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A guidebook for SME

Section 1: How to do business


What makes you win as an entrepreneur

Keeping your feet firmly on the ground and head on the shoulders even as your eyes see sky as the limit

Let’s face it: these days, launching a start-up is considered cool, starting a micro or small enterprise is not. Start-up founders tend to be seen as new-age entrepreneurs who have arrived on the business circuits—after all, the start-up launches are eagerly covered by the media and their founders get interviewed and quoted all over.

Every time a start-up receives a funding, it is further talked about. The buzz around it gets louder and bigger with each round of funding or investment, which also helps raise the valuation of the start-up. Not all of the start-ups make it big and only a handful reach the stage where they could be termed as unicorns (companies that are valued at $1 billion or more). Nevertheless, the ‘cool’ factor stays on.

The micro, small and medium enterprises (MSMEs), on the other hand, get none of the goodies that their start-up brethren are so used to getting. Not surprisingly, the temptation to cross the fence and go after the grass that appears to be greener on the other side is becoming high.

 

Do not get carried away by hypes

The hallmark of a successful MSME is being in touch with ground-level realities and there is no reason why it should change. While it may be good to take a cue or two from a start-up and see how it could be adapted in your business set-up, it is important for an MSME to know where to stop. After all, there must have been reasons why you decided to start a small enterprise and not a start-up. If you have doubts, better clear those off before taking the plunge, as otherwise you will lack the required focus and more likely fail.

Yes, even if you are focused, there are likely to be ups and downs, but those are part and parcel of doing business and are to be taken in the stride. Of course, there will be lessons learnt from various events and instances but those are to be used to gain better market intelligence and customer insights.

 

Know the reality—and the challenges

India is presently ranked 130th among 189 nations in the World Bank’s Ease of Doing Business 2016 study. This essentially means that the country still has a long way to go in creating a friendly environment for businesses. This is all the more true for SMEs.

Amongst other challenges, the sector is facing issues such as inability to retain skilled talent, lack of awareness about available SME schemes; no single unified platform to represent sector in front of government; rejection of loan applications on inconsistent grounds; poor quality of skill development programs and lack of bureaucratic accountability.

To address these issues, the government has taken a few initiatives such as Udyog Aadhaar Memorandum (UAM) to promote ease of doing business for MSMEs. Under the new initiative, the Ministry of MSMEs, introduced a one page simple registration form for online filling of UAM which replaces earlier multiple filings.

It is important to note that the UAM can be filled on self-declaration basis and there is no fee or documentation required for the registration. This has made MSMEs easier to get themselves registered without any bureaucratic hassles.

 

Know rules of the game—and play those well

Today, India is very much a globalized market and the consumers are well aware of various products and brands, especially in the urban areas. As such, in order to differentiate your offerings, marketing strategies have to be well thought out. Also, marketing budgets and spends need to be well defined in advance. Unfortunately, not many SMEs are doing that consistently enough. Marketing spends, even in product-centric sectors like manufacturing are often ad hoc.

It is important for MSMEs to define their marketing spends in a realistic manner and even identify the media channels—print, online or outdoor—when they would run their marketing campaigns and in what proportion. These decisions should be a reflection of their product or service offerings, market competitiveness and the socioeconomic profiles of their target customers.

The fact remains that MSMEs, particularly in manufacturing, have largely been reluctant to up marketing spends for their products, relying instead on word-of-mouth publicity or leveraging existing customer relationships to obtain repeat orders. A Crisil analysis for the period 2013-14 found that marketing cost of about 3,600 MSMEs from the manufacturing sector as a percentage of their total costs of sales was 1.41 percent, while those for the four other segments – leather and footwear, fast-moving consumer goods (FMCG), consumer durables, and textiles – were 3.99 percent, 2.60 percent, 2.34 percent, and 2.12 percent, respectively.

 

Keep aligning to customers’ changing needs

Today, the customer needs are changing on a more frequent basis than ever before, thanks to the ultra-competitiveness across the markets and the choices that it spawns for the customers. SMEs must make concerted efforts to acknowledge the demands of the customers and address that in one way or the other. For example, if they are not able to respond with a competing product offering, they could always find a way to compensate through a value-added service. Given the relatively higher proximity with the customers due to their local presence (compared with the large enterprises), SMEs may find themselves better positioned to respond to changes in customer requirements or any new localized demands.

 

Stay tuned into government initiatives

A key initiative taken by the government is the proposed launch of Department of Industrial Policy and Promotion (DIPP) portal for the Indian states.  The portal will enable states to update their progress on a predefined 340 development parameters—such as number of hours power is being supplied; loan disbursement methodology; time taken in providing power connections to manufacturing units; provision for e-filing for commercial disputes at district courts among others—on a real time basis. The move is touted as an effort to promote competition amongst states to improve ease of doing business in India.

The role of center is also critical to equip SMEs leverage the available opportunities appropriately. Till date, states have been involved with the task with very limited success. The center needs to monitor effectively if the existing policies and programs have been implemented correctly or not. There has to be some accountability.

Overall, while the last couple of years have been promising in terms of policy changes, India needs to take aggressive and proactive measures to improve the business and investment climate for SMEs.

 

Section 2: Policies and regulations


Knowing the system helps navigate red tapes

The clearer your understanding of policies and regulations, the better your ability to identify opportunities and convert those into business wins

 

Budgets are invariably natural outcomes of existing policies and at the same time are also reflective of the current thinking in the government. So before we look at the policies and regulations that govern the MSME landscape, it is worth going through the changes that the current Budget has brought forth.

