Small and medium enterprises are businesses that are characterized by a low number of employees and a high rate of employee turnover. At the same time, the total values on the balance sheets of such businesses are not large (Blackford, 2003). The definition of these enterprises has been developed to incorporate the issue of economic developments since they are highly influenced by performance of the said enterprises. Therefore, to differentiate these enterprises from large businesses, we need to consider the number of employees, rate of employee turnover, as well as, the totals of the balance sheet. In fact, the European Union believes that these features are the essential for identifying the setting in which a business operates.
A small enterprise employs less than fifty workers and has a low turnover. Small enterprises also have very small values as their totals on the balance sheet since they have less assets and a lower capital base. A medium sized enterprise is seen to employ less than two hundred and fifty workers. At the same time, the annual turnover and the balance sheet may not be significantly large.
They are seen to enjoy certain privileges that other large companies might be unable to enjoy. They have fewer requirements for registration as compared to other large businesses, and as such registration and compliance fees are low. Additionally, they have a high probability of being supported by other larger businesses as well as non-governmental organizations. For example, they might enjoy funding and other forms of support from support programs that may be targeting small and medium enterprises. These programs might not be targeting large businesses since they are already well established.
In 1986, an association was developed and its main aim was to support small and medium sized enterprises. It was not oriented to make profits but to provide a range of services and programs that were meant to help the small and medium enterprises to be able to survive in a competitive economy. The association was developed by a group of entrepreneurs who believed in providing market knowledge to the owners of small and medium businesses. This knowledge helped the entrepreneurs think of ways in which to grow and expand their businesses.
In 2012, a committee was developed to ensure that small businesses export their products. This was an important move in that the small and medium sized enterprises could now have access to large markets and hence better promotion strategies for their products and services. As a result, the businesses will be more productive since they do not experience problems in marketing their products and services. It is through such strategies that the firms are able to expand and grow since high productivity implies a larger capital base. The committee also seeks to provide advice and recommendations to small entrepreneurs. This is because it believes that the small entrepreneurs are new in the sector and hence need support and encouragement.
Small businesses are affected by the pressures of the market to a large extent (Audretsch, 2003). As such, different firms are seen to adopt different strategies to deal with the changing economic circumstances. Businesses adopt these strategies differently based on the consequences of adoption and the perception of risk in different businesses. The strategies are also determined by the owners and managers since they dictate how the business is run. Additionally, the resources available in a business determine what strategies are to be adopted in different economic situations.
Different economic structures in different countries also determine the extent to which small businesses are affected by recessions. Exports are adversely affected during a period of global recession because recession is experienced differently in different countries.
Since the definition of small and medium sized enterprises is seen to incorporate the issue of economic developments, it becomes necessary to study the business cycles. This is because these enterprises have significant impacts in the economy and they determine the success of the economy. The performance of the small and medium sized enterprises determines the performance of the economy as a whole since they contribute significantly to the Gross Domestic Product (GDP) as well as its growth (Patton & Worthington, 2004). As such, it is important to study the impacts of the small and medium sized businesses at different economic situations. The different economic situations are well illustrated by the business cycles.
Business cycles refer to the fluctuating and repeated levels of economic activity that prevails in a certain economy over a given duration of time. They are composed of five stages through which a country is seen to go through. These phases include; expansion, trough, peak, boom and recession.
Expansion is a phase that is characterized by the economy moving from trough to peak. This is to mean that the Gross Domestic Product rises until it reaches its peak. This phase is also known as a phase of growth or economic recovery.
Boom refers to a phase where the business activity is very high or increases very fast. It is characterized by high level of sales of different products. Contraction is a phase in which the economy is seen to be declining. It is seen to occur after the economy has reached the peak but it ends before the economy reaches the trough. The phase is therefore seen to be the opposite of the expansion stage. Economists believe that a contraction occurs when the real Gross Domestic Product declines continuously for two or more quarters. This phase is also known as recession as the country records a downward trend.
In this paper, attention will be driven towards the effects of small and medium sized enterprises after global recession. Global recession implies that the economy is declining worldwide. As such, most countries are experiencing a decline in their Gross Domestic Products. For example, there was a global recession that existed between 2007 and 2009. It was characterized by a financial crisis that had great impacts on firms worldwide. To be precise, some of the firms that had been strongly founded had to shut down as a result of the financial crisis and the rapid financial downturn. The crisis had spread in such a way that all the continents were greatly affected. In fact, it led to the collapse of some European banks.
