SME Management (MGT-601) VU

Definitions
Characteristics of Small Businesses

1. Privately Held:
o Very small: Owner is the main worker.
o Larger small businesses: Owner directs employees.
2. Limited or no Management Layers.
3. Personalized Management: Owner oversees all decisions.
4. Limited Resources: Insufficient to dominate markets.
5. Independence: Full control by the owner.
6. Local Market Focus.
7. Small Market Share.
8. Labor-Intensive: Limited use of capital-intensive machinery.
9. Technological Innovation: Key to success.
10. Specialized Skills: Catered to niche clients.
11. Adapts Well to Changes: Quick to adjust costs and labor.
12. Success in Developing Markets.
13. Resilience in Adverse Conditions.

Large vs. Small Businesses

1. Fostering Change:
o Small businesses: Cycle of birth and death.
o Large businesses: Expansion and contraction.
2. Risk and Reward:
o Small businesses: Decisions are personal.
o Large businesses: Decisions by managers without direct stakes.
3. Economic Power:
o Small businesses: Minimal influence.
o Large businesses: Significant influence.
4. Resource Utilization:
o Small businesses: Use secondary resources.
o Large businesses: Use primary resources.
5. Market Segments:
o Small businesses: Serve overlooked or niche markets.
o Large businesses: Target broader markets.

THE REGIONAL CONCEPT of SMEs

The Relationship between Small and Big Business
Small business is less affected by economic disruptions and is more or less self-adjusting. It tends to act as
cushion for economy.
Relationship b/w small and large firms: Job subcontracting, purchase subcontracting, complementary
products, maintenance and repair services, Merchandising and commercial trading, Social benefits
(employment generation, decentralization)
General criteria to define SMEs: no. of workers employed, capital investments or assets, volume of production or
turnover.

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The Government’s Effort towards SME Development

Based on “Indian Model”. The basic idea behind this model is to develop infrastructure facilities such as
industrial estates, common facility centers and vocational training institutes.
Definitions by Provincial Level Institutions PSIC, SSIC, SIDB (Small Industries development board) KPK, DIB
(Directorate of Industries Baluchistan)

These organizations defined the small industries as under:

Industries with fixed investments up to 20 million excluding the cost of land and no limit of people employed.

Definition by (SBFC) Small Business Finance Corporation

Small:
• No limit of people employed.
• Productive assets limit of 20 million
Medium:
• No limit of people employed
• Productive assets limit of rupees 100
million.

Youth Investment Promotion Scheme (YIPS):

Industries with fixed assets of up to rupees 10 million (Excluding the cost of land and building).

Small & Medium Enterprise Development Authority (SMEDA)

Micro: 10, 2
 Less than 10 people employed
 Productive assets limit of 2 million rupees.
Small: 10-35, 20
• Between 10-35 people employed.
• Productive assets limit of 20 million.
Medium: 36-99, 40
• Between 36-99 people employed
• Productive assets limit of 40 million.

Definitions of "Entrepreneur"

1. Richard Cantillon: uncertainty bearers

2. J.B. Say: Organizers.
3. Joseph Schumpeter: Enterpreneur are innovators who introduce:
o New goods.
o New production methods.
o New markets.
o New sources of raw materials.
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o New forms of industrial organization.
4. Peter Kilby: Entrepreneurs in underdeveloped countries identify market opportunities, adopt production
techniques, and manage resources effectively.
o Distinguished between independent entrepreneurs (innovators) and corporate entrepreneurs
(implementers).

Definition of Entrepreneurship

 Cole (1959): A purposeful activity involving decision-making and resource organization for profit-oriented
business ventures.
 Modern Perspective: Entrepreneurship is pivotal in driving innovation and growth in SMEs and advancing
fields like technology, medicine, and telecommunications.

 Reggie Aggarwal & Mark Esposito: Entrepreneurs in high-tech sectors focus on solving problems,
creating long-term value, and achieving freedom despite challenges.