  • The threshold limit for the turnover for calculating presumptive taxes for small and medium enterprises (SMEs) has been revised to Rs 2 crore from the earlier limit of Rs 1 crore.
  • The corporate income tax rate for small enterprises with turnovers not exceeding Rs 5 crore has been reduced to 29 percent, plus the surcharge and cess.
  • 100 percent exemption of taxes on profits for three years is proposed for start-ups with turnovers not exceeding Rs 5 crore.

Here’s a list of financial support policies for SMEs that you need to know:

  • Public Procurement Policy: Formulated by government of India in 2006, the policy makes it mandatory for public sector units and government departments to make at least 20 percent of their total purchases from micro and small enterprises.
  • Udyog Aadhaar Memorandum (UAM): In 2015, Ministry of MSME launched UAM, to help SMEs conduct business in India easily. The UAM replaces the erstwhile filing methodology Entrepreneurs Memorandum (EM part-I & II) with the respective States/UTs. Entrepreneurs can easily get their unique Udyog Aadhaar Number (UAN) by visiting and registering themselves at http://udyogaadhaar.gov.in
  • Prime Ministers Employment Generation Program (PMEGP): The program is aimed at generating employment opportunities in rural and urban areas of the country through promoting entrepreneurship and self-employment opportunities. The details of the guidelines can be accessed at the Ministry of MSME website.
  • A Scheme for Promotion of Innovation, Rural Industry and Entrepreneurship (ASPIRE): The scheme has been launched in March 2015, with an objective of creating new jobs and reducing unemployment by establishing network of technology centres for promoting innovation, entrepreneurship and Agro-Industry.
  • Credit Linked Capital Subsidy Scheme (CLCSS) for Technology Up-gradation: This scheme was launched in October 2000 and intends to provide technology upgradation support to MSEs. Under this scheme 15 percent of capital subsidy (maximum of Rs 15 lakhs) can be obtained by a MSME for purchase of plant and machinery.
  • Scheme of Fund for Regeneration of Traditional Industries (SFURTI): The scheme, implemented by Ministry of Micro, Small and Medium Enterprise (MSME) aims at making India’s traditional industries more productive and competitive and facilitating their sustainable development.
  • Lean Manufacturing Competitiveness Scheme (LMCS): The scheme intends to help MSMEs to reduce their manufacturing costs through effective utilization of resources by applying lean technics in manufacturing. Under the scheme, the Government of India provides a maximum of 80 percent of the Consultant fees for each Mini Cluster.

 

Section 3: Dos and Don’ts


Best practices for SME leaders

It’s one thing to keep a constant tab on the business but quite another matter to sink knee-deep into operational issues

 

Here’s a quick list of what SME leaders must do:

  1. Provide focused leadership: For any start-up, initial few years are extremely critical. It is extremely vital for CEOs of such companies to act as visionaries and set goals that are realistic in nature. They should have adequate understanding of their respective business environments and know the current trends of the markets. It is necessary for them to do comprehensive research on the area of business they deal with.
  2. Quality manpower: Even with limited budget, an SME unit should strive to get quality manpower for key job roles to drive the business and get innovative ideas. The CEOs should avoid indulging in day to day operational activities to free their times to focus on long-term goals such as strategic business development
  3. Effective PR and marketing: In today’s competitive environment, it is hard to reach your audience without having good PR skillsets. It is always advisable to appoint a specialist liaison and PR officer who can manage the organizational brand image and connect with right officials for alliances that can drive growth. However, to avoid any additional cost burden, need-based PR services can also be obtained by professional agencies on a term basis.
  4. Access to finance: Access to quick and easy finance is one of the prerequisites to establish and run a successful venture. One should always have the right know-how to obtain the information related to financing opportunities on best possible terms.
  5. Cost planning: The MSMEs should initiate their cost planning right at the time of establishing the organization. One of the major concerns for a SME could be to arrange timely working capital on a regular basis. Adequate working capital finance arrangements should be done at least for the first year.
  6. Periodic self-reviews: Periodic self-reviews enable us to understand if we are heading in the right direction. The CEOs of MSMEs should review organizational goals on a regular basis and promote healthy competition among their staff for fast-paced growth.
  7. Outsource non-core activities: The CEOs should explore the possibilities of outsourcing their non-core business activities to allow their organizations to focus on business development and customer wins.

 

And here are some of the pitfalls to be aware of and hence to be avoided:

  1. Don’t depend on a single product or service for growth: Diversification is the key to success in today’s competitive world. In order to survive and thrive, the SMEs should strive to diversify their products and services offerings as much as possible.
  2. Refrain from making advance payments to companies outside India: The SMEs, unless they have direct legal presence in other countries, should avoid making advance payments to companies that are operating in those countries where the Indian laws don’t apply. Even if advance payment cannot be avoided, both the parties should operate through a third-party escrow account that is recognized in both the countries.
  3. No manipulations: Any manipulations, internal or external to the organization, should be completely avoided as they might dent the organization’s reputation, in addition to lending the CEOs themselves in trouble.
  4. No overboard spending: In the initial few years, the SME units should avoid excessive spending and retain their core teams to strengthen market position and drive excellence. For example, they could optimize technology-aided measures such as video-conferencing as an alternative to travel for client meetings, to the best extent possible.
  5. Don’t forget compliances: The CEOs must be thoroughly aware of various compliances that may be applicable to their respective sectors as well as the tax obligations, and should comply with those in a timely manner.

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