Issues of Small and Medium-Sized Enterprises - Coursework Example

Introduction The term SME is a recognized abbreviation for Small and Medium Sized Enterprises. To however, there is no internationally recognised definition of SME1. General definitions are that SMEs are autonomous as they can be completely independent or have one or more minority partnerships with another enterprise. When there is more than 50% of a relationship between people in a business it is deemed a Partnership. There is debate of the value of singling out SMEs for assistance2. This paper aims to review the variety of definitions that currently exist within the business arena to characterise entities, which subsequently affects a company’s tax, and accounting obligations. Firstly, the definition of a Small to Medium Entity (SME) will be provided with regard to UK, European Commission and USA legislation. Secondly, the roles of entrepreneur and manager will be delineated. Next, the question of whether an entrepreneur in the SME sense could also be a manager will be discussed. Finally, a conclusion shall synthesise the main points of the paper, and justify the need for an international standardized definition of an SME. Defining the Small to Medium Entity (SME) Within the UK, recent legislation proposals are seeking to put in place a standardised national definition of SME for tax purposes. In the UK, it is estimated that in 2004 about 4.3 million SMEs were in existence. Hence, the majority of the UK workforce is employed by SMEs3. Although, of these, 99.3% were small organisations with less than 50 staff, and 0.6% were medium-firms with 50-250 employees. Sanctions 247 and 249 of the Companies Act, 1985, use the noted definition an SME to meet accounting requirements4. Recently, these sections have been amended by the Statutory Instrument 2004/16 The Companies Act 1985 (Accounts of Small and Medium-sized Enterprises and Audit Exemption) (Amendment) Regulations 20045. As such, a small company has a turnover of no more than £5.6 million, a balance sheet total of not more than £2.8 million, and not more than 50 employees. Whereas a medium-sized company has a turnover of not more than £22.8 million, a balance sheet total of no more than £11.4 million, and not more than 250 employees6. However, as mentioned, across the UK this definition of SME remains flexible. Within the European Commission, there is a category of business called Micro Enterprises. A micro enterprise has less than 10 staffs, and a turnover or balance sheet of not more than €2 million. Whereas, a small enterprise has a headcount of up to 50 employees and a balance sheet of €10 million7. In the USA, the government department of Small Business Small Administration (SBA) Size Standards Office determines the definition of a small business. Size standards are used to identify what makes a small business a small business, so that small businesses can take advantage of funding that they are eligible for8. As such, the entity cannot be a dominant player in its market, and must be independently owned and operated. Unlike Europe and the UK, which have simplified definitions across all industries, the USA has set size standards for each individual NAICS coded industry9. It is anticipated that the diversity will provide a better representation of the differences inherent across industries. The most commonly identified sizes are; less than 500 employees for most manufacturing and mining organisations; less than 100 employees for most wholesale trade organisations; and less than $6 million annual turnover for most retail and service industries.10 (Crain, 2006). Defining the Entrepreneur and the Manager Across time there have been inconsistent definitions of entrepreneurship. Characteristics that have often been focused upon include the creation of new entities, the initiation new combinations of activities, products or services, investment into research and development of discover novel opportunities for business, and the collaboration of various production or service factors11. An entrepreneur can be translated from its French roots to mean “one who undertakes,” and in this sense was used to refer to people who had the knowledge and skills and dream to organize an enterprise that will involve the taking of risk in the hope of the opportunity to make a profit and to operate independently of an employer12. It is not unusual to hear of an entrepreneur being as “inspired” or as having “vision” as they start businesses entities to fill gaps that they perceive are meet a consumers needs, or identify products and services that do not adequately meet the needs of the consumers13. An identified area of need is also termed an “opportunity niche,” such as the recently set up online resource for unsuccessful Web-based entrepreneurs.14 Creativity, vision, motivation, risk taking and organizational skills all appear to be essential characteristic of an entrepreneur. The entrepreneur can be considered to be a function that involves the taking advantage of environmental opportunities within the existing market15 Exploitation occurs with the direction and/or combination of successful contributions. In general, an entrepreneur is able