Challenges:

1. Only 1 in 6 million tech ideas result in IPOs.

2. Less than 1% of business plans secure venture capital funding.
3. Founder CEOs own less than 4% equity post-IPO.
4. 60% of VC-funded companies fail.
5. IPOs take 3–5 years to materialize.

Characteristics of Entrepreneurs

(Based on David McClelland’s Research): Need for achievement, Preference for responsibility, risk preference,
confidence in success, future-oriented, feedback-oriented, energetic, organizational skills, attitude towards
money.

Qualities of an Entrepreneur: Mental ability, Human ability, Conceptual ability, Technical ability,
communication and decision making.

1. Mavericks: Independent thinkers or innovators.

KINDS OF ENTREPRENEURS ROLE AND FUNCTIONS IN AN ENTERPRISE

Kinds of Entrepreneurs: innovative, imitating, Fabian (skeptical and cautious to change), drone () Inert and
traditional.
Role of Entrepreneurship or Entrepreneur: change, innovation, increasing productivity, solve problems,
achieve freedom.
Entrepreneur: Idea person + manager
As rightly pronounced by Jule Buckman, “Basically an entrepreneur sees a need and then brings together the
manpower, materials and capital required to meet that need.”

Introduction of Change: Initial launching, subsequent expansion, factor innovation (finance, manpower,
innovation), production innovation, market innovation.

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Increasing Productivity: Keys are: R&D, investment in plant and machinery, resource allocation, realization of
internal and external economies of scale.

Barriers in the Path of Entrepreneurship

Vesper has listed 12 common barriers in the path of entrepreneurship.
1. Lack of viable concept
2. Lack of market knowledge
3. Lack of technical skills
4. Lack of seed capital
5. Lack of business know-how
6. Complacency (lack of motivation)
7. Social stigma attached to certain vocations
8. Job “Lockins”, “Golden Handcuffs” or attachment with the job
9. Time Pressures, Distracter
10.Legal constraints
11.Monopoly- Protectionism
12.Inhibitions Relating to Patents

Salient Features of Small Entrepreneurs in Pakistan

SMEs withstand economic disruptions easily.

 Pakistan:
o SMEs provide employment to over 80% of the labor force.
o Contribute more than 50% to GDP and exports.
o Significant sectors: Textiles, sports goods, surgical instruments, carpets, and footwear.

SMEs in Pakistan: Key Contributions: employment, exports, economic growth, gender inclusion, support to large
industries, low loan default rates (15%, far lower than large enterprises 65%), subcontracting systems, lower
overhead costs, inclusive economic growth, just wealth distribution, social stability, innovation, technological
advancement, fosters collaboration among small scale vendors.

Investment in SMEs: Synonymous with investment in human resources

1. Pre-Requisites for SME Development: customized banking for SME, one-window operation, government
and bureaucratic support.

4. Directorate of Industries, Baluchistan - 1976

 Key Contributions: 63 training centers, one small-industries estate and sales centers.

Financial Institutions Supporting SMEs

1. Small Business Finance Corporation (SBFC) – 1972, restructuring - 2000

 To support self-employment and cottage industries.

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 Restructured: reduced branches, improved IT and management efficiency. Financing projects like
gemstones, textiles and marble processing.

2. Regional Development Finance Corporation (RDFC) - 1985

 Established: to promote industrialization in less-developed areas.

o Disbursed Rs. 80 million for self-employment schemes.

3. Youth Investment Promotion Scheme (YIPS)

 Special focus on rural women with loans between Rs. 25,000 and Rs. 200,000 at subsidized rates (10%).

4. Industrial Development Bank of Pakistan (IDBP)

 Extends term finance for manufacturing sectors.

 Prepares feasibility studies to support small-scale investments.

The NGO Business- fair trade cooperatives, designer, marketer or distributor.

SMEDA: Small and Medium Enterprises Development Authority – 1998 – under MOIP

o Functions as a promoter and facilitator of SMEs in Pakistan.

