Critical steps for the development of small and medium enterprises in Serbia

Small and Medium Enterprises (SMEs) have played a historic role in the development of many countries around the world. One of the main features of successful economies is the development of a wide variety of SMEs. It is natural that every business starts as small and most are run by individuals/entrepreneurs. SMEs contribute to the economy in several ways: creating new jobs and stimulating continuous development of new products and processes which make the economy more competitive in world markets.

The economic crisis has weakened enterprises and wiped out many jobs. However most people’s expectations regarding employment are towards large state systems, what is usually unrealistic and in most cases a waste of time. We are constantly talking about the money from EU that is supposed to jumpstart the economy and create enough jobs what I doubt: first, Europe will not have enough available money for the next few years to help satellite countries such as Serbia, because most of it will go to Greece, Italy, Portugal and other internal problems; second, even if something comes from that side, it will only address a small percentage of unemployed in Serbia – most of unemployed will have to “cook something in their own kitchen”, and third, the money from such assistance is generally inefficiently spent which creates a negative perception and discourage entrepreneurial activity. Consequently, I suggest a turn towards encouraging entrepreneurship in society on a large scale and paving the ground for this type of economic activity as the only permanent and complete solution for Serbian economy. The goal should be set for creating one million small business jobs in the next few years. For this to happen, the economy has to shift completely from (micro) giants that are naturally non-competitive in global markets towards successful SMEs.

Unfortunately, it is almost completely untapped potential in Serbia. In addition to bias towards entrepreneurship among job seekers the main obstacles for the development of SMEs are weak managerial capacity of entrepreneurs themselves and their senior staff, the absence of multiple (different) sources of funding, lack of access to bank loans, lack of access to domestic and foreign markets, inadequate technology, poor production capacities, the reluctance of large companies to cooperate with them, lack of interest in this type of economic activity among general population, the bureaucracy and administrative barriers, de-motivating tax system and weak support from the government, NGOs and other parties.

SMEs play a critical role during the transition from agricultural to industrial economy using every opportunity to organize and commercialize processing of raw materials which can bring significant resources into the economy, accelerate it and further develop manufacturing capacity and technology. SMEs support the formation of flexible economy in which small and large firms interrelate. Small firms have lower capital costs while creating new jobs and better utilize capacity. They very often lean towards manual production which increases employment even further, especially among young and unskilled workers. SMEs are also more agile while looking for new markets and creating new products and manufacturing processes. They are competitive and easy connect in clusters and associations. Finally, small businesses have a better sense of consumer needs and adapt quickly.

In my opinion the state should pass laws that will further promote this critical part of the economy and provide technical and financial support for the SME’s case. It should also promote investments in this part of economy and introduce tax incentives for domestic and foreign investors. Special focus (incentives) should be on undeveloped municipalities.

I see three untapped key areas that deserve urgent attention. First, in Serbia there is very little organized private financial support for start-ups either from interested individuals or small private investment funds (venture capitalists) which would be mainly profit driven. Taking into account huge untapped financial potential of Serbian diaspora I believe that the state agencies should do strong marketing campaign and investment promotion especially about Serbian SMEs which must be coupled with announcements of simplified bureaucracy i.e. elimination of excessive legal obstacles that require bureaucratic signature and seal at different levels as well as additional tax incentives for investors, from wherever they come. It will help create a new small business development vehicle for Serbian economy. Private investor is naturally in a better position than the state agencies to control the operation of entrepreneurial firms and, more importantly, can actively contribute to the quality of business decision making and provide critical business contacts – especially for export.

These funds and individuals (often called “angel investors“) fill the gap in financing the initial stages of a company when money usually have to come from friends, relatives or personal savings as banks try to avoid this type of risk. More commonly, angel investors become interested in the second round of funding that is when an entrepreneur has already proven the feasibility with a “pilot project”. These investors typically focus on specific industries such as biotechnology, pharmaceuticals, information technology, agriculture, renewable energy and others.

Second, I suggest forming an investment bank focused on emerging companies as well as good business ideas that have yet to materialize. This bank would be a private listed company with share capital from European Funds, the state of Serbia, interested commercial banks as well as individual investors with criteria such as profit, job creation and growing export potential. In this way, more effective control of invested capital will be ensured what would further promote the bank itself and attract new capital.

