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RECEIVABLES MANAGEMENT OF MSMEs:

A STUDY OF MSMEs IN TAMILNADU

A THESIS

Submitted by

V. M. PONNIAH(Reg. No. 77506003)

In Partial Fulfillment of the Requirements

for the Degree of

DOCTOR OF PHILOSOPHY

Under the Guidance of

Dr A. CHANDRA MOHAN

Professor of Management

SCHOOL OF MANAGEMENT

FACULTY OF ENGINEERING AND TECHNOLOGY

SRM UNIVERSITY, KATTANKULATHUR- 603 203

JULY 2011

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DECLARATION

I hereby declare that the dissertation entitled RECEIVABLES

MANAGEMENT OF MSMEs: A STUDY OF MSMEs IN TAMILNADU

submitted for the Degree of Doctor of Philosophy is my original work and

the dissertation has not formed the basis for the award of any degree,

diploma, associateship, fellowship of similar other titles. It has not been

submitted to any other University or Institution for the award of any degree or

diploma.

Place: Kattankulathur

Date: 20th

July, 2011 (V M PONNIAH)

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SRM UNIVERSITY, KATTANKULATHUR -603 203

BONAFIDE CERTIFICATE

Certified that this thesis titled RECEIVABLES MANAGEMENT

OF MSMEs: A STUDY OF MSMEs IN TAMILNADU is the bonafide

work of Mr. V.M.PONNIAH who carried out the research under my

supervision. Certified further that to the best of my knowledge the work

reported herein does not form part of any other thesis or dissertation on the

basis of which a degree or award was conferred on an earlier occasion for this

or any other candidate.

Dr. A. CHANDRA MOHAN

RESEARCH SUPERVISOR

Professor of Management StudiesSchool of Management

Kattankulathur- 603 203

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4. ACKNOWLEDGEMENT

I first and foremost salute the ALMIGHTY for giving me the health

and strength to pursue endeavours leading to a holistic life and for the

continuous blessings throughout the research work.

I am grateful to all my teachersfor their persistent efforts in shaping me.

I am most grateful to my Research Supervisor,Dr. A.Chandra Mohan,

Professor School of Management, SRM UNIVERSITY, whose critical

comments, valuable suggestions and encouragement helped me throughout to

complete the research work successfully and on time.

This thesis will be meaningless without mentioning all those who have

helped me to make it possible. With utmost sincerity, I thank

Dr.C. Muthamizhchelvan,Director, Faculty of Engineering and Technology,

Dr. Jayshree Suresh, Dean of School of Management, Dr. Narayana Rao,

Director ( Research) and Dr. S.Kasmir Raja, Dean of Research, SRM

University for their constant and valuable support.

I humbly express my sincere thanks to Dr.T.R.Pachamuthu,

Chancellor of SRM University for providing all the required facilities to

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complete this thesis successfully. I thank Prof. P.Sathyanarayanan, President,

SRM University, Dr.Ponnavaikko, Vice Chancellor, SRM University,

Dr.T.P.Ganesan, Pro-Vice Chancellor, Dr.N.Sethuraman, Registrar and

Dr.Ponnusamy of SRM University, for their valuable advice and guidance.

I am grateful to Mrs. Parvathi Ponniah, my wife, for valuable help

rendered throughout the research work and constant encouragement. My

special thanks to Sri. P.Meenakshisundaramand Smt. M. Kuppammal, my

parents and Sri. D.Meenakshisundaramand Smt M.Ulagammal, my in-laws,

for their moral support. I thank all my brothers and other family members for

extending their support.

Last but not the least, I must thank all my friends and well wishers who

have provided me with the right ground to complete the thesis work in a

successful way.

(V.M. PONNIAH)

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5. ABSTRACT

The performance of SSI was focused mainly at National level, while

issues like size, growth, structure and productivity were left to the States,

which paid inadequate attention to these issues. Liberalization has exposed

Indian MSMEs to unequal competition with its counterparts in the industrially

advanced countries. The history of funding of the MSMEs reveals that the

sector has been mostly relying on self finance and debt finance through

banking system. Lack of demand and shortage of working capital are the main

reasons for acute and incipient sickness in both the registered and unregistered

units in SSI sector.

Task force of Prime Minister on MSMEs in January 2010 reported that

shortage of capital, particularly working capital, is the major problem faced by

the enterprises in the unorganized sector, which constitutes 94 % of MSMEs in

India. According to the Task Force on MSMEs, workable legal options should

be developed for the securitization of trade credit receivables and for the

promotion offactoring services.

