One of the keys to SMEs’ success is a focus on long-term economic growth and financial stability. They should start by adopting a business model that not only enhances performance, say Joe Carr, Global Leader of SME Advisory Services and Fabrice Demarigny, Global Leader of Capital Markets, Mazars, but also one that has a positive impact on society.
Small and medium-sized enterprises (SMEs) have been particularly hard hit by China’s slowing economic growth. Yet, as they employ more than 65 per cent of the global, private sector workforce and account for 52 per cent of total gross value added, SMEs should merit an increased level of support from government, trade bodies and trusted financial advisors on the particular challenges they face.
One of the main challenges facing SMEs is their inability to fully participate in Chinese markets. Access to global value chains is a crucial component of growth, yet many SMEs find themselves excluded. In particular, lending restrictions, following the financial recession, has meant that SMEs have seen their access to finance curtailed, which has in turn acted as a barrier to market entry.
Challenging the barriers to inclusiveness
The challenge to improve market participation and access to finance is among a set of issues that are important to SMEs. Initiatives designed to remove the obstacles that SMEs are facing include improving the transparency and availability of data on SMEs to help reduce the risks associated with lending to them.
A realignment of the regulatory and capital market landscape, to allow SMEs greater freedom to participate in global markets, is another element of change required. The development of tailored financial instruments such as loan guarantees, as well as a review of transaction laws and the encouragement of equity finance, will help provide a firmer footing for SMEs to operate more effectively.
Perhaps the biggest challenge, though, is to provide support to SMEs embarking on expansion programmes. Access to local market information, protecting rights and compliance with international labour, social, environmental and quality standard laws can add considerably to the complexity and costs that SMEs face. Greater technical assistance and advice on how SMEs can deal with these issues is therefore an essential part of the policy recommendations now on the table.
Reforming the landscape in which SMEs operate is without doubt an ongoing process. New research, continued debate and participation in legislative and regulatory change, as well as the formulation and adoption of new financial tools that both harness and develop SME growth, should be welcomed. Making more practical information available on how the SME sector functions can only help to shed further light on the particular constraints SMEs experience, as well as how they can overcome such hurdles.
Achieving a sustainable balance
Some recent research that we carried out, shows that the success of SMEs is not solely reliant on the removal of market barriers. It is also about how they react to changes in the operational environment. As a result of the so-called ‘new normal’, many SMEs find themselves in a very competitive space where organic growth is now difficult.
The statistics suggest the need for some tough choices. In addition to repositioning a product or service offering, consolidation with other SMEs to achieve economies of scale at regional or national level could also be a viable consideration, not least to improve access to credit, which tends to favour larger organisations. Having said this, it is important to recognise that there is often a trade-off between size and the inherent ability to react quicker to fast-changing market conditions and customer requirements that is the trademark of SMEs. In addition to this agility, which enables them to make decisions quicker than larger firms, SMEs have often developed stronger personal relationships with their clients which is an important ingredient for better business in society.
Better access to finance is a key agility factor for SMEs. In addition to access to credit, funding through capital markets should also play a major role. This can be achieved by encouraging angel investment, venture capital and private-equity investment with appropriate tax incentives and pooling of investment vehicles. It also requires making sure that disclosure and other regulatory requirements for smaller firms are more proportionate in order to facilitate greater issuance and trading of SMEs’ debt and equity.
Getting the balance right is therefore crucial. Rather than simply trusting that bigger is better, the more useful lesson to learn is that SMEs should ‘right-size’. So if a company is staying small it needs to ensure it maintains a niche focus and that it is deeply rooted in supply chains and the wider ecosystem to ensure the benefits of critical mass can be leveraged. This may involve outsourcing non-core activities and developing strong partnerships with others as an alternative to internal organic growth. Linking to important sectoral clusters and ecosystems to enhance value chains and remaining abreast of sectoral innovations and best practices is one way of staying ahead.
Lessons for SMEs
Certainly more in-depth analysis of the SME sector will help towards the formulation and adoption of high-level principles such as beneficial ownership transparency. Transparency around ownership and control of companies is a key issue in the battle against corruption, money laundering and tax evasion. Getting a consistent cross-border approach to beneficial ownership transparency, whereby there is agreement on benchmarking and compliance standards, will help simplify and reduce the burden experienced by all businesses, but particularly SMEs.
Governments, trade bodies and professional firms now have an important role to play in raising awareness of the strategic challenges facing SMEs. Central to this is the will and expertise to promote and participate in effective regulation, trust and transparency so that businesses gain the capacity to change for good.
Mazars is an international, integrated and independent organisation, specialising in audit, accountancy, tax, legal and advisory services. As of 1st January, 2016, Mazars operates throughout the 77 countries that make up its integrated partnership. We draw on the expertise of 17,000 professionals to assist major international groups, SMEs, private investors and public bodies at every stage of their development.
 The Association of Chartered Certified Accountants (ACCA)
 How to be a Stand Out SME: A Performance Study of the EU SME Sector for the Period 2008–2013, Mazars, <http://www.mazars.co.uk/Home/Your-needs/Owner-managed-businesses/How-to-be-a-Stand-Out-SME>