An Investigation Into Smes Survival and the Discrimination Between Fgsmes and All Other Smes

Introduction In a competitive global market, micro, small and medium-sized enterprises (SMEs) play an increasingly important role in a nation’s economy. Today they make a substantial contribution to job creation, innovation, as well as entrepreneurial skills. A report conducted by European Commision(2005) stated that in the enlarged European Union of 25 countries, 23 million SMEs provide about 75 million jobs and account for 99% of all enterprise. SMEs are also the vital attributes for lifting the productivity of economy. This is primarily because SMEs are been considered as having a key role to play in providing new products. Take UK for example, SMEs have become more and more dynamic. SMEs have enjoyed higher productivity growth than large firms since 1998, and the proportion of SME employers reporting that they have undertaken either product or service innovation in the past 12 months has increased from 32% in 2005 to 48% in 2006(BERR,2002). An important aspect of SMEs, especially for the young SMEs, is their survival rate, according to Haugh and McKee(2000), survival means continue to exist in the future. Although we have seen a large increase in new company formations and higher levels of their survival rates than the past, we cannot neglect the fact that the rate of failure of these SMEs is also very high. Some of the firms fail in their infancy stage and some fail within several years after start-up. Some statistics suggest that the failure rate of SMEs in their first five years is more than 50% (Reiss, 2006). There are many reasons that contribute to SMEs’ failure: insufficient capital, poor management skills, poor human resources, lack of innovations and so on. Factors that contribute to small business survival and non-survival In order to prosper, all SMEs need to ensure that they are alert both to opportunities for achieving success and threats to their survival. Only when the company are aware of and deal with these factors correctly, they can survive, grow and succeed. 1. Financial circumstances 1. 1 Access to Finance Obtaining the right finance is a pivotal factor to a new firm’s survival and high growth. For SMEs, there are various types of finance available, including bank loans, borrowing from family and friends, obtaining equity investment from business angels, venture capitals and so on. Obviously, different options have different profits and constraints. The advantage of loan finance is that it will not dilute ownership structure of the firm. However, excessive reliance on loan finance could be a financial threat to their firm’s solvency. Astebro and Bernhardt (2003) stated that there was a significant negative correlation between having a bank loan and the survival of the business. Since loan means a continuing obligations for the firm to repay the principal debt and associated interest on a predetermined timetable. This kind of loan covenants can place strain on a firm’s cash flow position, if a firm’s capital contains a high proportion of debt, then the firm has to generate more cash to cover the repayment obligations, however it may have greater threat to default due to a sudden interruption in income. 1. 2 Financial Health A critical reason for SMEs’ failure is that they cannot identify and react to threats to their financial healthy. For example, the substantial increases in overheads could be a threat to financial healthy since it is a signal of weak cost management. Significantly increasing overheads will reduce the available cash flows and profits, eventually reduce the probability of survival. According to Schaefer (2006), over-expansion is a leading cause of business failure. This often happens when business owners confuse success with how fast they can expand their business. A large amount of bankruptcy is due to rapidly expanding firms. Birley and Niktari (1995) found that, in the opinion of many accountants and bank managers, 70% of SMEs failures were caused by a very large extent to being under-capitalized, to short-term liquidity problems or insufficient working capital. So in order to survive, firms have to look out for financial threats to the firms’ solvency and maintain effective management control over their finances. 2. Human capital In most SMEs, power is centralized in the hands of the owner-managers and the owner-managers always play multiple roles in a company, including general manager, sales manager, production manager, financial manager and so on, so that characteristics of the owner-managers, such as education background, family business background, personal goals, previous work experience, strategic awareness have a significantly impact on firm’s activities and performance. Several studies indicate that in SMEs, the personality of the owner-managers is a critical determinant of corporate structure and strategy(Miller and Droge 1986; Miller and Toulouse 1986). Owner-managers who are inability to motivate staff, rarely listen to others’ advices, have little knowledge of marketing strategy, finance, and personnel management may act as a significant constraint to SMEs’ survival. On the other hand, owner-managers are not experts at everything, many owner-managers in small firms are lack of the leadership and management skills which are necessary for the firms’ survival and growth. Deakins and Freel (1998) found that one of the critical factors in the success of a SME was the ability to build an ‘entrepreneurial team’. The presence of a diversified management team may imply a greater variety of complementary skills: marketing skills, business skills, as well as technological skills, this is also crucial for SMEs in relation to the long term success of the firm. So building a entrepreneurial team will definitely increase SMEs’ viability. 