 Vision: Growth of a globally competitive SME sector for national economic sustainability.
 Mission:
o Provide a conducive environment and services to enhance SME capacities and competitiveness.

SMEs face challenges in adapting to economic liberalization and accessing global markets, but they hold immense
growth potential with proper regulations and promotion.

Current Status of SMEs in Pakistan

 SMEs account for:

o 90% of private enterprises in the industrial sector.
o 78% of non-agricultural employment.
o 30% of GDP and 35% of manufacturing value-added.
o PKR 140 billion in exports.

Government Strategies for SME Development

o Poverty Reduction Strategy Paper (PRSP).

o SME bank
o SMEDA
o SBFC
o PSIC, SSIC, SIDB, DIB

 Recommendations:
o Increase the use of Urdu in official documents and business communications.

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o Develop mechanisms like those in the U.S. (e.g., Small Business Ombudsman) to ensure fairness
in SME operations.
o Facilitate SME participation in public sector procurement (currently below 4%).

Taxation Issues

 Problems:
o High tax rates push firms toward the informal economy.
o disproportionate compliance costs (monetary, time, and psychological).
o overly complex tax regulations, with 67% of enterprises citing them as a significant challenge.
o Smaller firms (assets < PKR 1 million) face the greatest tax-related difficulties due to limited
resources for compliance.
o Non-standardized tax structures allow excessive discretion to tax authorities leading to mistrust
and confrontation.
o Reforms focus on administration and management, neglecting SME-specific issues.

 Recommendations:
o Consider fixed taxation schemes for retailers and SMEs.
o Incentivize small businesses to enter formal economy.

Arbitrary: Based on personal discretion or judgement.

 Labor Issues in Pakistan

o 56 complex labor laws, some industry-specific, create compliance challenges for SMEs.
o Frequent inspections and inconsistencies retard SME growth.
o Modern labor markets require flexibility, security, and compliance with international standards.

 Government Initiatives: labor law simplification (6 basic statutes), WEBCOP (Worker employer bilateral
council of Pakistan), Labor inspection policy (reducing government interference while focusing on
industry standards.)

Organizations like PCSIR (Pakistan council of scientific and industrial research) and PITAC (Pakistan Industrial
technical assistance center) need to play an active role.

Key Takeaways: Thus, government should focus on: policy reforms, access to credit, skills development,
technology, coordination

 A harmonized definition of SME is vital for: coherent SME policy development, efficient resource
allocation and benchmarking against international best practices.

 Women's participation has expanded into urban cottage industries and self-employment, yet formal
entrepreneurship remains limited.

o ISO 14000 combines environmental and quality standards to boost competitiveness.

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Long-Term Issues for SME Policy: LLII: Low literacy, Law and order, IPR (patents, trademarks, copyrights),
Infrastructure (Power, telecommunication, transport).

Ancillarization: creating supportive products for existing industries.

Pitfalls in Venture Selection: Lack of objectivity, Market myopia, Technical misjudgment, financial
mismanagement, Legal oversight.

Technical Feasibility: critical technical spec, quality-cost relationship, product testing

1. Critical Technical Specifications: Functional design, adaptability, durability, reliability, safety, reasonable
obsolescence, standardization
2. Quality-Cost Relationship: optimal quality is marginal quality = marginal cost, direct correlation b/w
cost and quality, avoid excessive quality upgrades.
3. Product Testing: conduct, engineering studies, blueprints, models, prototypes, lab and field testing.

Market Feasibility: identify market potential, cost-volume relationship, sources of market info, market testing

1. Identifying Market Potential: Identify end users, segment the market, identify potential for each
segment.
2. Cost-Volume Relationship: study how pricing affects the sales, economy of scale for optimal production
and cost-efficiency.
3. Sources of Market Information: primary data, secondary data.
4. Market Testing: showcase products at trade fairs, conduct test marketing.
o Drawbacks: costly, time-consuming, exposure to competitors.
o Benefits: Determine cost-volume relationships, validate marketing, identify potential of each
segment.

Financial feasibility analysis: Determine the total financial requirements.