to bear a significant amount of risk when seeking business opportunities as they draw on their own personal funds to remain independent in their decision making, and to stay in control of the overall business that is developing. Also, an entrepreneur may take on a managerial role, although the routine day-to-day management of the ongoing operation is not included in the definition of entrepreneurship16. Hence, entrepreneurial activity can be transient and fleeting. The entrepreneur may develop a business, but be delegated later to the role of manager that does not include drawing on their entrepreneurship skills. Small business owners often fall into this category and are not considered to be entrepreneurs.17 However, there may be employees within an organization that are considered to be entrepreneurs, although they are non-founders of the business they continue to seek and exploit opportunities. This is also known as “entrepreneurship” and so can be included into a definition of entrepreneurship18 Turning now to the definition of management, this can be characterised as the role that cultivates the drive and optimism of the entrepreneur. The manager is responsible for planning and directing the activities of a business, delegating duties, monitoring progress and goal outcomes, and taking corrective action when required. The manager in an SME also holds the power to hire and fire employees, or to promote staff within the business, whereas in a larger corporation the manager would likely only recommend internal staff for promotions to the next level of management.19 Finally, the manager has the authority to modify or stop work assignments of individual employees as well as working groups. Managers may delegate tasks directly to employees, or they may have several supervisors to whom they entrust responsibility and accountability for delegation of work. As such, the manager needs to be very familiar with the activities that the employees they are supervising are doing. However, a manager is not expected to be an expert in all aspects of production and or service of a business, although it is critical that a manager be aware of how to manage others.20 Management of others requires that a manger be a leader. Leadership is a quality of character essential to providing guidance, support and evaluation of an organization, its employees and the procedures and processes that enable all to function effectively. Leadership is a role that requires valuable skills as well as a reliance on innate personal characteristics. Effective leadership is highly demanded in the product and service industries. The act of leadership is complex and is determined by the credibility of the leader; importantly the leader must be able to exhibit commitment to a clear set of values.21 Characteristics of a good leader are often identified as being: honesty, competency, a good communicator, inspiring and forward-thinking22 A manager of an SME as a leader needs to uunderstand the market, improve products, increase revenue, and motivate employees by transforming organisational culture that fully engages the employee, and acknowledges their value. When leaders have little time to plan, and no strategies in place for a crisis, it is best to keep things simple. To overcome unsuccessful outcomes have a strategy for direction and monitor progress towards the goal; clean house of management involved in the crises, adopt a financial orientation23. Ultimately, leaders must make decisions hence, they need to rely on their conscious as an “inner compass”24. Humanity and morality are dual traits of an effective leader, as they allow one t to look to the well-being of the worker and the community as well as the organization. Leaders promote integrity and independence within the workplace, whilst providing moral and strategic direction. It is important that a leader is able to take risks and to be transparent in their actions. The leader manager gets involved with the operating-units of their company, and learns about the employees, the organization, the procedures and processes25 Defining Terms Sole Trader A sole trader can be defined as a single person who is trading under their own name when carrying on a business with or without a registered business name. As such, a sole trader employs themselves. In general, a sole trader mostly owns and operates their business, and so the term “owner/manager” can be applied26. A sole trader is not necessarily an entrepreneur; they are not seeking new opportunities, nor are they innovators in the market, and are not risk takers, although some sole trader can be entrepreneurs. In the UK and Europe a sole trader is a business owner/manager who does not necessarily have any start-up costs, has complete control over their business, can easily change to another trading identity, and trading accounts do not need to include a balance sheet such as required for an SME. However, a sole trader is personally liable for all their business27 At present there is no clear definition of owner/manager in the UK within the tax legislation, and so the issue is being debate by Government with regard to section IR591 of the Pre-Budget Report: the intended action