Considering the need for managing receivables, it is decided to find out

how many MSMEs have practised an efficient receivables management

practices. Further the type of problems that could be caused by this inefficient

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management of receivables in MSMEs, need to be investigated so that

appropriate corrective and preventive measures could be designed and

commissioned in these MSMEs. This research is undertaken to determine the

variables of Receivables Management of MSMEs and to find out association

of receivables with other variables in managing the business. The present

research identified gaps in the literature on the receivables management which

leads to the formation of the research instrument (questionnaire). 525

respondents have been covered from 12 districts in Tamilnadu, with

questionnaire, containing 50 questions in four parts.

Trade credit occurs when there is a delay between the delivery of goods

or the provisions of services by a supplier and their payment. For the seller this

represents an investment in account receivable, while for the buyer it is a

source of financing that is classified under current liabilities on the balance

sheet.

Twelve receivables management variables were identified based on

literature review, discussions with MSMEs and their inputs and a pre-test was

conducted. Based on the outcome of analysis, seven variables have been

retained for further research. Retained variables are 1) Receipt of advances

before supply of goods, 2) Receipt of advances at the time of supplying the

goods, 3) Whether credit period extended or not, if extended the duration of

such period, 4) Collection of Receivables within the stipulated credit period or

not, if extended the duration of such extension 5) Debts doubtful of recovery

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6) Business with top one customer and 7) Business with top three customers.

The predominant problems of MSMEs namely, Marketing issues,

Finance issues, Human resources issues, Operations issues and General

problems are collected besides personal characteristics, business details and

investment in plant and machinery / equipments, through the questionnaire.

Data collected through primary and secondary data are analysed using

the various analytical and statistical tools like Percentage Analysis, Chi-

square test, Karl Pearsons Co-efficient of Correlation and One-Sample t- test

by using Statistical Package for Social Science (SPSS). The higher order

statistical tools viz Factor analysis, Cluster analysis and Multiple Regression

analysis are exploited systematically to establish the association as well as

relationship among independent and dependent variables. Discriminant

Analysis is used to develop an empirical model to evaluate the Receivables

Management Strategy of MSMEs in Tamilnadu.

There is a deep association between domestic sales of MSMEs with

business profile of MSMEs, with top one customer and with top three

customers. The advances at the time of supply are essential for venturing into

domestic sales. It is found that credit period is an essential component of

receivables management.

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It is found that the advances received before supply and at the time of

supply are able to encourage net profit of MSMEs. It is also found that doubtful

recovery percentage hampers the net profit generation.

Receivables Management variables as well as problems mutually acted as

independent and dependent variables. The subsequent usage of discriminant

analysis followed by linear combination of the variables sharply estimated a

mutual relationship between receivables management and problems.

Personal and entrepreneurial traits of MSMEs owners are vital in

determining their capabilities to withstand against the consequences of

receivables management. It is found that gender, age, educational level of

MSME entrepreneurs etc, influence on credit period decisions, receivables

collection, number of customers and advance receipts.

Investment on MSMEs has their anatomical association with receivables

management within the framework of nature of investments.

The Model presents that personal, business details and investments in

productive fixed assets are highly influencing the receivables management, to

have an influence in the form of total revenue and net profit. The

conglomeration of receivables management and problems of MSMEs have

been clearly proved in the model. Every MSME can evaluate itself with

reference to the model constituents and determine the direction to strengthen

the management of receivables. Rather this model could become a tool for

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raising the alarm, when the management of receivables is not on right

directions. This will help MSME entrepreneurs not only to sustain their

business without any problems in realisation of trade credit receivables, but

also to achieve growth of their business.

6. TABLE OF CONTENTS

CHAPTER

NO.TITLE PAGE NO.

ABSTRACT

TABLE OF CONTENTS

LIST OF TABLES

LIST OF FIGURES

LIST OF SYMBOLS, ABBREVIATIONS

vi

x

xviii

xxii

xxiii

1. INTRODUCTION 2

1.1 CONTEXT 2

1.2 DEFINITION OF

ENTREPRENEURSHIP

4

1.3 DEFINITION OF MICRO, SMALL AND

MEDIUM ENTERPRISES (MSME) AND

CHALLENGES

5

1.4 DEFINITION OF RECEIVABLES

MANAGEMENT AND ITS CURRENT

STATUS IN MSMEs

7

1.5 BACKGROUND OF THE STUDY 10

1.5.1 Global Impact of

Entrepreneurship

10

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CHAPTER

NO.TITLE PAGE NO.

