Root causes of financial distress in SMEs:
One of the important reasons for financial distress in small and medium enterprises is too few people looking after to many functions. Even if a business is very small, it has to carry out all the activities on smaller or larger scale that are carried out in the large companies.
Following are the corporate activities that a business has to carry out:
Group/ Corporate structure
Mergers & acquisitions
Business alliances, JVs
Following are the technical, operational and sale related activities that a company has to carried out:
Operations & Maintenance
Business development & sales
Research & development
Following are the support functions in a company that the management has to look after:
IT – HW, NW, SW, SM
These are around 30 different kind of activities are executive directors of this small and medium businesses to carry out. In most of the companies in SME sector, there is only one executive director. He serves as the base of the company. There is hardly any middle management to support him in carrying out these activities. The worst part is that in all the companies the initial setup of all the departments for functions has to be formulated from zero. The small and medium enterprises do not have prior experience of creating effective departments and functions. They learn the functions of all the departments by experience. Many of them do not have the experience of having worked in large and professional companies. So, this creates following of problems:
Since these functions are not setup professionally in the beginning, the Businessman has to pay personal attention for many routine activities the other people in the business do not have ability or authority to take appropriate decisions.
These are too many functions for 1-2 persons. They cannot improve them even if they want.
Most of these functions remain unattended the problems of various kinds and start accumulating and start exacerbating in the due course of time.
To run a business successfully it is required to run all these functions and departments effectively and efficiently. But to take down the business, adverse development in any one department are sufficient.