Working Capital Management of Micro & Small Enterprises.
| Author | Bhattacharyya, Som Sekhar |
Introduction
Micro, Small and Medium Enterprises (MSMEs)in India were being categorized based on the size of investment in plant and machinery for manufacturing enterprise and on equipment for enterprises providing or rendering services [MSMED Act, 2006]. The upper limits for the classification of MSMEs, as per the MSMED Act, 2006 have been tabulated in Table 1.
Katyal (2015) explained how economic development in India had been propelled by MSMEs, and the role of MSMEs in creating job opportunities for a semi and unskilled labor force. Chakrabartty (2016) described the role of MSMEs in the expansion of entrepreneurial culture and business innovations. Studies done by researchers (Garg &Walia, 2012; Subrahmanya, 2004; Slyal, 2015) clearly emphasized the importance of MSMEs across different sectors of the Indian economy, which had been producing diverse range of products and services to cater to local and global market demands. MSME's contribution has been represented in Table 2.
Bose (2013) had reported that many of these enterprises either operated with inadequate capital or solely depended on the owner's capital and firm profits generated.
Working Capital Management
Funds were required for the purpose of procurement of raw materials, payment of wages and other daily expenses (Gupta, 2015). These funds, working capital(WC)formed that part of the firm's capital which was essential for financing short-term assets such as cash, securities, debtors and inventories (Popli & Puri, 2013). Tauringana and Afrifa (2013) explained WC as a practice for carrying daily operations effectively. The basic objective of working capital management (WCM) was to make sure that an organization had enough funds to meet its operating costs (Sagner, 2010). Banos-Caballero et al. (2010) stressed upon the importance of WCM and its effects on profitability and risk. Deloof (2003) explained that the significance of WCM for firms had attracted many studies that were focused on the extent of its effect on profitability and risk. However, Mehmet et al. (2009) mentioned that these studies were mostly related to large companies. Stephen and Elvis (2011) stressed that though there has been literature which indicated the importance of WCM to SMEs and its impact of WC on SMEs. The challenges in effective WCM and its role on a strategic front had remained untouched. MSMEs, basically small entities played a crucial role in Indian economy contributing to 33% of the total manufacturing output from the manufacturing enterprises and 45% to the total exports from the country as per Small and Medium Business Development Chamber of India (2016-17). This depended significantly on WCM.
Adequacy of Working Capital
Yasasway (1978) stressed that WC was important for running any business and it was challenging to carry out the business with fixed capital alone. A positive correlation was reported by Sharma and Kumar (2010) between WCM and profitability. One of the major reasons for the failure of many small enterprises was accounted for by poor WC decisions (Haswell & Holmes, 1989). WC laid the basis for the objectives of profitability and liquidity (Shin & Soenen, 1998). Major research in this area also emphasized the correlation between corporate profitability and healthy WCM practices (Singh & Kumar, 2013). Kulkarni (1983) highlighted the significance of efficient WCM and thus WCM has been looked upon as the key driver for any successful business organization.
Working Capital Management Principles
WCM involved various challenges making it hard for MSMEs to handle it effectively (Das, 2008). According to Kovelskly (2015), a greater risk prevailed with higher disparity between the maturities of a firm's short-term debt instruments and its flow of internally generated funds. Therefore, as the WC levels increased, amount of risk decreased, and vice-versa, so the opportunity for benefit was more likely to be affected adversely (Banerjee, 2015).
One of the objectives of WCM has been to increase the profitability of a company so as to ensure sufficient funds to meet firm's obligations to continue the business (Azeez, 2016). Thus, the two main objectives of WCM have been to increase profitability and to ensure that MSMEs have sufficient liquidity to meet its short-term obligations.
Literature Review
The authors carried out a string search on WCM and WC challenges in the Indian context in journals, data bases on ProQuest, EBSCO, Emerald Insight, Wiley, Sage, Blackwell and such others. For efficient management, various aspects like inventory management, receivables and cash management must be simultaneously managed. This had to be done along with WCM and its impact on liquidity and profitability, and further WC policies have been studied. The area of research under inventory management has been tabulated in Table 3. Research contributions under receivables management in WCM has been tabulated in Table 4. Extant research on overall WCM and firm management has been tabulated in Table 5.
Research Gap
MSMEs played a major role in the Indian economy providing substantial job opportunities for the semi and unskilled labor (Chakrabharty, 2016). Many of these enterprises either had inadequate capital or entirely depended on the owner's capital and the firm's revenue retention (Bose, 2013). As MSMEs relied on running business on a day to day basis, WCM played a key role in its functioning (Stephen & Elvis, 2011). Literature on the role of WCM in MSMEs was studied to understand the importance of inventory management, cash receivables, operating cycle, cash conversion cycle on both operational and strategic front. As the major reason for the failure of MSMEs was accounted for to poor working capital management, the importance of WCM across various sectors was studied. Though the importance of WCM in MSMEs was reported in many studies, the role of WC on a strategic front and the challenges in implementing WC practices remain relatively untouched. The present study was carried out in Srikakulam district of Andhra Pradesh (AP) as the Government of Andhra Pradesh (GoAP) with its mission of being a leader in the industrial development has undertaken conscious steps in achieving its dreams (AP MSME Policy, 201520). Culturally also it has been reported in the past that the practice of entrepreneurship was very prevalent in AP (Upadhya, 1988). This study aims at understanding the WCM in micro and small enterprises on operational versus strategic levels. This study also aims to find out the challenges in effective WCM and its importance as a strategic decision in the smooth functioning of the business unit.
Methodology& Data
The authors used exploratory qualitative research to understand the answers to the research questions as suggested by Maxwell (1996). The second author conducted independent interviews with entrepreneurs in Srikakulam district of Andhra Pradesh. The minimum ownership management of an entrepreneur was 9 years and the maximum experience was 31 years. The 12 interviews were conducted between the months of December 2017 and March 2018. The interviews conducted lasted an average of 55 minutes each. A semi structured open ended questionnaire was provided to the entrepreneurs to secure their inputs. The entrepreneurs belonged to diverse businesses like food processing industries, polymer and metal recovery sectors. The data gathered by the interviews were content analyzed for thematic analysis (Weber, 1990; Popping, 2000; Holsti, 1969). Data collection was closed after 12 interviews because thematic saturation was reached. The profiles of the respondent companies have been tabulated in Table 6. The code data set was additionally analyzed by three more independent content analysis method experts, one subject expert on WCM, one on corporate finance and another subject expert on business strategy. The results of the study have been presented later in the paper. The intra-coder reliability was 93% while the inter-coder reliability was 94% (Holsti, 1969; Urbina, 1981). The author revisited the coding process after a gap of fifteen days. It can be noted that both the reliability levels were well within accepted levels (Holsti, 1969; Urbina, 1981).
Findings
The responses from the entrepreneurs were collected and have been tabulated in Table 7. The thematic content analysis of the 12 respondent's responses has been tabulated in Table 8. The two themes were challenges and strategic imperatives.
Discussion & Conclusion
The primary data was collected by getting responses filled for the pre-designed, semi-structured open-ended questionnaires indicated in Table7 from the respondents who managed the WC...
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