Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. It is the cash flow that matters. A business that grows fast devours cash. Constant investment have to be made to just keep even.
In a developing nation's economy, it's the small and micro enterprises (SMEs) which play a vital role. If India has to have a growth rate of 8-10% for the next couple of decades, it needs a strong micro and small sector and micro entrepreneurs need to be nurtured. They not only give employment to a large number of people but also support bigger industries by supplying raw material, basic goods, finished parts and components, etc. The felicitation of micro entrepreneurs today, is not to be mistaken as the ultimate goal of the enterprise. It is in fact, only the beginning of its process in achieving greater heights. A small enterprise today will be a big enterprise tomorrow, and might well become a multinational enterprise eventually, if given the support, among others, to build their skills and knowledge levels. In MSME sector, the failure rate may perhaps be relatively higher - the reasons for which range from delayed/inadequate availability of credit to non-availability of backward and forward support system. Despite the risk, financing of first time entrepreneurs is a must for financial inclusion and growth. Thus, the banks and other agencies should take pride while servicing the micro entrepreneurs as they are playing an instrumental role in the formation of MNCs of tomorrow. There is a need for sensitisation of the bank's staff towards the needs of small entrepreneurs. The banks should develop systems such that the field staff is regularly updated and is equipped to appraise the financial requirements of small enterprises. The banks may use the platform provided by the technical institutions and send their staff to such institutions on a regular basis. Training is also required to be imparted to the branch managers and their loan officers for change in their mindset away from the perceived risk in financing micro and small enterprises.
Lessons from Emerging Countries
We should learn from the experience of Korea which has now become a leader of many globally important brands. However, barely forty years ago, Korea had no industry at all. The Japanese, who ruled Korea for decades, did not allow any. They also did not allow any higher education, so there were practically no educated people in Korea. By the end of the Korean War, South Korea had been destroyed. Today Korea is world -class in two dozen industries and the world's largest in ship building and other areas. Not far behind Korea is Taiwan, which like Korea was preindustrial in 1950. Today, Taiwan is a world leader in a number of high- tech areas, including microchips. Entrepreneurship and innovation are the key drivers of success in these two counties and turned them into world class manufacturers and industry leaders. The Koreans have set up small groups of their brightest people to systematically apply the discipline of innovation to identify and develop new businesses. Innovation requires us to systematically identify changes that have already occurred in the business - in demographics, in values, in technology or science - and then look at them as opportunities.
Four Pitfalls to Avoid
Many new businesses start out with high promise but suddenly run into trouble after a year or two. There are four typical mistakes entrepreneurs make and all four are foreseeable and avoidable. Here, I draw extensively from what Peter F. Drucker has very rightly pointed in one of his books. He said that there are four typical mistakes entrepreneurs make. Firstly, majority of successful new inventions or products do not succeed in the market for which they were originally designed. To illustrate the point, I would like to tell you of a man by the name of John Wesley Hyatt who invented the roller bearing for the axles of railroad freight cars. The railroads, however, were not ready for radical change; and Hyatt went bankrupt. Then Alfred Sloan, the man who later built General Motors, asked his father to buy Hyatt's bankrupt business. Unlike Hyatt, Sloan was willing to broaden his vision of the product. It turned out that the roller bearing was ideal for the automobile, which was just coming to the market. In two years Sloan had a flourishing business; for twenty years Henry Ford was his biggest customer. Similarly, very few would know that Novocaine was invented by a German chemist, Alfred Einhorn for use as general anesthetic in major surgery but it was not found suitable and ultimately it was used successfully by dentists. In fact, Peter Drucker had said that majority of successful new inventions or products do not succeed in the market for which they were originally designed.
Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. It is the cash flow that matters. A business that grows fast devours cash. Constant investments have to be made to just keep even.
When a business grows, the person who founded it gets too busy. Rapid growth puts an enormous strain on the business. It outgrows its production facilities and management facilities. The quality falls, customers do not pay and deliveries are missed. The best way to avoid a crisis is to create a management team. Young entrepreneurs cannot pay to bring in a management team. So it is necessary to identify the core competencies of the people working with you. One may be good at marketing, the other, say in, customer service. They have to be utilised for their respective competencies to be able to deliver their optimum. This planning should take place well in advance.
Lastly, when the business is a success the entrepreneur needs to ask what the business needs at this stage and whether he is concentrating on the right things. While entrepreneurship starts by putting himself before business and questions that are at the forefront is " What do I want to do?" or " What is my role?" , but when it succeeds the right questions to ask is " What does the business need?" and " Do I have these qualities? ". As successful entrepreneurs, having gained experience and wisdom from past mistakes, going forward, it is necessary to ensure that the same mistakes are not repeated. First generation entrepreneurs can also take a lesson from the successful entrepreneurs to avoid committing the same mistakes.
Support from all stakeholders
There are ample opportunities in small businesses in India and such opportunities will transform the country in the coming future. For such transformation to happen there needs to be support from all stakeholders, government, banks, corporate, regulators, civic society, etc. Technology universities may be set up and the government can tie up with the best in the world to help in research. We need to harness entrepreneurship and look at skill building. A scheme for utilising NGOs to provide training services to tiny micro enterprises could be encouraged. Entrepreneurship development is important in view of its visible impact on wealth creation and employment generation. To facilitate and encourage this, skill building has been impressed upon by the Prime Minister's Task Force for MSMEs. Enterprise Development Centres (EDC) should be set up by the Central/State Governments with incubators to provide training not just for setting up of new units but also to provide continuing education on different aspects like product design, packaging, technology upgradation, financial management and marketing. Entrepreneurship development is the key factor to fight against unemployment, poverty and to prepare ourselves for globalisation in order to achieve overall economic progress.
(Abridged version of the keynote address by Dr K. C. Chakrabarty, Deputy Governor, RBI at the Citi Micro Entrepreneur Awards at NCPA, Mumbai. Full text can be accessed from www.rbi.org.in)
