Problems of Small Business

Small scale industries are at a distinct disadvantage compared with large scale industries — in their scale of operations, their access to finance, their ability to use modern technology and their procurement of raw materials. Most of these problems stem from their small size, which keeps them from enjoying the advantages that large organisations command.

The problems are not identical for every kind of small business. For small ancillary units, the main problems include delayed payments, uncertainty about getting orders from the parent units, and frequent changes in production processes. For traditional small scale units, the problems include a remote location with poor infrastructure, a lack of managerial talent, poor quality, outdated technology and inadequate finance. For exporting small scale units, the problems include a lack of adequate data on and intelligence about foreign markets, exchange-rate fluctuations, quality standards and pre-shipment finance. In general, small businesses face the following problems.

1. Finance. One of the most severe problems is the non-availability of adequate finance. A small business usually starts with a small capital base and often lacks the creditworthiness to raise money from the capital markets. As a result it depends heavily on local financial sources and frequently falls victim to exploitation by moneylenders. Working capital is often short — because of delayed payment of dues or capital locked up in unsold stock — and banks will not lend without collateral security, guarantees and margin money that many small units cannot provide.
2. Raw materials. Procuring raw materials is another major problem. If the required materials are not available, the unit must either compromise on quality or pay a high price for good quality. Its bargaining power is low because it buys in small quantities, and it cannot risk buying in bulk because it has no storage facilities. The general scarcity of metals, chemicals and extractive raw materials hits the small scale sector the hardest.
3. Managerial skills. A small business is usually promoted and run by a single person who may not have all the managerial skills the business needs. Many small entrepreneurs have sound technical knowledge but are less successful at marketing, may not find time for every functional activity, and cannot afford to hire professional managers.
4. Labour. Small firms cannot afford to pay high salaries, which affects workers' willingness to work hard. Productivity per employee tends to be low and turnover high. Attracting talented people is difficult, unskilled workers who join for low pay take time to train, and — unlike large firms — small units cannot practise division of labour, so they lack specialisation and concentration.
5. Marketing. Marketing generates revenue and calls for a thorough understanding of customer needs, but it is usually a weak area for small units. They therefore depend excessively on middlemen, who sometimes exploit them with low prices and delayed payments, and direct marketing is often not feasible because they lack the necessary infrastructure.
6. Quality. Many small units do not maintain the desired quality standards. Concentrating on cutting costs and keeping prices low, they lack the resources to invest in quality research or the expertise to upgrade technology — and maintaining quality becomes their weakest point when competing in global markets.
7. Capacity utilisation. For lack of marketing skills or demand, many small firms operate below full capacity, which pushes up their operating costs and can gradually lead to sickness and closure.
8. Technology. The use of outdated technology is a serious weakness, resulting in low productivity and uneconomical production.
9. Sickness. The prevalence of sickness in small industries worries both policymakers and entrepreneurs. Its causes are both internal (lack of skilled and trained labour and of managerial and marketing skills) and external (delayed payments, shortage of working capital, inadequate loans and lack of demand). …