to introduce a proposal in the 2004 budget to guarantee that the right amount of tax is paid by owner/managers on the profits of their businesses. In the USA a sole trader is referred to as a “sole proprietorship”, which again is a business that does not exist separately from its owner. All debts remain those of the owner/manager, it does not pay corporate taxes but rather personal income taxes on the profits made. The sole proprietor may register a trade name to allow them to open bank accounts for the business. Self Employed The definition of a person who is self employed is similar across the globe in the business community. In the UK and Europe a self employed person gains a livelihood directly through their own trade or business rather than by being an employee of another28 what do you mean by 3. In the UK a self employed person is responsible for their own tax and National Insurance contributions, so the Her Majesties Revenue and Cusoms (HMRC) must be informed by the owner/manager about the self employed income by completing a Self basement tax return. As owner/managers a self employed person may also be considered to be a sole trader (UK/Europe) or sole proprietor (USA). As such, the person takes responsibility for all the risks involved in setting up and maintaining the business29. In the USA, the self employed person is subject to self employment tax in addition to income tax, on the net income from self employment activities30 This tax is paid in lieu of Social Security payments. Family Business The term “family business” is a terminology which does not actually exist within commerce, or taxation and accounting standards, as the business would have a trading name and so would be considered an entity, just like any other business31. A Partnership, as defined in the UK, Europe and the USA, is when two or more people join together in business and take joint responsibility for debt and tax payments, and other operating activities. For many family businesses, the venture is short-lived, as evidenced in Grant Thornton’s International Study of over 331, 000 family businesses across the globe, where he found that 31% expect to change ownership over the next decade. Tucker (2005) states that: The world of the family business revolves around family involvement and with many founders now reaching the age to consider stepping down it is not surprising that there are such a number of family businesses expecting a change in ownership in the next decade. In fact, family businesses tend to struggle to span the generations with only about 10% making it through to the third generation so the statistics should not be seen as alarming, provided the necessary measures have been taken to accommodate this change in ownership, and the change may actually involve passing the business on to the next generation32. A family business is likely limiting themselves in terms of staffs hiring with regards to skills, competencies and knowledge that can add to the business. Especially with regard to having an employee with entrepreneurial ability, which may not be the case with any of the family members, and so the business does not have the opportunity to exploit environmental opportunities to the full extend if they did 33. Can an Entrepreneur be a Manager? Overall, the differences in styles of approach for the entrepreneur and the manger occur across five core business dimensions; strategic orientation; commitment to opportunity; commitment to resources; control of resources; and management structure. Firstly, with regard to strategic orientation, the entrepreneur is dependant on their perception of an opportunity; this is especially of value when other opportunities are perceived to have diminishing returns, alongside rapid changes in technology, economies, social values or political standings34. Whereas, the manager in their administrative role, would plan systems to measure performance and control current resources to allow for the strategic orientation of seeking and exploiting new ventures. Secondly, commitment to opportunity varies depending on the length of commitment required. For the entrepreneur there is pressure for action, short decision windows, a willingness to assume risk, few decision contingencies and a short time span is generally involved with regard to opportunity commitment. In contrast, the manger takes more time to act on an opportunity. However, once an action has been decided upon, the manger is responsible for applying long-term commitment to opportunity35. Third, with a commitment to resources an entrepreneur is used to having resources that are committed at periodic intervals and that are grounded for particular takes and goals. The resources may often be acquired from others as they may be difficult to obtain, and so the entrepreneur sets out to maximize the resources as best they can36. From a managerial viewpoint the manager is responsible for authorizing commitment to resources for the company, and for entrepreneurs that exist within the company. Fourth, the control of resources drives the manager to effectively administer resources, and they are often geared toward the accumulation of as many resources as possible. The pressures