME Facts

The contribution of SME to the Indian economy is over 10% of the GDP.  It accounts for nearly 35% of the manufacturing and 40% of the exports.  The role of the SME in the employment generation can hardly be discounted. The SME sector is truly representative of the spirit of the Indian entrepreneurship.  It is all about frugality in the business and survival of against all odds.  It is based on native intelligence and being extremely street smart.

Inconsistencies and Shortcomings

Yet the performance of the SME sector has not delivered the promise that we all expect it to. Many a discussion on this paradox has centered on the inability of the SMEs in enforcing well defined processes and systems. The common traits and role conflicts that have been observed in many of them are the following:

First and foremost is the inability to evaluate, objectively, the performance of the enterprise.  Most SME owners are extremely passionate about their enterprise and its success but do not consistently evaluate the financial performance.  Many focus on them only at the end of year when the regulatory filings have to be completed. The performance is inevitably evaluated in terms of the top line growth or at the other extreme equating profitability with cash flow. Sometimes, the inconsistency can be attributed to the holding pattern of the company as the owners are sole shareholders. Many a time their evaluation of the enterprise and the returns that it delivers are in absolute conflict.

The SME owners are often blamed for their inability to network with other professionals in dealing with issues. They try to resolve issues which are not their forte like an extremely brilliant technocrat dealing with banks to address financial requirements or a person with extraordinary marketing capabilities trying to resolve production glitches.  The inability on the part of the entrepreneurs to network amongst themselves with a view to moving up the value chain is hardly visible.

Finally, the entrepreneurs are blamed for taking great pride in the philanthropic aspect of the enterprise by providing employment to a number of persons, not necessarily the best in terms of capabilities. What they inevitably overlook is that they rather earmark a specified percentage of the profits for philanthropic purposes while ensuring that they employ capable people who can optimize the utilization of scarce resources.

There is an old management quote that says that you can manage only things that can be measured. To deliver more as SMEs, it is imperative to measure performance against some benchmark. For existing companies that already are in the business, one of the best methods to start the process is through the medium of well structured budget. 

Scales and Measures – Using Budgeting to increase efficiency.

To start with a budgeting process it would be good idea to determine as what the “limiting factor” would be. The limiting factor would basically be constraints that the organization would have to address in the business process. The limiting factor could be size of the market, production capacity, regulatory approvals or the like.

The preparation of the budget would require a bit of analysis of the cost patterns of the organizations in terms of variable and fixed costs. I would recommend budgets be prepared on “Zero Costs” basis.  This assumes that every line of expenditure would have to be fully justified as that would give a great opportunity to analyze all costs.  Some organizations have the tendency to make a provision of 10% additional based on previous year figures. It is akin to conceding that if there was 25% inefficiency in the system in the previous year then you will add another 10% to it this year!

I would strongly recommend that the budget be prepared for a minimum duration of month and definitely not beyond a quarter.

 A typical SME would require the following budgets to start with:

1.         Sales budget

2.         Production budget

3.         Manpower budget – both in terms of number and their costs

4.         Variable costs budget – Function of sales and production budget

5.         Selling & Distribution budget – This would mix of fixed and variable expenses

6.         Expenditure budget – mostly fixed expenditure

7.         Capital expenditure budget

8.         Cash flow budget

9.         Profitability budget

The cash flow budgets will help the organizations to determine their funding gaps and take timely action to source funds.  Another benefit out of the preparation of the detailed budgets is that it will enlighten the organizations to define well defined policies in respect of all key functions starting from marketing, human resources, purchases, finance, capital expenditure etc.

These will go a long way to measure actual performance at the end of period, again not beyond a quarter.

These small steps would go a long way to bring in a lot more structure to the thought process.  The big companies are looking at the SME to help them in their growth as they provide a pool of capable set of people. Remember when they source from a vendor they are not just buying the products and services but its capabilities!