1.5.2 Global Experience of Small

Enterprises

11

1.5.3 Performance and Growth of

MSMEs in India

12

1.5.4 Performance and Growth of

MSMEs in Tamilnadu

14

1.6 NEED FOR THE STUDY 15

1.7 RESEARCH PROBLEM 17

1.8 CHAPTERISATION SCHEME 18

2. REVIEW OF LITERATURE 21

2.1 ROLE OF MSMEs IN OVERALL

ECONOMIC DEVELOPMENT

22

2.2 MSMEs IN UTILIZATION OF

RESOURCES

23

2.3 ROLE OF MSMEs IN SOCIAL

DEVELOPMENT

28

2.4 ECONOMIC AND OTHER

INCENTIVES FOR MSMEs BY

STATE-CURRENT STATUS

32

2.5 DRIVERS OF MSMEs 34

2.6 FINANCIAL MANAGEMENT AND ITSROLE IN SUCCESS OF MSMEs

40

2.7 RECEIVABLES MANAGEMENT FROM

THE LITERATURE

46

2.8 RESEARCH GAPS 51

3. RESEARCH METHODOLOGY 54

3.1 RATIONALE OF THE STUDY 54

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CHAPTER

NO.TITLE PAGE NO.

3.2 OBJECTIVES OF THE STUDY 55

3.3 HYPOTHESES OF THE STUDY 56

3.4 DEVELOPMENT OF RESEARCH

INSTRUMENT

57

3.4.1 Compilation of Measures 57

3.4.2 Pre-Test 58

3.4.3 Scaling Technique in the

Questionnaire

59

3.5 VALIDITY OF THE RECEIVABLES

MANAGEMENT VARIABLES

60

3.6 PILOT STUDY 60

3.7 SAMPLE DESIGN 61

3.8 MAIN STUDY 63

3.9 VARIABLES OF THE RESEARCH 64

3.10 STATISTICAL TOOLS FOR

ANALYSIS

65

4. DATA ANALYSIS AND INTERPRETATION 68

4.1 DESCRIPTIVE ANALYSIS 68

4.1.1 Gender wise classification of

MSME Entrepreneurs

69

4.1.2 Age wise classification of

MSMEs Entrepreneurs

70

4.1.3 Classification of MSME

entrepreneurs based on

Educational Qualification

71

4.1.4 Classification of MSMEs based 72

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CHAPTER

NO.TITLE PAGE NO.

on major influencing factors for

the entrepreneur to start thebusiness

4.1.5 Status of MSME Entrepreneurs at

the time of starting the business

unit

73

4.1.6 Existence of MSMEs based on

Year of their establishment

74

4.1.7 Business entity /Type ofOwnership of MSMEs

75

4.1.8 Type of Business of MSMEs 76

4.1.9 Line of Activity of the Business of

MSMEs

77

4.1.10 MSMEs Investments in Plant &

Machinery (Manufacturing sector)

and Investment in Equipments

(Services sector)

78

4.1.11 MSMEs based on break up of

Sales Revenue / Total Income for

the fiscal year 2008-2009

79

4.1.12 MSMEs based on actual Sales

Revenue / Total Income earned

by MSMEs during the fiscal year

2008-2009

80

4.1.13 MSMEs based on Net Profitearned during the fiscal year

2008-2009

81

4.1.14 MSMEs based on proportion of

Sales Revenue / Total Income

earned through top one customer

82

4.1.15 MSMEs based on proportion

Total Income earned through top

three customers

83

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CHAPTER

NO.TITLE PAGE NO.