of power, status, and financial rewards cause the administrator to avoid rental or other periodic use of the resources. This is in opposition to the entrepreneur who under the pressure of limited resources, the risk of the risk of obsolescence, a need for flexibility, and the risks involved strives to rent, or otherwise achieve periodic use of, the recourses on an as-needed basis. Finally, the management structure differs greatly between the two roles of entrepreneur and manager37. . The manager is responsible for formalizing the organizational structure and hierarchical nature of the company. This often represents the need for clear defined parameters of authority, responsibility and accountability. On the other hand, the entrepreneur has a desire for independence and may draw on others to create a flat organizational structure, with informal networks. Despite these differences in specific roles, the entrepreneur and manger do overlap in many cases. As most innovators like to have complete control of their own organization, it is possible for an SME entrepreneur to also be a manger. However, many at some point do decide to delegate suitable and qualified managers to take care of day-to-day affairs. If an entrepreneur chooses not to hire a manager, they may find themselves solely managing their business and not having time to seek new opportunities of to implement innovations. Alternatively, not employing a manger will likely restrict an entrepreneur’s ability to seek out environmental opportunities, or to take the time to research and develop new processes, or combinations of processes. Ultimately, for the entrepreneur, it the management of people and the drawing on leadership abilities to motivate others to innovate, contribute, and to take responsibility and accountability for actions that becomes the management overlap for them. By managing one’s managers the entrepreneur has time to be creative whilst the day-to-day administrative and manufacturing running is the responsibility of sub-managers. In this sense, the entrepreneur/manager needs to fully develop reflective abilities to cultivate their leadership skills that enable the entrepreneur to plan the steps that allow their vision to come into existence. Leadership qualities are perhaps the most critical need of the manger, regardless of whether they foster entrepreneurial characteristics. Conclusion In summary an SME can also be an owner/manager, however an owner/manager is not necessarily an SME. Sole traders or self employment are persons that take responsibility for their own debts and tax, and can be defined perhaps most similarly across the globe by the number of employees that an organization has, although this too varies within and across nations. Most entrepreneurs are innovators, creating new business opportunities; they can be initially managers and CEOs rather than owner/managers. Entrepreneurs can be found in all types of entities, i.e., small, medium and large organisations. The most salient feature about an entrepreneur is their willingness to take risks. Being able to “shoot from the hip,” as in their tendency to take risks, provides an entrepreneur with the opportunity to make astounding innovations and developments of businesses and processes. It is clear that an entrepreneur can be a fantastic manager, of people and activities, as they start and develop a business, perhaps aiming for an integrated global strategy and the subsequent employment of managers to take care of day-to-day delegation of tasks and accountability, whilst the entrepreneur moves on to initiate other ventures and environmental opportunities. A study into entrepreneurship by Peter Drucker supports definitions that see the entrepreneur not as a capitalist or investor or employer, and rather than a role, in which knowledge is used to raise, deploy and invest capital. This is in contrast to the role of manager, who is deemed to be responsible for the overall structure and infrastructure of an organisation. The manager is highly relied upon to provide leadership support, and so motivate staffs to collaborate on decision making and to comply with company policies and goals. Managers, in opposition to the entrepreneur have more difficulty taking spontaneous risks, without a suitable and often lengthy deliberation. Managers are also more interested in the accumulation of resources for the organization. And there may be pressure due to power, status, and financial rewards that cause the manager to seeking to only keep resources for the short-term. It is anticipated that post-modern entrepreneurial/managers will more fully develop their communication, interpersonal and intra-personal skills, to enable their people management to provide time for their creativity and innovation in expanding markets. References Brockhaus, R. Snr. (1980). Risk taking propensity of entrepreneurs. Academy of Management Journal, 23( 3), 509-520. Carland, J., Hoy, F., Boulton, W., & Carland, J.A. (1984). Differentiating entrepreneurs from small business owners: A conceptualization. Academy of Management Review, 9( 2), 354- 359. Carton, R., Hofer C., & Meeks M.D. (1998). 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