With blurring boundaries and climbing scope, businesses across the globe face similar challenges. Entrepreneurs require a stable and conducive environment to let their SMEs soak in the benefits and prosper. The pandemic and the accompanying turbulence has hugely impacted small and medium scale enterprises resulting in lay-offs and salary-stashing for employees and in some cases, closing down of, a part of or, complete business operations. The need is to look at the problems SMEs face beyond the regular budgetary constraints and government regulations.  

Before we delve into the less-talked-about problems faced by SMEs, it is pertinent to talk of SMEs themselves. An SME can be any non-subsidiary, independent firm that employs fewer than a certain number of employees (250 employees in the European Union, for example).  Small and medium enterprises form the backbone of any economy that distils itself as a free-market or mixed economy on the world map. The technological and globalised markets have witnessed the reducing importance of the economies of scale, thereby leading to SMEs gaining prominence in the market share. Here are a few insights:  

  • SMEs account for over 95% of firms in the private sector in OECD countries (the percentage rises to 99.9% in the UK and regions).
  • They contribute to 60-70% employment generation in economies.
  • The number of SMEs has grown by 60% since 2000.
  • Over 45% of the SMEs use e-commerce,
  • SMEs contribute between 25%-35% of world exports of manufactures and account for a small share of foreign direct investment. 

Source: European Commission

Challenges and Problems Faced by SMEs

SME problems are unique, and their weaknesses become more prominent in a globally competitive economy. Here are some pointers worth considering:

Lack of Access to Finance and Cash Flow Management

Banks and financial institutions shy away from granting loans to new and small firms given the uncertainty and risk involved. The gestation period and the initial costs involved, put a severe strain on the SMEs to perform on zero or even negative profits. The formalities and red-tapism further choke the growth prospects of SMEs. 

The Global Entrepreneurship Report of 2015-2016 stated over half of the businesses stopping their proceedings because of lack of profits or financial funding.

Another aspect of smooth working for any organisation is the availability of working capital. Cash Flow and Stock management require some of the most crucial planning decisions and market predictions. Overstocking and overtrading can both prove fatal and lead the firm into debts. Majority of the small firms face trust issues from the investors.   

Cash Mode vs Electronic Payments

Cash still powers the majority of the SMEs across the globe. Most enterprises prefer the cash mode in their B2B and B2C payments despite the rise in digital payments.  

The “Uses of Cash and Electronic Payments” report stated that nearly 80% of the SMEs do not intend to go cashless in the near future. And 35% of the SMEs revealed that their customers continued to stay away from electronic payments. However, this needs to change quickly.

Liquidity, for any SME, is more significant than profits or return on investments. A healthy cash flow system is pertinent if the operations must run smoothly. But often, due to subpar management, SMEs can end up spending excessively or face unauthorized expenses due to the very nature of cash payments and the tracking challenges they pose. Of course, cash payments are also prone to straight up theft, and also bring additional costs in terms of management, record-keeping and storage. A critical payment, if unpaid, can disrupt the lifecycle of a sound business. If a business fails to keep a track of its receipts and payments, the cash flow required for the day-to-day operations may either become clogged as a historical cost or remain stuck in a fixed asset.

A recent study by U.S. Bank found that 82% of the time, poor cash flow management or poor understanding of cash flow contributed to the failure of a small business. A shortfall in cash flow results in increased borrowing. And more debt burden in the long run isn’t an encouraging indicator for a successful SME.

SMEs would want to rely on a suite of tools, software and the right banking solutions – like Salt – to track and manage the nature and fluctuations in their cash, and cash flow in the short and long run.

Supply Chain and Client Base Management

89% of companies see customer experience as a key factor in driving customer loyalty and retention according to the infographic by Invespcro.

At the end of the day, it is the customers and clients that have to be served. If a product fails to satisfy the customers, the sole purpose of the entire business is lost. SMEs often face the hurdle of diversifying their client base. If the business of an SME relies on a single or a few clients, it is at a greater risk of drowning into losses. Growth has to be accomplished through a portfolio of clients. 

The longer the supply chain, the more scope there is for things to go wrong. A supply chain is only as strong as its weakest link.

The most common cause of failure of SMEs is poor supply chain management. As the business grows, the complexity of operations – whether finance, stock or logistics – grows along. These aspects, if mismanaged, lead to wastage and subsequent loss of cost and efficiency. 

Company culture and Leadership

A survey of 2,500 SMEs revealed the need to improve upon management and entrepreneurial skills. 

Leadership skills aren’t inherited or inborn but form the essential element to run any business. A lack of it results in faulty strategy and business planning. The management, as well as the leadership, have to be involved in the ‘how’ aspect of strategy and its implementation. Teams and functions can go haywire easily if the objectives aren’t well-wrought into plans and strategies are implemented over a stipulated time period.  

SMEs need to build the right culture thriving on honesty, customer service, innovation and respect for each other. A healthy company culture attracts the right kind of talent and provides synergistic growth. But the upkeep of the right aspects in the culture demands a headstrong management. ‘Living by your values’ and ‘culture beats strategy every time’ – these mottos can make or break any organisation.  

Environment and Government

Under current U.S. law, the corporate tax rate is currently a whopping 35% on income over $10 million.

Stringent government policies regarding book-keeping, auditing and tax compliance issues are effervescent challenges for smaller firms. Any company operating in a particular country has to comply with the environmental regulations and has to seek several permissions regarding the same. Though good for the environment, the firms suffer at the micro-level and have to let go of good opportunities. SMEs are also required to adhere to the advertising and cyber-security tenets. 

A business-conducive environment is an incubator for an SME. For instance, the post-Brexit fall in the value of the pound, Lebanon crisis, and the global pandemic have posed never-seen-before challenges and have caused the firm to rethink their systems and processes.  

Team Building and Employee productivity 

With limited resources, finding the right kind of people becomes a task in itself. Any organisation- whether big or small- consists of all functions including planning, finance, production, accounts and operations. Team building is necessary where each player plays their part. SMEs aren’t a one-man show. Specialisation becomes paramount as the business grows. 

“If you look after your staff, they’ll look after your customers. It’s that simple.”

~Richard Branson

The SMEs are also required to invest in training and orientation programmes for the employees and work towards greater employee involvement and productivity. With the SMEs themselves operating under uncertainty and at times, a hostile environment, it becomes difficult for them to guarantee stability of tenure, grievance handling, reward system and career growth to their employees. As such labour turnover and absenteeism remain high, HR costs are further pushed up. 

Ancillary cost-heads

Compliance to employees’ social security measures like Employee Provident Fund, Pension, and gratuity involves additional cost-heads that fall heavily on the already constricted budget of SMEs. Health care costs like group life insurance, health insurance, though essential, make it difficult to manage finances. Besides that, research and development, replacement of obsolete technology, marketing and promotion are larger overheads in the short run that contribute to the growth of the SME in the long run. 

It should be remembered here that all these expenses enhance productivity and product quality and reach, and cannot be done away with. 

The challenges faced by small and medium scale firms are vast and layered. At the micro level, each SME problem needs to be addressed by the entrepreneurs and management to upholster the fabric of organisation as per the structure of the economy, government and industry. A dynamic SME sector can be achieved expeditiously through fostering public-private partnerships and small-firm networks and clusters on the macro level. When integrated into local systems of productions, SMEs can be more responsive and flexible to customer needs than large firms.