The financial crisis did not only affect the large businesses but also affected the small and medium sized enterprises. In Europe, a study conducted in April 2009 indicated that small and medium sized businesses had their rates of development reduced. This is to mean that there were fewer developments in the small businesses during this period, and as a result, productivity of the small businesses was hindered to a great extent. At the same time, the number of bankruptcies among the small businesses increased rapidly. This is because most of the small businesses were unable to meet their financial obligations.
Recessions acts as a constraint in achievement of the objectives of a business. As such, it is disadvantageous to the owners of a business. A recession causes the asset prices for a business to go down. At the same time, the aggregate sales of the business are seen to decline. Many weak firms exit the market during this period thereby leaving the strong firms only. Competition is reduced as a result of some firms exiting the market. During this period, small and medium enterprises produce less in order to save on the costs of production to be able to use the accumulated resources during the recovery period.
The confidence of the managers in small and medium firms was reduced by the financial crisis (Blum, 1996). In fact most of them were now unable to make more investments with the fear of the situation recurring. Firms had to seek for better ways of producing so as to cut costs of production. In doing so, some of the firms ended up in redundancies. It was clearly seen that the future of all businesses depended on the political decisions that were to be made in different countries, as a way of dealing with effects of the financial crisis. This made the small businesses to rely on the governments’ decisions to a large extent thereby hindering their performance. Firms should make their own sound decisions but during this period, they could not be able to do so to avoid their decisions conflicting with those of the government.
Small and medium size enterprises need to gather information to be able to monitor the political developments occurring in the economy. As such, certain sources of information can be significantly used by the small businesses to gather information. These sources of information help the small businesses to monitor the responses that the governments are using towards dealing with the financial crisis. Managers use open sources of data to gain market intelligence and thus competitiveness.
The small businesses should decide on the correct criterion of choosing the source of data to adopt. This depends with the kind of intelligence that the business needs. Large businesses are seen to have more power in making political decisions as compared to small businesses. As such, large businesses can easily monitor the political developments in the economy. Since large businesses have more resources than small businesses, their actions are seen to affect the political decisions significantly.
After small businesses were affected by the financial crisis, it was necessary that they monitored political decisions. However, monitoring political decisions might be expensive for small businesses. Time and other financial resources are used to gather information so as to ensure that small businesses make sound internal decisions. However, the need to monitor political developments for a small business depends on the extent to which the country is affected by recession.
Since the crisis, the small and medium sized enterprises have been affected to date. Demand has never recovered to the levels in which it was before the financial crisis. At the same time, suppliers may not be willing to offer much credit since there is a high probability that the clients will be forced to postpone their dues. From that time, international markets have been growing smaller as a result of investors and banks becoming conservative. The small businesses have been faced with the problem of diversification due to lack of extra financing, and as such, the economic activities have been downsized.
Studies have shown that during crisis, small businesses have inadequate supply of finances. The lenders were not willing to supply more credit for the fear of becoming insolvent. Small businesses are highly volatile, and can therefore shut down at any time during the recession period. This fact makes it hard for lenders to offer unlimited credit facilities to the small businesses, as they can easily be shut down during recession.
During financial crisis, output is seen to be falling even for the developed countries. Monetary reforms and fiscal policies in a country are seen to bear no fruits during recession (Frey, 1999). Economies that are not independent will always suffer shortages after a global recession. This is because less is produced and it might not be sufficient for export. Due to reduced productivity, the economy is seen to be experiencing many economic problems which might include shortages and rationing.
Unemployment is seen to have an upward trend during recessions. This is due to shutting down of small and medium size enterprises that lacked proper foundations. These businesses had job opportunities that go away with their shutting down thus increasing unemployment levels in the economy. Due to increased unemployment, the dependency ratio among the population is seen to be on the rise. This is because many citizens depend on the working group which might not be as large as the unemployed group. Additionally, an increase in the unemployment leads to an increase in crime rate. This happens because most of the citizens lack a source of income, thereby ending up in crime and violence.
Lack of incomes, as well as low incomes have the impact of reducing household demand. This causes the business activity to reduce significantly. It also implies that the society will be surviving under low standards of living.
Poverty had risen to high levels during the global recession. As such, the small businesses played a great role in trying to eradicate this poverty through creation of jobs. Other well established small businesses came up with strategies which were aimed at reducing poverty levels. For example, small businesses that had specialized with subsistence production supplied food and other basic necessities to the most affected groups. This is because they believed that poverty hinders people from making sound decisions where alternative exist.