3. Over-dependent Some firms do not have the appropriate strategy and become excessive reliance on a single customer or a small client base. The more a firm relies on a particular client, the more possibly it is damaged by factors out of its control than if it has a wide client base. Natwest (1997) stated that an important reason for SMEs failure is over-reliance on one or two customers and lack of sales. Failures often occur due to firms’ sole customer withdrawing its orders or going bankrupt. The same principles also apply to a firm’s supplier base. If there is a breakdown in the commercial relationship between the firm and its single supplier, the prodution of the firm will be damaged. As a result, if a young firm wants to survive, it should seek to cultivate a wide client (supplier) base instead of depending on a small number of regular clients (suppliers). However diversification strategy can realize this. Diversification across production and services can satisfy different types of customers and reduce the probability of over-dependent. 4. Training One of the factors that contribute to SMEs failure is low level of management performance and inefficient operation, which is a result of lack of training. It is generally acknowledged that the majority of the small-firm owners run their business just based on their own experience and common sense, without getting professional or other formal qualifications. Stanworth and Gray (1992) pointed out that minority of small-firm owners who participate in management training tend to have better educational qualifications, and their businesses have better survival and growth rates than other small firms. Also, Kitson and Wilkinson (1998) found a positive link between training and innovation and growth, as training was provided by 60% of innovating firms but only 41% of non-innovators, and 72% and 68% of medium and fast-growing firms, respectively, compared with 46% of stagnant and declining firms. Training could cover a wide range of areas including accessing to and managing finance, cost management, personnel management, marketing strategy, information use and retrieval, operation management and so on, which equip small-firm owners and employees with the skills necessary to survival and the further growth. So training is also an important factor that contributes to small firms’ survival which can be easily ignored. 5. Innovation In this era of knowledge economy, innovation become inextricably linked with a firm’s survival, successful entrepreneurship always relies heavily on innovation. It is extremely important for new small firms who still enter industries where economics of scale plays a critical role, by innovation small firms could compete on the basis of added value, therefore enhancing the likelihood of survival. On the other hand, innovation intrinsically linked with a company’s diversification strategy, through innovative activity, firms have the chance to produce new products and services so that they can attract more customers and increase their market share. Also, cost reduction can be achieved by innovation in operation processes, marketing and organizational forms. For example, in order to expand, some firms may choose a strategy called e-marketing to reduce cost, they may create a impressive and special site to grab people’s attention, on the website, a convenient online selling system is provided. Also, the firm may send their new products and services details to their target customers and potential customers, sometimes combining with even fun facts. So business innovation is especially important not only for large companies but also SMEs’ survival, lack of innovation could be a barrier to a small firm’s growth. Discrimination between fast growth firms and all other SMEs Different SME tends to have different growth rate, some of them grow rapidly and are recognized as FGSMEs(fast-growth small-to-medium enterprises). According to Caroline and Kosmas, FGSMEs are firms that achieve at least 20% annual compound sales growth over a 5-year period. Birch (1995) found that FGSMEs make up 3% of all small firms. Based on former research, there are many firm-based characteristics, which are concentrated on both customers and organizations aspects, such as satisfaction of customers, financial perspectives, staff retention, number and quality of successful innovations and so on, to discriminate between FGSMEs and all other SMEs. 1. Customer Focus FGSMEs are customer centric, regularly receiving feedback from clients and taking their requests and complaints seriously into consideration (Tan, 2007). They always try to retain clients through improving the quality of products and services or developing new products. According to the BSC, customer perspectives focus on traditional marketing issues such as market share, customer satisfaction and service quality ratings, customer loyalty, and customer perceived value (Kaplan & Norton, 2000). 2. Financial Perspectives FGSMEs tend to spend a lot of time and effort in analyzing the financial health of their firms. On the contrary, other SMEs always analyze cash flows on a regular basis, relying on occasional ‘back of the envelope’ calculations. Financial summaries provided by accountants are used for mandatory reporting purposes instead of financial management (Barnes et al. , 1998). 3. Internal Business Perspective Internal business performance indicators contains traditional operational terms such as tender success rate, data rejection percentages, time per customer (Kaplan & Norton, 2000), on-time delivery, the number of new products launched and product defects (Zaman, 2003). FGSMEs tend to manage and examine their business processes. For example, Liaise marketing (a supermarket broker) CEO, Tony Merlino stated that their firm measures manufacturer sales, market share and store visits to make sure that their sales team operates properly and efficiently. 4. Employee Focus Kaplan and Norton (2000) pointed that innovation, learning, and growth perspectives are closely linked to improve employee job satisfaction and commitment, and develop employees’ technical ability and innovation skills. According to the previous literature, FGSMEs seem to pay a lot of attention on employees. Nicholls-Nixon, 2005; Tan, 2007). So we can see that these fast-growth firms all have a strong emphasis on making their employees as part of the performance measurement system. Staff’s ideas and feelings are very important and cannot be ignored easily. Conclusion This study aims at identifying the factors that contribute to SMEs’ survival. Finding on the study sug gests that effective financial management, outstanding leadership and training play a critical role in SMEs’ survival, while excessive depend on one or two customers(suppliers) will be dangerous and may lead to a death. 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