World SME Day: Dealing with the challenges of smaller firms

Key Takeaways

§? The SME sector is the largest grouping in the business world

§? However, the acronym SME is a misnomer

§? SMEs face many challenges, finance being the one most cited

§? Cash flow is a vital issue for the sector as smaller firms are cash sponges

§? Scaling these firms is paramount to achieving critical mass

Small and medium-sized enterprises (SMEs) are the unsung heroes of the global economy. They contribute significantly to GDP, employment, and incomes, especially for developing countries. The United Nations General Assembly designated June 27 as World SME Day to highlight the contribution of this diverse economic grouping. Policymakers and entrepreneurs should note what the SME sector can deliver and, more importantly, the unique challenges. ?

Importance of SMEs

Despite their relatively small size, SMEs are often unappreciated and get less media coverage than their larger counterparts. Some larger firms may not thrive without SMEs, as humans cannot survive without the millions of microorganisms that support daily body functions. Therefore, SMEs can contribute collectively, somewhat subliminally, to developing national and international economies.

The acronym SME is a misnomer. The grouping includes micro, small, and medium-sized organisations classified by sales, number of employed, or asset ownership, and they possess diversity, as in the word Caribbean. The convenience of the acronym often takes away from the big and accurate picture of the sector, which is a challenge to policymakers, together with the absence of data on these emerging firms.

SMEs are champions of job creation. The World Bank says, "In emerging markets, most formal jobs are generated by SMEs, which create 7 out of 10 jobs." Why do these smaller firms generate more employment? SMEs are generally in the growth phase of the business life cycle, and double-digit expansion is the norm.

These smaller firms are generally more agile and innovative. SMEs can match environmental changes faster since they are less bureaucratic and have new business models and adaptive organisational strategies.

Despite its importance, the SME sector faces many challenges at the firm level. Many emerging economies need support structures and a developed entrepreneur ecosystem.

Access to financing

Some say that the main problem for SMEs is poor access to low-cost financing. The majority of the funding in any economy is from the banking system. The commercial banking sector is risk-averse; they have an eye on depositors' funds who get safety in return for low interest rates.

Sursatee Benny-Ali, an entrepreneurship trainer, thinks entrepreneurs must be aware of the full spectrum of financing. She says, "Being able to access this financing?can be daunting?and challenging as to the where and how of being successful. Whether it's through private equity firms, banks, government?grant funding programmes or investors, it is important that the entrepreneur understand?the process and its specific requirements?in order to achieve?success."

Cash Flow Management

While access to capital is essential, managing cash resources is just as important. An early-stage organisation has different requirements from larger firms. While the medium-sized firms can be cash cows, the mini-micro and micro businesses can be described as cash sponges—they take in more cash than they give out.

The advice is to be resourceful and manage cash like gas in your car. Do not buy a new desk; use the kitchen table if you are a ring light entrepreneur conducting webinars at home. When Amazon started, Jeff Bezos used his house; his desk was made of wood and bricks.

Scaling the business

The main goal of entrepreneurs is to grow the business to be self-sustaining and achieve a critical mass so it can compete with an advantage against larger firms. Critical mass gives you better access to lower capital costs, financing, significant marketing resources, and better talent. Post-start-up is growing the top line, but it is looking for technology to automate some of your processes. Since many SMEs are digitally deficient, this puts them at a disadvantage. Today, you can design your website, buy an e-commerce site on a subscription, or use AI to write copy for your ads. As larger firms would outsource, SMEs can use this same strategy.

Talent management

Some say that financing is one of many challenges. It's the optimization of human resources—selection, motivation, feedback, training, and compensation of your people. Many entrepreneurs are more passionate about building a new venture and are often weak at HR management. What compounds the problem is that SMEs cannot pay competitive salaries.

If larger firms can offer employee share ownership and bonuses based on profit, why can't smaller firms? While Silicon Valley start-ups cannot attract talent from established firms with salary benefits, they do it with shares and promotion opportunities. This innovative strategy means they can attract more risk-taking staff and have a vested interest in the future of the business.

Many executive assistants have become very successful. According to Business Insider, "Steve Ballmer joined Microsoft in 1980 and nailed his role as the?assistant of co-founder Bill Gates?at the time, so much so that he went on to become the company's president in 2000."

Dealing with family

Many times, SMEs are family-owned and operated. Close-knit families are expected to involve the family, capitalise on shared resources, including finances, and use free family labour in many activities. Families in business face some unique challenges, but one that stands out is conflict.

Ria Mankee-Sookram, attorney-at-law, mediator and arbitrator, who has advised numerous families, thinks it is more complex than entrepreneurs believe. The family business advisor says, "One major challenge is defining family members' responsibilities within the company. Ambiguities in roles can lead to conflicts and inefficiencies. To mitigate against this, it can be helpful to establish clear job descriptions, conduct performance evaluations, and implement an organisational chart."

While resilient and adaptable, SMEs need different support in each aspect of the business life cycle. However, SME entrepreneurs and policymakers should view these challenges as opportunities for growth and innovation.

Sajjad is an SME and Family Business Advisor who supports entrepreneurs in scaling their ventures. In his spare time in Trinidad and Tobago, he tries to produce organic tropical fruits and vegetables and practise sustainable farming in his home garden.

His book, Build Your Legacy Business: Solopreneur To Family Business Hero, is unique in its combination of entrepreneurship and family enterprise.

You can contact him at [email protected] or www.entrepreneurtnt.com