It can be done by preparing a financial statement in the following way:

Financial Requirement Statement: Initial expense, fixed investments, Operating expenses.

Initial Expense Period 1 Period 2

Expense in product development ------- -------
Legal expense ------- -------
Product testing expenditure ------- -------
Marketing and technical feasibility ------- -------
Expenditure
Miscellaneous expense ------- -------
Sub Total(1)
Fixed investments

Building ------- -------

Equipment and machinery ------- -------

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Patents ------- -------

Other equipment ------- -------
Sub Total(2)
Operational expenditure

Material ------- -------

Wages ------- -------
Sales promotion, distribution ------- -------
Rent, interest, insurance, taxes ------- -------
Contingency ------- -------
Sub Total(3)
Total 1+2+3 1+2+3

Financial resources and other costs

Financial resources could be categorized on the basis of periodicity into:
Short term resources:
(those payable in a year). Trade credit supplies, short term loans from banks or other lending
institutions, sales of account receivable etc. belong to this category.
Intermediate Term Loans:
Intermediate term loans are those available for one to three (sometimes five) years. It includes terms
loans from banks, lease finance, financial assistance from institutions etc.
Long-term loans
Long-term loans are those from banks, equity capital and investments of earnings.
It would be appropriate to compute weighted average cost of funds as illustrated below:
weighted cost = proportion x cost

Cash Flow Analysis: projected sales, available financial resources and financial requirements.
If the projected sales, associated financial requirements and available financial resources are known, the
anticipated cash flow can easily be determined.

Cash Flow (Projected)

Cash Flow and Financial Transactions Period 1 Period 2

1) Cash outflow
Initial expense
Fixed investment
Operating expense
=Total cash outflow
2) Cash inflow
Cash sales
Account receivables
=Total operating inflow
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3) Net cash flow (2-1)

4) Desired minimum cash balance
5) Total amount of funds required
= cash inflow – cash outflow [3 (if
negative + (Desired minimum cash
balance) 4)]

Source of Funds: short term (net trade credit, commercial loans, sales of A/C receivables), intermediate loans
(Trerm loans, leanse finance, financial assistance from FI), long-term loans (banks, equity capital, investment
from earnings), equity.

Anticipated return on investment: financial feasibility is judged on the basis of return on investment or return
on equity.
It can be calculated by relating the average earnings expected over a given period to either the total amount of
investment or net worth of organization (Return on equity). Both are compared with potential yield from
alternative investment opportunities to ascertain the acceptability or otherwise of a new venture.

Assessment of Personal Requirements and Organizational Capabilities: Activity analysis

a) Ascertaining the anticipated workflow and the various activities (called activity analysis). At this stage,
the total range of activities and level of skills are identified.
b) Grouping the activities into set of tasks that individuals can handle effectively.
c) Categorization of various tasks to form the basis of structure of organization.
d) Determination of interrelationship between different positions and designing of organizational
hierarchy.

Analysis of Competition: for survival and growth. Two types direct, indirect

The entrepreneur must guard against being content with neutralization competitors’ strategic advantages . The
aim should be to have superior strategies at least during the initial stages.

Field Problems of Starting a New Enterprise

Feasibility analysis:
1. Technical analysis
2. Market analysis
3. Financial analysis
4. Economic analysis (ROI or ROE)
5. Competitor analysis
1. Pre-Operator Problems: Selecting appropriate form of business and acquiring
resources of raw material, power, transportation.
a. Problem of selecting an appropriate form of business organization.
b. Problems related with the acquisition of basic facilities such as sources of raw materials,
power, transport etc.

2. Problems during the construction phase These would be connected with:

1. Acquisition of land;

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2. Construction of building and other aspect of civil works;

3. Acquisition of machinery and its installation;
4. Preliminary work about the sources of supply of raw materials, labor and managerial inputs;
5. Prospecting about marketing;
6. Preliminary work regarding sources of working capital;
7. Coordination problem connected with the acquisition of different kinds of assets or
completion of jobs;