Making SMEs thrive

Maldivian society is filled to the brim with creative and entrepreneurial individuals. At a time where more people are able, and seeking, to merge their passions into careers, the number of Small and Medium-sized Enterprises (SMEs) are on the rise -  a positive sign for economic growth. According to the Maldives Monetary Authority (MMA) report, 'Impediments to SME Growth in Small Island Developing States - The Case of the Maldives,' each atoll on average had 80 percent of its businesses registered as SMEs in 2019.

With the added impact of the COVID-19 pandemic and the resultant layoffs and cutbacks, the number of SMEs debuting are expected to increase even further – with many hoping to make ends meet without relying on others. However, despite the SME registration boom, the success and longevity of these businesses hang by a thread. 

One of the critical factors leading to the failure of SMEs is the very foundation they start on. In the words of a previous café owner, "small businesses are built upon debt." It is the inevitable fate of most SMEs to register and accumulate working capital with liabilities piling over - a fact that has very much to do with the small and independent nature of these businesses. There is a self-imposed time crunch and expectations that push these entrepreneurs to these extents.

Then there is the paperwork that comes with registering a business. There is layer upon layer of official documents that need to be submitted, at various offices. Registration at the Ministry of Economic Development (MED), tax registration at the Maldives Inland Revenue Authority (MIRA), food safety approvals and registrations from the Health Protection Agency (HPA) and so on. The thick stash of papers and regulations are confusing and complicated to many. However, contracting specialists is daunting, as this again increases liabilities or may be seen as a drain on the limited capital that was raised with difficulty. 

Today's markets are highly saturated and overflowing with a multitude of fast trends with minuscule lifespans – one starts a business, and it seems like everyone else follows. One important factor that SMEs need to consider is the importance of business planning – both in the initial and continuing phases of the SMEs' life cycle.

Failure to appreciate the importance of business planning can have devastating effects, with many SMEs caught unawares as markets shift. While having a business plan cannot guarantee success, contingency planning goes a long way in ensuring an SMEs' ability to weather market downturns. 

Accounting and bookkeeping is the numerical evaluator of the health of any business. SMEs, especially home-based SMEs, may tend to become lax with their bookkeeping, oftentimes assuming that there is no need for proper accounting of finances.

Keeping accounts, no matter how basic, also makes apparent problem areas, and at the same time indicates areas for potential and possible growth. Improper bookkeeping may also increase the likelihood of overtrading – trading beyond the scale and capacity of the SME. Without established mechanisms to gauge the flow of trade in and out, SMEs may at times reach for unsustainable and infeasible growth. 

Another important factor to consider is financial and economic literacy – one need to get a degree in accounting, economics or finance – but keeping abreast of tax developments, interest rate impacts and so on. Honest mistakes in understanding tax obligations may lead to hefty fines that can have a devastating impact on small businesses.

Accounting and bookkeeping, as well as maintaining separate bank accounts for the business, even from the start, provides SMEs with a credit history, which will assist it in raising debt financing for future expansion. 

SMEs usually start based on a passion, as a creative outlet, or an entrepreneurial spirit. However, running a business requires human resources, although employee turnover may prove critical for small businesses that are dependent on these resources. Employee retention is critical as well, as most SMEs do not have the resources to train their employees, or retrain new people, in the event of turnover. 

Setting up an SME and going out on one's own is risky, yet at the same time the rewards are exhilarating. Given that SMEs are the backbone of a country's growth, and the apparent need for diversification of the Maldivian economy, it is imperative that the government provides opportunities for the training and know-how required. It has already embarked on this process, and the country is seeing promising returns.