Bad Growth Vs Good Growth

How you will categories "Rs.400 crore turnover business"? Is it a SME or a large business?

SME stands for Small to Medium Enterprise. However, what exactly is an SME or Small to Medium Enterprise defers from country to country and depends on the industry norms used to classify it like headcount or annual turnover of the enterprise. Many country use SME to refer to a business with fewer than 250 employees, while classifying firms with 250 or more employees as "large" businesses.

Developments in prices and productivity make it necessary to adjust the financial thresholds norms from time to time and thus many countries have recently amended the definition of the SME to improve business environment for SMEs in their country. The increase in threshold limit allows an important number of enterprises to maintain their SME status and ensure their eligibility for support measures.

SMEs are an essential source of jobs which foster entrepreneurship and innovation and are thus crucial for economic growth of the country. However, it is very important for these enterprises to ensure Good Growth.

It is always thought that SMEs are often confronted with market imperfections. SMEs frequently have difficulties in obtaining capital or credit, particularly in the early start-up phase. Their restricted resources may also reduce access to new technologies or innovation. Well, I would say, it depends on the business objectives of the SMEs and differs on case to case basis. Many factors contribute to Bad Growth like type of ownership, management style and corporate governance, high dependency on few individuals or resources, business control environment and commitment for Good Growth etc.

Let's consider some real life scenario which I came across recently.

Few Months back, I had met CFO of a leading food retail chain firm at their Office in Mumbai. And, to my utter surprise, they have not carried out any Internal Audit during past 4 years and have no immediate plans either to carry it out in near future. Now that's a Bad Growth.

I had heard the story of a business group having facilities near Mumbai at a drive of around 3 hours from my place that has grown their business significantly in a very short time and is growing at an incredible speed on a Y-O-Y basis. The directors staying in Mumbai are flying owned helicopters to reach the work place on a daily basis. Again to my utter surprise, I came to know that they have very minimal Internal Audit programme for their fastly growing business. The Internal Auditors mainly involved in transaction audit that too remained inadequate due to growing transaction volumes. I quickly realized that the remuneration paid to Internal Auditors justified deploying two audit clerks only. That's called step behaviour with Internal Audit.

Recently, I had a chance to meet and talk to Purchase Manager of a SME organization with CAGR of more than 40 %. This time again to my utter surprise, the guy asked me how Internal Audit is different from ISO Quality Certification Audit. I am sure such unawareness about purpose of Internal Audit is somewhat faked. In my knowledge there are many such SMEs having turnover of Rs 100 crore or more which have Quality Certifications but does not have an appropriate Internal Audit Programme suitable to their size of operation. What one could find is missing controls, controls overridden, mis-utilisation of resources, mismanaged processes and tacit people issues within such enterprises.

In India, private equity & venture capitalist are looking to invest in such growing businesses; however, the individuals in the organization who have vested interest have created an environment which is not conductive for the Good Growth. Processes and controls are highly dependent on few individuals leaving the business leaders helpless. Also, a mindset has developed among such SMEs to not to part away with equity due to the same reason as cited above. SME Leaders need to realize that they need to expand the business with professional help and requisite control environment within the organization which could alone strengthen its path to high Profitability, Efficiency and off course Good Growth.