The growth and survival of small and medium sized businesses is significant for development of economies worldwide (Pavlin, 1998). This is because development and survival of small businesses creates job opportunities. This reduces the levels of unemployment in the economy and adds to the Gross Domestic Product. Small businesses are seen to absorb fifty percent of employees in the private sector, and therefore work significantly towards reducing unemployment.
Most innovations in a country are seen as a result of existence of small and medium sized enterprises. Due to these innovations, governments are seen to support the small businesses to a great extent. They do these by improving the environment in which the small business operate. The government also prefers providing financial aid to small businesses to large businesses.
Due to the major roles played by the small businesses in growth of the economy, different governments had to develop different strategies so as to ensure their survival. The large burden lied in simulation of demand so as to ensure that all the products were disposed. To work on this, different governments adopted strategies that could be effective for longer periods as well as in the short run.
Some governments believed in helping the small businesses to increase and maintain their cash flows. This was achieved through accelerating depreciation of the already undertaken investments. Other governments played a significant role in protecting the small businesses by giving them tax incentives. This ensured that the small businesses paid lesser amounts to the governing body as compared to larger businesses. Some governments provided the small businesses with refunds, tax cuts, as well as tax credits. Other governments still extended the deadlines by which the small businesses were required to have cleared their taxable dues.
Most governments also addressed the issue of low amounts of working capital for the small and medium sized enterprises. Governments reduced payments delays to ensure that the small businesses had sufficient working capital at all times. Governments also helped the small businesses to strengthen the payment discipline. This ensured that debtors paid in good time thus reducing the inconveniences to the small businesses. At the same time, these measures ensured that the businesses had sufficient cash.
Additionally, governments had to work towards alleviation of the sales shock. This was particularly done in the export market where competition is very high. These markets could also provide investment credit for short and medium sized enterprises that sold their products abroad. Other than stimulating demand, the government had the obligation of increasing liquidity to the small businesses through provision of credit. Some governments like Greece provided introduced a scheme that provided capital to the small and medium size enterprises. This scheme provided the working capital for new small businesses for the first three months of transacting. France also introduced a scheme that covered a significant portion of the risks associated with the loans.
Governments also come up with measures meant to strengthen investments. These measures persuade small and medium size enterprises to undertake long term investments. Some governments used these measures to increase the capital base of small businesses. They are also used to increase the productivity of the small businesses. Small businesses also need to come up with initiatives that protect them from shutting down during a recession. As such, they should abandon all other investments and dedicate much effort towards building their major business activities. For example, a company that owns stocks should sell them during a financial crisis. This ensures that the business focuses on the major transactions thereby being relatively productive during such times. Additionally, such a sale will ensure that the business has sufficient working capital during the recession period.
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During a recession, it is necessary that small businesses increase their monitoring and control of cash. This is because there is a financial crisis, and the little that is available should be put into the most efficient use. This initiative also ensures that the business never goes out of cash since its flow is closely monitored. Small businesses should increase the marketing and advertising costs during a recession. This is because human beings might tend to be rational given that their incomes might be low during such a period. Advertising also ensures that the business survives at a time when competition is very stiff. It also ensures that the level of sales remain stable because it ‘speaks’ on behalf of the business.
It is also wise that small businesses minimize their full time staff during a recession. This helps to reduce the cost of production per unit as less workers will be paid. However, this increases the level of unemployment. As such, firms should add more employees after the recession period to ensure that it benefits the whole economy.
Therefore, small and medium size enterprises refer to businesses that have a low number of employees and a high rate of employee turnover. These businesses contribute significantly towards growth of the economy. As such, it is important to support the small businesses in an economy since they are seen to create job opportunities in the country. Through creation of job opportunities, small businesses reduce unemployment among the citizens. This has the effect of reducing poverty and improving the standards of living of the citizens. During the recession period, small and medium size enterprises are faced with the problem of financing as lenders are not willing to give unlimited credit facilities. As a result, during such periods small businesses end up being shut down. Shutting down such businesses leaves many persons being unemployed and thus increasing crime rate. At the same time, demand reduces thereby reducing business activity. Different governments have come up with initiatives that are meant to prevent the small businesses from shutting down during recession. The small businesses also have initiatives that ensure their survival even during the recession period.