Discuss about the Factors That Affect The Performance Of Small And Medium Enterprises(Smes).
Small and medium enterprises contribute in the development of any nation. They are sources of revenues to the government, source of employment and a means of poverty eradication in a country. However, these small and medium enterprises are faced with lots of problems and they sometimes end up failing (Langenberg, 2005).
Factors that has contributed to the failure of the SMEs are both internal factors and external factors within the business environment. The challenges that they face limit them from surviving and growth.
The study aims at arriving at a summary of the main factors that contributes to the failure of these business enterprises and coming up with measures necessary to curb this problem. The approach in determination of this factors is a quantitative approach that is based of statistical facts from data collected.
The main objective of this study is to determine the factors that affect the performance of small and medium business enterprises. These factors under analysis are both internal and external factors. The specific objectives include application of regression analysis in determination of these factors and coming up with various measures to help in survival and growth of small and medium business enterprises.
The proposed research project aims at determination of internal and external factors that have resulted in poor performance of the SMEs. The data to be used is both qualitative and quantitative which will be collected by use of well-structured questionnaire. The study is limited to only small and medium enterprises.
An enterprise is a word that has been used in a range of contexts. In business, the word has been used to mean a way of creating wealth through risk taking activities (Indarti, 2004). An enterprise can also be said to be a system that consists of an effector, detector and selector. The detector detects any information in the business environment which is then sorted out and selected. The work of the effector is to make use of the selected information about the business environment.
Firm performance is used to refer how the business behaves in the business environment. Performance can be negative or positive depending of various factors that affect the business. These factors may be because of internal or external influence (Lancaster, 2001).
Small and medium enterprises (SMEs) have a definition that varies from one party to another and each of these definition is subject to any form of critics. SMEs can be classified according to type of goods produced or services offered, level of production, size of stock or even according to the profit realized per trading period. All these definitions might be taken to mean one and the same thing.
Various factors have been suggested each one of them has an extent to which it has contributed to the success or failure of an enterprise. Empirical studies that involved factors that negatively affect the performance of an SME, showed that the factors can be divided into two groups (Hitt, 2000). It was based on whether they focus on a variable of a limited source or on profiles of the failed SMEs.
Both case studies and surveys have been used in past empirical studies on factors contributing to the poor performance of the SMEs. Some compilations of previous studies result such as Storey (1994) focused on the stages of SMEs starting from birth, the growth and finally the death of small firms.
Recent studies based on surveys and case studies have come up with the factors that affect the failure or success of a given small firm in an economy. Maria Langenberge and Narul Indarti (2005) came up with the key components that are important in the analysis of the business success. The components included the characteristics of the small firms, the character traits of the entrepreneur and the elements in the development of SMEs.
Effects of different practices of management on small firms was investigated by Gadenne (1998). He studied 369 small enterprises in the manufacturing, service and retail industry. Pearson and Baker (1993) studied financial performance and planning’s in the cleaning industry. The relationship between market performance and orientation was explored by Pelham (2000).
The main factors that are said to contribute to poor performance of SMEs can be explained as below;
This is a factor that has affected almost all the SMEs and many that have failed regard this as a main cause. The SMEs need to have a source of credit facilities to enable them make purchases and have adequate capital to run their business. Lack these credit facility leads to business failure
Any business activities need managerial knowledge. This is because a business is a matter of taking risks. The owner of the business or the manager need to understand risks management and he or she is also expected to have other basic managerial skills. Lack of managerial skills leads to huge losses an eventually the business dies.
All business activities are regulated by government. These regulations may be in favor or against the business enterprises. Regulations requiring businesses to pay taxes at a higher rate are unfavorable as they deprive the business savings. such regulations imposed by government leads to poor performance of the business and may eventually lead to collapse.
Any business activity requires the owners to be well informed on the current trends in the market. A business that has no means of acquiring the trending information may be left out in case of opportunities such promotions and arrival of new products. It is therefore important to stay well informed on current issues and trends in the market.
Many of the small enterprises are in remote areas where infrastructure is so poor. Transport and communication becomes a problem. Entrepreneurs need good road network to supply their goods. Accessing target customers becomes a problem and in return it leads to business failure.
Liedholm and mead (1998) stated that the main factors that have contributed to poor performance of the SMEs is not about their small size but isolation. This prevents them from access to finance, markets and information. Most of the enterprises are established and operated by one person and this has led to low chances of survival of the business on the long run.
The list of the factors affecting the performance could be endless but this study aims at concentrating on only the above factors for analysis.
As noted in the above literature review, most of the research done emphasized of identification of the factors contributing to the poor performance of the SMEs. No work has been done to quantify the extent to which the above factors has contributed to poor performance. All the above factors are causes of poor performance but each has a magnitude to which it has contributed in the failure of the business.
This research proposal is meant to give a quantitative approach on the factors that has led to poor performance of the SMEs and give the extent to which the factor has contributed.
The research hypothesis is as formulate below;
Null hypothesis(H0); Factors that affect the small and medium enterprises have the same magnitude.