4.1.16 MSMEs based on Advances

received before supplying thegoods / providing the services

84

4.1.17 MSMEs based on Advances, as a

percentage of Total Order value,

received before supplying the

goods / providing the services

85

4.1.18 MSMEs based on Advances

received at the time of supplying

the goods / providing the services

86

4.1.19 MSMEs based on Advances as a

percentage of Total Order value

received at the time of supplying

the goods / providing the services

87

4.1.20 MSMEs based on Credit period

allowed to their customers

88

4.1.21 MSMEs based on duration of

Credit period allowed to their

customers

89

4.1.22 MSMEs based on Receivables

collected from their customers,

within the credit period allowed

90

4.1.23 MSMEs based on additional credit

period allowed to their customers

91

4.1.24 MSMEs based on their Doubtful

Debts, as a percentage of Sales

Revenue / Total Income for the

fiscal year 2008-2009

92

4.2 ANALYSIS OF SECONDARY DATA:

PERFORMANCE OF MSME UNITS IN

INDIA AND TAMIL NADU

93

4.2.1 Number of MSMEs in India. 93

4.2.2 Employment Potential of MSMEs

in India

94

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CHAPTER

NO.TITLE PAGE NO.

4.2.3 Production in MSME Sector in

India

98

4.2.4 MSME Units in Tamilnadu -

An Over view

100

4.3 INFERENTIAL ANALYSIS 103

4.3.1 Association of Receivables

Management variables and Sales

Revenue / Total Revenue

achieved by MSMEs

104

4.3.2 Association of Receivables

Management variables and Net

Profit

109

4.3.3 Influence of Problems of MSMEs

on Receivables Management

variables

110

4.3.4 Association of Personal

characteristics of Entrepreneurs

and Business characteristics of

MSMEs entrepreneurs and

Receivables Management

variables

118

4.3.5 Association of Investments in the

Plant & Machinery

(Manufacturing sector)/

Equipments (Services sector) of

the different types of

MSMEs on the Receivables

Management Variables

130

4.3.6 Opinion of MSME entrepreneurs

on the different types of Problems

normally faced by MSMEs

133

4.3.7 Factors on the Problems normally

faced by MSMEs using Factor

Analysis

139

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CHAPTER

NO.TITLE PAGE NO.

4.3.8 Classification of MSME

entrepreneurs based on theproblems normally faced by them

using Cluster Analysis

148

4.4 DISCRIMINANT ANALYSIS TO

DEVELOP AN EMPRICAL MODEL TO

EVALUATE RECEIVABLES

MANAGEMENT STRATEGY OFMSMEs IN TAMILNADU

151

4.4.1 Receivable Management Model

for MSMEs

156

5. FINDINGS AND SUGGESTIONS 160

5.1 SUMMARY OF CHAPTERS 160

5.2 FINDINGS OF THE STUDY 162

5.2.1 Growth of MSMEs in India with

specific reference to Tamilnadu

162

5.2.2 Association of Receivables

Management variables and Sales

Revenue / Total Income of

MSMEs

163

5.2.3 Association of Receivables

Management variables and Net

Profit earned by MSMEs

167

5.2.4 Association of Problems normally

faced by MSMEs and Receivables

Management variables

168

5.2.5 Association of Personal

Characteristics of MSME

entrepreneurs and Business

characteristics of MSMEs and

Receivables Management

variables

170

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CHAPTER

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5.2.6 Association of Investments in

Plant & Machinery(Manufacturing Sector) /

Equipments (Services Sector) of

MSMEs and Receivables

Management variables

171

5.2.7 Empirical Model for Receivables

Management for MSMEs in

Tamil Nadu.

172

5.3 SUGGESTIONS 172

5.4 CONCLUSIONS 174

5.5 RECOMMENDATIONS 175

5.6 SCOPE AND LIMITATIONS OF

THE STUDY

176

5.7 SCOPE FOR FURTHER

RESEARCH

177

REFERENCES

APPENDICES

LIST OF PUBLICATIONS

VITAE

179

192

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7. LIST OF TABLES

SL.NOTABLE

NO.DESCRIPTION

PAGE

NO.

1 1.1 Micro, Small And Medium Enterprises underServices Sector and Manufacturing Sector

6

2 3.1 Cronbach co-efficient and Hotellings T-square

value.61

3 3.2 Sample Design 62

4 3.3 District-wise MSMEs from whom data are

collected63

5 4.1 Gender wise classification of MSMEEntrepreneurs

69

6 4.2 Age wise classification of MSME

Entrepreneurs

70

7 4.3 Classification of MSME entrepreneurs based

on educational qualification

71

8 4.4 Classification of MSMEs based on major

influencing factors for the entrepreneur to start

the business

72

9 4.5 Status of MSME entrepreneurs at the time ofstarting the business unit

73

10 4.6 Classification of MSMEs based on Years of

their existence

74

11 4.7 Classification of MSMEs based on Business

entity / Type of Ownership

75

12 4.8 Classification of MSMEs based on Type of

Business

76

13 4.9 Classification of MSMEs based on Line of

Activity of the Business

77

14 4.10 Classification of MSMEs based on Investments

in Plant & Machinery (Manufacturing sector) /Equipments (Services sector).

