Advantages And Disadvantages Of SME

883 Words4 Pages
This article states what challenges do Small and Medium Enterprise (SME) face in the working capital management.
When comparing a large organization to a SME, one clear disadvantage that the SME face is that the large organization can afford experts who are dedicated only to working capital unlike the SMEs fueled with low level of funds. Therefore, this shows that even how well the SME are doing, they are not able to match up with the large organizations due to insufficient funds to grow.
Small ticket size and high transaction cost is one factor which challenges the SMEs in working capital because it leads to low revenue per customer but high distribution, manpower and marketing costs. This then deter financial institutions from investing on the ticket size of loans
…show more content…
The limited funds forces SMEs to operate solely and discreetly which translates to the shortage of working capital, inadequate marketing as well as being stagnant at the growth stage. Given that SMEs operate in small scale, one of their biggest challenge is to command competitive procurement, distribution as well as the selling price. The working capital of these SMEs is restricted in the illiquid inventory and receivables due to the unorganized sectors which makes SMEs prone to any demand disruption in the supply chain which can affect their operations drastically. The financial manager has to ensure cash available to the company in order to cover its operating expenses and short-term debts. To obtain an effective working capital management, the manager must manage the cash flow to pay the employees and debts, know when to take on short-term loan to pay the suppliers or unexpected expenses. The manager can keep more current assets to reduce liquidity risk. However, this would reduce the company’s profitability as current assets have low returns. In contrast, using more current liabilities which cost less will result in higher
Get Access