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

Topics: Management, Finance, Business school Pages: 9 (2506 words) Published: April 30, 2010

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...
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