78

15 4.11 Source of Sales Revenue / Total Income of

MSMEs for the fiscal year 2008-2009

79

16 4.12 Classification of MSMEs based on Sales

Revenue / Total Income earned during the

fiscal year 2008-2009

80

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SL.NOTABLE

NO.DESCRIPTION

PAGE

NO.

17 4.13 Classification of MSMEs based on Net Profit

earned during the fiscal year 2008-2009

81

18 4.14 Classification of MSMEs based on proportion

of Sales Revenue / Total Income earned

through top one customer

82

19 4.15 Classification of MSMEs based on Sales

Revenue / Total Income earned through top

three customers

83

20 4.16 Classification of MSMEs based on Advances

received before supplying the goods/providingthe services

84

21 4.17 Classification of MSMEs based on Advancesas a percentage of Total Order value, received

before supplying the goods/providing the

services

85

22 4.18 Classification of MSMEs based on Advances

received at the time of supplying thegoods/providing the services

86

23 4.19 Classification of MSMEs based on Advances,

as a percentage of Total Order value, received

at the time of supplying the goods/providingthe services

87

24 4.20 Classification of MSMEs, based on Credit

period allowed to their customers

88

25 4.21 Classification of MSMEs , based on duration

of credit period allowed to their customers

89

26 4.22 Classification of MSMEs based on their ability

to collect the receivables from their customers,

within the credit period allowed

90

27 4.23 Classification of MSMEs based on Additional

Credit period allowed to their customers

91

28 4.24 Classification of MSMEs based on their

Doubtful Debts, as a percentage of Sales

Revenue / Total Income for the fiscal year2008 2009

92

29 4.25 Number of MSME units in India (in lakhs) 93

30 4.26 Regression of MSME units in India and Years 94

31 4.27 Employment potential of MSMEs in India 96

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SL.NOTABLE

NO.DESCRIPTION

PAGE

NO.

32 4.28 Regression of employment potential of MSME

units in India and Years

97

33 4.29 Production of MSME Units in India (Value in

Rs. in Crores)

99

34 4.30 Regression of Production of MSME Units in

India and Years

100

35 4.31 Registered MSME units in Tamilnadu 101

36 4.32 Employment of MSME units in Tamilnadu 102

37 4.33 Production of MSME Units in Tamilnadu 103

38 4.34 Association of Receivables Management

variables and Domestic Sales

105

39 4.35 Association of Receivables Management

variables and Export Sales

106

40 4.36 Association of Receivables Management

Variables and Job Work Receipts

108

41 4.37 Association of Receivables Managementvariables and Net Profit

109

42 4.38 Output of Multivariate tests to determine the

influence of Problems on ReceivableManagement variables

111

43 4.39 Tests of Between-Subjects Effects 112

44 4.40 Model Summary 114

45 4.41 Variables in the Equation 114

46 4.42 Model Summary 115

47 4.43 Variables in the Equation 115

48 4.44 Model Summary 11649 4.45 Variables in the equation 116

50 4.46 Model summary 117

51 4.47 Variables in the equation 117

52 4.48 Output of Multiple General Regression Model

to determine the influence of Personal

characteristics of entrepreneurs and Business

characteristics of MSMEs on the Receivables

Management variables

119

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SL.NOTABLE

NO.DESCRIPTION

PAGE

NO.

53 4.49 Output to determine the association of

Investments in Plant & Machinery

(Manufacturing sector) / Equipments (Servicessector) by MSMEs on the Receivables

Management variables

131

54 4.50 Summary Attitude Scale with opinion of

MSME Entrepreneurs on the different types of

Problems normally faced by MSMEs

133

55 4.51 One-sample test: Opinion of MSME

entrepreneurs on the different types of

Problems normally faced by MSMEs

135

56 4.52 KMO and Bartlett's Test for Factor Analysis 14057 4.53 Number of Factors of Problems normally faced

by MSMEs141

58 4.54 Factors obtained through Continuous Vari-Max

Rotation142

59 4.55 Lack of Trust and Hyper Competition 143

60 4.56 High Entry Barriers 144

61 4.57 Low Access towards Cheaper Finance 145

62 4.58 Poor Logistics and Low Labour Productivity 14663 4.59 Low Venture Capital Culture 147

