Meaning and Nature of Small Business
The categorization of micro, small and medium enterprises in India is governed by the criteria laid down by the Micro, Small & Medium Enterprise Development (MSMED) Act of 2006. The MSMEs are broadly divided as Manufacturing Enterprises and Service enterprises.
The manufacturing industries carry on manufacturing activities of goods as specified in the first schedule to the industries, Development and Regulation Act of 1951. The small manufacturing industries are defined as those having investment in plant and machineries above INR 25 lakhs but below INR 5 crores.
Small Service enterprises are those having investment in equipments, exceeding INR 10 lakhs but below INR 2 crores.
The following is a list of enterprises, construed to have been rendering services.
- Small water and road transport operator, having investment up to Rs 200 lakhs in vehicle
- Retail trading having credit limits below Rs 20.0 lakhs
- Small business having original cost price of equipments below Rs 20.0 lakhs
- Professionals and self-employed individuals, having borrowing limits, below Rs 10.0 lakhs, out of which Rs 2.0 lakhs is towards working capital. However, for qualified medical practitioners the borrowing limit should be below Rs 15.0 lakhs, out of which, the working capital should not exceed Rs 5.0 lakhs
Almost all small business enterprises are taken up in the form of ‘Sole Proprietorship’. A small business entrepreneur has to be ‘matter of all trades’ because all the managerial functions have to be handled solely by him or her.
A small business enterprise is chiefly associated with proper Management of 4 Ms; namely Man, Money, Market, Machine. Of all these, Motivation of Man is the greatest challenge. However, the 10 other challenges for doing small business in India are as below.
While taking up any small business, it is essential to prepare a Project Report. It should clearly indicate the technical and economic viability of the proposed business. An entrepreneur must ‘look before he leaps’. No project should be taken up just out of an urge to be an industrialist or your adventurous spirit, usually associated with excitement, thrill or enthusiasm for doing something risky.
Unless the entrepreneur has practical working experience in the field, he obtains a project report from a consultancy firm, who mostly has ‘readymade’ project reports.
But as an entrepreneur, you must make a thorough study of your own, with regard to market potentialities, availability of raw materials and other infrastructural facilities such as land, electricity, water and skilled man power.
What you manufacture must be marketed. In the present day environment of globalization, liberalization and Direct Foreign Investment (FDI), you may be subjected to cut throat completion in the market.
Not only that, as the market price is determined by supply and demand, the rate of your products or services may not yield enough of margin, even to meet your cost of production. In order to get a competitive edge, you have to take full advantage of the latest Information Technology.
The traditional ways of advertisement and publicity for your products or services may not suffice to meet your marketing needs. You may not be able to provide for R&D for consistently improving the quality of your manufacturing process and quality.
If you are a first generation entrepreneur, you may not have enough of funds of your own to start the small business. In that case, either you can start business with low investment or go for funding. Funds are required mainly for two purposes- Fixed capital and Working Capital. Financing institutions and banks are too stringent in sanctioning these two types of capitals.
Sometimes, you may have to obtain fixed capital from one institution and the working capital from other. The financing institutions ask for equitable mortgage in the shape of non-movable assets and third party guarantee. Unless you have land and building in your name, you may not be in a position to comply with the requirements of the financing institutions.
In such circumstances, if you obtain loans from private lenders, you will have to pay a significantly higher rate of interest which may not be economical for your business. Of course, the present finance facilities of MUDRA may give you some relief and respite.
Cost of raw materials constitutes a major part of your cost of production. Not only the raw materials should be of superior quality, it should be available at comparatively cheaper rate. This could be possible only if the materials are available locally or the transportation cost of the materials are the least.
Besides quality of the raw materials, the quantity should also be ensured. If the availability of raw materials is seasonal; for instance, fruits or seasonally harvested produce, you may have to procure the materials in bulk and store the same suitably for keeping your factory busy throughout the year.
You will have to pay a higher rate, if you purchase in off-season. Thus, you may require more working capital for blockage of funds on inventory.
Under-utilization of Plant Capacities
The cost run-off for idle capacity adds significantly to your cost, thus draining out your working capital and the ultimate loss. There are a number of factors that could be attributed to under utilization of your plant capacity.
Few of them may be power failure, power cut-off, absenteeism of workers, labor turn-over, non-availability of raw materials, insufficient working capital, non-disposal of finished goods, forced close-down due to statutory reasons, Labor strike, lay-off and some unforeseen eventuality, beyond your control.
If you intend to start an industry in an undeveloped area, you may be constrained with infrastructural facilities such as land, building, electricity, water, transportation, banking and availability of skilled man power.
Most electricity supply agencies in India are controlled by governmental agencies. Thus, the red-taping and corrupt practices of the officials will be a great challenge to get initial connection of electricity. The main excuse they take is, either the existing transformer will not take power load you need, or it will take time to install a new transformer.
Much of the gestation period of your enterprise is thus consumed. In the similar way, you may be challenged with initial water supply connection.
Blockage on Receivables
In most of the small businesses, you will have to sell your goods or services on credit, in order to retain your customers, thus ensuring a consistent sale.
Some customers are very cunning. They try to enjoy the credit facilities extended by you, to the maximum possible period and the longest period of time. Initially, they may ask for credit for a definite amount repayable within a definite time.
But gradually, they go on increasing the amount and not paying you within the promised period. This blockage on receivables or sundry debtors contains you for more working capital and the consequent effect on your production. The worst situation is, when you fail to recover receivables and have to write the same off your books of accounts.
Stringent Statutory Compliance
You have to comply with a number of statutory requirements such Factories Act, Minimum Wages Act, Industrial Dispute Acts, Trade Unions, Provident Fund, Employees’ State Insurance (ESI), Establishment Act, Sales Tax, Income Tax Act etc.
Financial involvement in complying with these statutory provisions will add substantially to your cost of production. Most of the time, different officials dealing with these statutory requirements will force you to adopt the statutory requirements or fulfill their personal requirements.
Threat of Obsolesce of Manufacturing Process
With the rapid advancement of technologies in every field, it is quite likely that the process you are adopting may become obsolete being taken over by an improved process of manufacturing.
If you continue with the same process, you may be disadvantaged with regard to cost of production and quality of your goods. If you do not get finance for adopting the improved process, you may be forced to close down and even be threatened to go bankrupt.
In such eventuality, you will be ruined financially, socially, physically and mentally. You will be an outcast in the society. Worst still are the coercive actions resorted to by your financers; whether institutional or individual.
As the sole proprietor, you have to carry on all the managerial functions that may encompass Production management, financial management, marketing management, HR management, Logistic management and IT management.
You need to have the required skill, knowledge, vision, dedication and whole-hearted devotion. You have to be a full-timer and your working hour is not limited to eight hours a day. You have to come first and leave the last.
Your personal competence counts much for the success of your business. You are pivotal, trustee, caretaker, servant and enjoyer of your small business enterprise. Just becoming a jack of all trades will not suffice. You have to master the art of ‘managing a small business enterprise’
If succeed in your efforts, you can enjoy the real thrill and excitement of being a successful small business entrepreneur and can share your success story with other intending small scale entrepreneurs.