The definition of small and medium scale enterprises (SMEs) is subjective and varies among individuals and industrial groups from one institution to another. In other words, there is
From the above definitions, SME can therefore be defined as an enterprise whose total cost is above $3000 in machinery and equipment. Whichever of these vast empirical definitions one selects the fact remains that SMEs are usually characterized by low level of investment and turnover. Few employees, management and control of investment are in the hand of the owners.
According to Oshagbemi (1983), the major criteria used in the definition of SMEs include:
- Number of employees
- Sales value or volume
- Financial strength
- Relative size
- Initial capital
- Comparison with performance
- Independent ownership
- Types of industry/firm
Characteristics of SMEs:
According to Mauseret al (1970) SMEs are usually characterized by
- Capital is supplied by one person or a small number of persons.
- Management is generally independent, reporting only to itself not to the board of directors
- The area of operation is local and the market for the business is also local.
Researchers on small and medium scale enterprise preferred to work with the feature s of enterprises as indices for classification. These researches include a group of entrepreneurs who outline some features of SMEs as follows:
- Small and medium scale enterprise are capital intensive
- The owner-manager supervises the whole operations of the enterprise such as financing, production, marketing and personnel. He may however decide to delegate authority and function to his subordinates.
- The proprietors do not usually raise short or long term capital for their businesses from the organised financial markets but rather rely heavily on personal savings or loans from friends, relations or from informal money markets mainly because they are usually unable to provide the required securities.
- SMEs are based on simple technology with low import content both in capital structure and raw material, hence are said to have greater inter-sectorial linkages.
- The level of education of the owner-manager is often low and this does not make for efficient management
- The SMEs are labour intensive and tend to use more human capital per unit of production than large scale organisations
- As a result of the combination of the above features, their mortality rate is high. For instance, low level of education leads to low managerial skill which in turn results in inefficient operation of the enterprise. as a result the enterprise owner cannot obtain credit to augment his week capital base.
- Typical SME therefore confines its vision to the local markets and thus ignores wider and distant markets and invariably reduces the quality of goods the establishment produces and hence the profits made.
Perhaps the best outline of qualitative characteristics was offered by the Committee for Economic Development which states that ‘’in view of this organisation, any small or medium scale enterprise is characterised by at least two of the following key features’’
- Management is independent
- Capital is supplied and ownership is held by and individual or a small group.
- The area of operation is mainly local, workers and owners are in one home community. Market5s need to be local.
- Relative size with the industry: the business is small when compared to the biggest unit in its field. The size of the top bracket varies greatly so that what might seem large in one field would be definitely small in another. (Committee for Economic Development 1947:44).
ADVANTAGES OF SMEs:
- Independence of action: Entrepreneurs in SME enjoy the advantages of independence of action. To be one’s ‘’own’’ boss appears to be a major reason for many people who establish such businesses. Since ownership and control are invested in owner, they act and take decisions independently they are relatively more flexible and can react quickly and easily to changes and special requirements and are therefore better suited for expansion. As a result of this, risks are better controlled.
- Adaptability to local needs: Most SMEs are situated in the communities and in the interior places. The owners therefore tend to understand the desires, preferences, customs, spending habits and other characteristics of the local market. The business methods are therefore adapted to suit local peculiarities and raw materials are sourced locally. Many thus achieve savings in transport cost, making them suitable for promoting industrial dispersal and decentralization of industries in the rural areas.
- Lower operational cost: The SMEs have relatively lower operating costs. This is usually as a result of lower wages, rents and investment in plant and equipment, fewer employees and lesser administrative costs. They are therefore suitable for mobilizing small savings for productive purposes, which would not be rapidly forthcoming in industrial capital formation within the context of large scale projects.
- Efficient management: Due to the size of SMEs, when compared with big businesses, they offer greater flexibility in management which may give rise to viability for the development of new production techniques. SMEs are also more efficient than larger firms in utilization of plants and in training of smaller number of skilled labour. In effect, SMEs offer better opportunities for efficient management than the big businesses.
- Other advantages:
- SMEs are more labour intensive than large firms and are capable of relating more jobs.
- They are less complex in terms of technology and can be better managed by the entrepreneurs themselves.
- They are relatively less capital intensive and are easy to set up an ideal as a channel of industrial development for capital deficient economies,
- SMEs help in the dispersal of industries and enhance growth and quality of life in the rural areas.
DISADVANTAGES OF SMEs:
- Difficulty in attracting employees: One of the disadvantages of small scale businesses is difficulty In attracting employees. This is due to the fact that SMEs are at a competitive disadvantage with large firms in securing the most efficient and productive employees. The issue of low wages, job security and lack of staff training and development, lack of promotion and so on, are more rampant in SMEs than in the large firms. People therefore prefer securing employment with large firms where these fringe benefits are guaranteed. This is notwithstanding. Working with larger organisations is more attractive and prestigious than smaller ones.
- Lack of specialization: In SMEs, the degree of specialised management is very low. The proprietors are usually responsible for all the major business functions such as policy formulation, personnel management, accounting, finance and so on. Obviously it is not possible for one to be an expert in all the areas of business activity otherwise the person will end up being a ‘’jack of all trade and master of none.’’
- Incompetent management: The fact that SMEs can easily be established is a problem in itself. Many people without formal training and development who may lack personality, intelligence and other qualifications are attracted into the business, consequently, nearly all small and medium scale enterprises are usually classified as ‘’high risk’’ ventures by most lending institution because of the high rate of failure and default in loan repayment associated with them.
- Personal problems: The management of small and medium scale business normally creates numerous personal problems. For instance, the individuals in the business face long hours of work, high financial risk, and responsibility for errors and mistakes from other workers, irregular income and other similar personal disadvantage. These might cause major mistakes in business judgement and decision making which can affect the entrepreneurs physically and emotionally.
- Financial difficulties: The major source of financing small and medium scale enterprises is the owner’s equity since it is not always easy to raise funds from outside due to the entrepreneurs’ inability to meet up with the banks, requirements (such as interest rate, collateral securities, guarantors etc.) and their unwillingness to allow the participation of outsiders in the management of their businesses.
- Sensitivity to economic fluctuations: As a result of inadequate financial planning, small and medium scale businesses hardly make provision for economic fluctuations. Changes in the economic environment and competition shifts could have severe impact on the small and medium scale businesses due to inadequate planning.
SMALL AND MEDIUM SCALE ENTERPRISES
That is all there is to know on small and medium scale enterprises. Any other addition will be irrelevant but there’s still room for your thoughts and you can do that by dropping a comment below.