The Hindu Business Line : Managing SMEs demands a different mindset

There should be a perceptible change in the thinking of those who run small and medium enterprises. They cannot give the go-by to normal business management principles merely because their units are small.

N. Syamasundaran

The deep-rooted problem with SMEs (small and medium enterprises) in India is that the proprietor/entrepreneur interferes in every aspect of the business, regardless of his functional skills, thus making the entire organisation stand on a single pillar.

Generally, the owner/proprietor of an SME contacts suppliers directly, orders materials and does not believe in the purchase order system. He does not also think much about the system of documentation of material receipts, as he presumes he knows what is happening in his unit. Therefore, he looks at each and every bill of the suppliers and decides about making payment or otherwise.

There are cases where SMEs have lost money owing to double payments, shortage of goods and poor quality of the products. Inventory planning is a perennial issue with SMEs. In many cases, SMEs have stocks of certain raw materials, whereas production has been held up due to shortage of certain other materials.

Materials management is thus a fire-fighting exercise in SMEs, with the owner devoting much of his time on this.

ALL IN ONE

The MD of an SME unit prefers to be an ‘all in one’ — by involving himself in the production, finance, marketing and personnel functions. By doing so, he neglects his holistic role; every other thing is done in a half-baked fashion.

In the absence of proper systems and procedures for salaries/wages payment, the accounts personnel often do not know who have joined or left the organisation, nor the salary and increments of personnel. And, so, the owner ends up becoming responsible even for payroll.

PRESCRIPTION

There is need for a mindset change in those who run SMEs. They cannot give a go-by to normal business management principles merely because their units are small. A proper organisational structure is needed.

The entrepreneur may retain a portfolio, say, production or finance, in which he has expertise. It is neither desirable nor feasible for SMEs to engage high-profile managers, but this does not mean they recruit mediocre ones. SMEs should ensure that department heads have a total grasp of the functions, can keep the wheels of the unit moving, can solve routine problems and are systematic.

EMPLOYEE RETENTION

Retaining employees, particularly the performing ones, is crucial. Again a mindset change is needed – from hiring more people at lower salary, to taking on fewer people but at market salaries. Work efficiency, and not working hours, should be the criterion.

Outsourcing

SMEs should outsource certain specialised managerial functions. For example, they can outsource services for improving material usage, quality of outgoing products, or saving energy.Certain routine services such as plant maintenance, despatch, etc., can also be outsourced. Here again, the effectiveness of the service vis-À-vis the cost should be kept in mind. For example, most SMEs hire security services cheap, but these are often ineffective. The units may feel they have saved money, but that is at the expense of good security.

Units end up losing substantially, on materials moving out without invoice, inflated overtime bills, lower productivity during night shifts, pilferage, etc. Hence, cost control makes more sense than cost suppression.

INSTITUTIONALISING THE SYSTEMS

SMEs should have well-documented systems and procedures for efficient functioning. These can be simple, but clear. SMEs must stop thinking short term and finding short-cuts.

SMEs should manage their affairs based on information rather than physical inspection. Many entrepreneurs think they know all that is going on in their organisations. This perception is wrong.

For instance, no entrepreneur can keep physical track of wastage of materials/rejections unless a periodical information system is in place.

Monitoring and control over productivity/waiting time can be effective only through information systems; not by occasional visits to the shop floor.

Further, even what is generally known to entrepreneurs soon becomes hazy — information on non-disposal of non-moving finished goods, non-recovery of old dues from customers and outstanding advances to suppliers are cases in point.

TWISTING THE RULES

SMEs are inclined to creating new entities to take advantage of excise duty concessions. But they forget that over time the mushrooming of such units will result in the costs of administration soon exceeding the excise duty benefit. Many entrepreneurs even lose track of such units leading to operational inefficiencies and fraud. Further, cross-company transactions, say, between sister units, weaken managerial control.

SME entrepreneurs should accept the tax regime rather than lose control over the very units created merely to gain tax benefit.

SME owners, in general, stretch themselves when it comes to getting orders. They commit themselves to impossible delivery schedules, low prices and longer credit periods.

All these may help get orders, but would be unsustainable in the long run. Instead, customers must come to depend on the SMEs’ credibility in meeting product specifications, delivering on time and good human resource practices, all resulting in quality output at the right prices.

Choosing customers is crucial to the success of any business. No entrepreneur can neglect this aspect. With good customers, a supplier can prove the business credentials without difficulty and establish a beneficial relationship.

(The author is CEO of Right India Consultancy House (RICH). Email: syam472001@yahoo.co.in)