Third, public-private partnership via joint presentation at one place of all actors in the SME arena e.g. government agencies, non-government institutions, private investors (banks) and SME support organisations and individuals would attract would-be entrepreneurs and help develop this sector further. It could be both on-line support via a dedicated web portal and brick-and-mortar service centres for SMEs in all main municipalities.

Particularly I propose a launch of Internet portal for SME assistance, business education and finance. A small business owner will use a standardized form to describe his/her business model and needs as well as give reasoning for the viability of investment. Entrepreneurs will find advice on administrative procedures during company constitution and registration, tax administration, the way of making business plans, hiring and firing people, business formulas, marketing tricks etc. At the same time, providers of capital will also register on portal and be able to search through business plans and requests for funding based on their own selection criteria and risk models through predefined categories in the application forms from entrepreneurs. In addition to these main parties, business mentors specializing in SMEs will also register on portal. They will provide assistance to both SMEs and other parties such as banks during business development phase and/or lifespan of a loan with the objective of reducing risk of failure – increasing probability of success. In practice, this platform will improve communication between all stakeholders in the SME game and especially provide better access for SME funding. Due to its transparency, it will enable constant monitoring for dysfunctional parts of the system and provide for on time reaction.

In the next step I propose establishing of service centres for small entrepreneurs in all large municipalities. Similar to virtual portal, but now in a brick-and-mortar environment, small business owners will find financial institutions, tax and legal advisers, business mentors, investment funds etc, all there to provide support and assistance within reasonable time about business plans, marketing, accounting, etc. Banks could concentrate their experienced and specially trained staff in one place with the right of final decision-making for more efficient service. It would be much easier for all players to identify profitable ideas that deserve special attention because they will all appear at a single place.

As for entrepreneurs, if they can’t get finance at the very beginning they should try to self-finance a pilot project first and prove the viability of the business model. Later, with a good business plan and a description/analysis of already executed pilot (mini) project one’s chances to get finance will substantially improve.

One starts a business with own sacrifice and commitment. An entrepreneur can invest what is available: time, persistence, and for example a personal computer. One should sacrifice a living standard and continue to drive a smaller car, reduce entertainment and expensive clothes in order to save a start-up capital. She/he must understand that it is necessary to demonstrate the feasibility of business idea before approaching other people for their money.

Experience tells me that most owners of small and medium sized enterprises have only short-term planning and rarely develop a formal strategy document for the next year, three or five. This kind of document is probably considered and drawn up for the first time when one approaches the bank for a loan. If a business is family financed and one doesn’t have to approach a bank, for example, then there is no one to bother him with “unnecessary administration”. Even if an entrepreneur put the strategy document together, it will probably contain only elements of marketing and sales and won’t speak about the development of human resources, production facilities and more. It must be understood that the business risk exists in all business areas and the lightning always strikes from an unexpected direction.

Even if the initial business plan is drawn up it is rarely reviewed and adjusted for changes in business environment including market and life cycle of your product or new technology for example. The annual strategic analysis of business strengths and weaknesses as well as opportunities and threats followed by a strategy workshop is rarely used in SME environments what is a standard practice of large companies.

If an entrepreneur manages his business on the basis of one-month sales plan and income or cash flow statement only, then he or she will lose a tremendous opportunity to make a critical step towards a stable and sustainable growth in sales and profit. Instead, unfortunately most small business owners go through fire fighting on a daily basis when managing their businesses and, at one point, crash and close down a company. Statistics prove this.

Čitajte ovo srpski.

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2 responses to this post.

  1. I completely agree about 3 key areas, especially about 1st financing (angel investors & funds), after that investment or development bank by district or region, 3rd public-private partnership and would like to add 4th the most important area control or monitoring i.e. who will be a supervisor. Based on my own experience from my SME business should be some “neutral” not agency, not NGO’s or government employees, but some local organization composes with well educated experts (foreign and local people) and clear targets (business plan), roles and responsibilities.

    Reply

  2. Fully agree. My idea is for the control to be in investors’ hands i.e. driven by profit and other pre-set goals. With VC funds and angel investors it’s given anyway. For the SME Investment Bank a board will appoint the control mechanism – fully professional and accountable individuals. They could be employees or this service could be outsourced.

    Reply

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