Alternative Hypothesis (H1): Factors that affect the small and medium enterprises are not of the same magnitude.
The hypothesis will be tested at 5% level of significance.
This study intends to answer the following questions;
What are the main factors contributing to poor performance of the small and medium enterprises?
This part discusses the design of the research and methodology to be used in the study. The target population, sample design, data collection method, instruments used as well as data analysis tools are also to be explained.
Research design
In his work, Kothari (2004), a good research design consists of a conceptual framework in which research would be conducted with the main aim of collecting relevant data or evidence at low cost. John W. Creswell (2009) defined research design as an ordered plans and procedures meant to use data collected and the analysis tools to come up with a decision.
This study intends to use a cross sectional method of design since it is the best method that suits our problem that is aimed at finding the prevalence of a problem. According to this study, we intend to come up with the factors affecting the performance of small and medium the enterprises where data will be collected once. The design method is cheap and it therefore fits our study.
The study aims at collecting data from small and medium enterprises owners in both urban and rural areas. The owners, managers and employees are considered as the main target through which the data will be collected. The targeted correspondents will be interviewed by means of asking them to answer both closed and open answers only. This method will provide a reliable data that is first hand and can be said to be valid for this study.
Performance of the enterprises will be measured by monthly income in US dollars. This becomes the dependent variable under study. The independent variables are the factors under study sated earlier. Some of these factors are qualitative while others are quantitative. The qualitative variables are to be measured on a scale that shows the degree to which the factor has contributed in performance
This study aims at use of a sample of the population to make a good inference about the entire population of the small and medium enterprises. To determine the sample size, we need to determine the following to apply them in our formula;
This refers to the summation of all available small and medium enterprises that are there in the region under study. The data is to be obtained from national sources that are concerned with registration and licensing of businesses.
This refers to the extent to which one believes that the actual mean is within the confidence interval. The most common is 95% which will be used in this study.
This is also called There is no determined sample that will be perfect. We therefore need to determine how much error we can allow. The confidence interval, also called error margin helps to determine the range in which the sample mean is expected to fall in relation to the entire population. This study has decided to use a margin error of ± 5%.
Responses are expected to vary and we must have an allowance for this. The study has the intention of using a standard deviation of 0.5 which is the standard value to use since it will ensure that our sample is large enough (R., 2001).
Having the above parameters, we will use the following mathematical formula to determine how large our sample will be.
Our confidence level corresponds to a Z – score.
For 95%, the Z- score will be 2.576
This value is obtained from statistical tables.
The next thing is to plug the values of the parameters above in the following formulae;
Sample size =
Having determined the sample size required, we therefore proceed to the method that will be used in data collection for our survey.
Data collection
This study intends to use oral interview to the small and medium enterprises mangers, owners and employees. A well-structured questionnaire that consists of both closed and open-ended questions will be used to gather information. Using questionnaires, the correspondents will be interviewed and the responses given will be filled in the questionnaires by the researcher.
Questionnaire design
The questionnaire consists of 8 questions which will be helpful in collecting the required information.
The sample questionnaire is as shown in the appendix.
Data analysis method
After data has been collected, the analysis is to be done using statistical program for social sciences (SPSS). The program is to be used since analyses both quantitative and qualitative data sets.
The analysis is meant to come up with a regression model on the factors that have affected the performance of small and medium enterprises. Each factor will have a coefficient that shows the extent to which it has contributed to the monthly income of the enterprise.
The regression model will be of the form;
Y= β0 + β1 X0 + β2 X2+ β3X3 + β4X 4+ β5X5
Where; Y is the dependent variable representing the monthly performance of the enterprise.
Bi represents the coefficients associated with various factors under study.
This study intends to focus on only five main factors that are affecting the overall performance of the small and medium enterprises. However, many factors have contributed to poor performance of these small and other medium enterprises. This call for further research on other factors that have contributed to poor performance.
Also, the use of questionnaire is not enough to have accurate information concerning the small and medium enterprises. More accurate surveys need to be conducted to have data that is good enough to make recommendations and conclusions.
This study intends to take place for the period starting 1st November 2017 to 30th November 2018. The one year will be enough to collect the required data and analyse for the purpose of giving a timely report.
Conclusion
Small and medium enterprises are as important as other forms of businesses and they need to be protected from poor performance. To do this, the factors proposed in this study will be helpful in determination of the extent to which they affect the business performance.
Data collection and analysis are to be done with the highest level of accuracy to produce reliable results. This proposal calls for further research to find more factors that have affected the performance all types of business activities.
References
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Hitt, M. I., 2000. The intersection of entrepreneurship and strategic management research, inHand book of entreprenuership. s.l.:Oxford
Indarti, K. S. &., 2004. Entrepreneurial Intention among Indonesian and Norwegian Students. Journal of enterprising culture, 12 .
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McMahon, R. G. P. (2001). Growth and performance of the manufacturing SMEs: The influence of financial management characteristics. International Small Business Journal, 19, p.15-27.
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