Small and medium enterprises (SMEs) feel that adverse market conditions and an unfavourable policy and business milieu raises the transaction cost of business, which eventually brings them to the verge of sickness.
These are the findings of a recent survey undertaken by the PHD Chamber of SMEs located in Uttar Pradesh, Haryana, Punjab, Rajasthan, Madhya Pradesh, Himachal Pradesh, Jammu & Kashmir, Uttarakhand, Punjab, Chandigarh and Delhi.
When asked to choose the most important factors which could bring businesses to the brink of sickness, respondents felt that SMEs are worst hit by economic slowdown and sluggish demand, as they do not have deep pockets to sustain operations for long. Lack of managerial expertise and ad hoc decision making by owner-driven firms also contributed to sickness, they felt.
Respondents felt that in most cases, promoters failed to understand that units were not viable in the way they were being run. Yet they continued to operate, attributing the cause of the trouble to lack of liquidity or non-availability of credit from banks and institutions. Use of obsolete technology was another major issue which constrains demand and causes firm to go sick, they felt.
Respondents (especially ancillary units) also said that delayed payments from large companies were aggravating their problems. Another important area of concern was the non-availability of credit on cost-effective terms. Government policy, particularly at the state level, emerged as yet another inhibiting factor that led to sickness.
The survey revealed that other factors that affected the functional efficiency of small units were lack of infrastructure including all-weather roads, inconsistent power supply, delayed or inadequate availability of raw materials, corruption, tough competition from imports, lack of information, inadequacy of skilled manpower and rigid labour laws, among others.
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Respondents unanimously felt that the four most important measures instrumental in preventing sickness and maintaining viability were availability of timely credit at cost-effective rates, the use of organised marketing efforts, government support (at both the Central and state level) and prompt organisational restructuring of the organisation.
However, once the unit showed incipient signs of sickness, there was need for prompt rehabilitation measures, as it was in the interest of all stakeholders to ensure that the unit remained healthy. Yet, about 66 per cent of respondents felt that there were delays in the rehabilitation of sick units, and by the time it was realised that remedial steps should be taken, it was too late.
Respondents said that the intensification of internal and international competition and the rapidity of technological change were putting pressure on the finances of SMEs.
They felt that the most important reason for delays in undertaking rehabilitation measures was the late identification of sickness. SMEs said that industrial sickness was the result of a slow and steady erosion of the net worth of the unit, until its health was beyond a cure. Hence, identification and detection of sickness at the incipient stage was the key to its reduction.
The majority of MSMEs are proprietary or partnership firms that continue to be run by owners whose lack of managerial competence is an important cause of sickness. In most cases, promoters failed to understand that units were not viable in the way they were being run, the survey concluded.
Companies often went in for expansion based on a sudden spurt in demand that did not last long, and then struggled to sell their products. The unintended rise in inventories was then attributed to lack of liquidity or non-availability of credit from banks and financial institutions. Such situations could be avoided by more prudence and better practices, the survey concluded.