64 4.60 Clusters based on the Factors of problems

normally faced by MSMEs148

65 4.61 Nature of Clusters based on the Factors of

problems normally faced by MSMEs149

66 4.62 Clusters of Entrepreneurs 150

67 4.63 Eigen values 152

68 4.64Wilks' Lambda

15269 4.65 Structure Matrix 153

70 4.66 Canonical Discriminant Function coefficients 154

71 A2 .67 Definition of SMEs Asia and other countries 200

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8. LIST OF FIGURES

SL.NOFIGURE

NO.

DESCRIPTIONPAGE

NO.1 4.1 Receivable Management Model 157

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9. LIST OF SYMBOLS AND ABBREVIATIONS

MSME Micro, Small and Medium Enterprises

SME Small and Medium Enterprises

SSI Small Scale Industries

GDP Gross Domestic Product

GEM Global Entrepreneurship Monitor

RBI Reserve Bank of India

QR Quantitative RestrictionsOGL Open General License

SIDBI Small Industries Development Bank of India

NABARD National Bank for Agriculture and Rural Development

WTO World Treaty Organisation

OEM Original Equipment Manufacturers

SPSS Statistical Packages for Social Sciences

ASI Annual Survey of IndustriesBUSONECUSTR Business with one customer, (ie) total revenue earned

through one major customer

BUSTHREECUSTR Business with top three customers(ie) total revenue

earned through three major customers

ADVRECDBEFORE Receiving advance before supply of goods

ADVRECDSUPPLY Receiving advance at the time of supply of goods

CREDITALLOWED Credit period allowed to the customers

RECVCOLLTD Receivables received within the credit period

DOUBTDEBTS The quantum of debts which are doubtful of recovery and

hence to be treated as bad and doubtful debts

SMERA Small Medium Enterprises Rating Agency

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CHAPTER 1

INTRODUCTION

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2

CHAPTER 1

INTRODUCTION

CHAPTER OVERVIEW

The first chapter of this study explains the problems and prospects of

MSMEs at all India level and Tamilnadu level in a lucid and concise manner.This chapter also covers the definitions of Entrepreneurship, Micro, Small and

Medium Enterprises (MSME) and Receivables. Besides these highlights, this

chapter explains the need for the study, exact research problem encountered in

this research. In this chapter, the following areas are covered:

context;

definitions of Entrepreneurship, Micro, Small and Medium Enterprises

(MSME) and Receivables Management ;

background and need for the study ;

researchproblem

chapterisation Scheme and

objectives of the study

1.1 CONTEXT

MSMEs have emerged as an engine of growth in the New Millennium in

India and world over. The MSME sector is a nursery of entrepreneurship, often

driven by individual creativity and innovation. The twenty-first century has

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3

dawned with entrepreneurship as a major force, shaping the global economy.

At the heart of this global movement are entrepreneurs who demonstrate their

willingness to assume the risk associated with creating new Micro Small and

Medium Enterprises (MSMEs). Those who possess the spirit of entrepreneurial

leadership have led, and will continue to lead the economic revolution that has

proved repeatedly to raise the standard of living for people. According to

Alvarez, (1996) Entrepreneurial fervor in the 1980s, a historian of the

entrepreneurial movement, writes, became a worldwide movement, spreading

across countries, regardless of their level of development or even of their basic

mentality or value orientation towards business activities.

Presently large number of MSMEs is first generation entrepreneurs and

significant number is accounted by technocrats, professionals besides skilled

manpower. They change the work culture and work environment in the

backdrop of Information Technology and Communication Technology. The

MSME sector has emerged as a dynamic and vibrant sector of the Indian

economy. According to the Handbook of Statistics on the Indian Economy,

published by the Reserve Bank of India (2008-2009), there were 128.40 lakhs

of MSME units in India during the fiscal year 2006-2007. These units

generated employment potential of 312.50 lakhs and achieved production of

value Rs 585, 11,200 lakhs.

The SSI sector proved its mettle even in the changed liberalized

economic environment of India. Liberalization of 1991 has opened new

opportunities and challenges at the same time. The need of the hour

undoubtedly was to provide substance through suitable measures to strengthen

it for converting the challenges into opportunities for scaling new heights.

Economic growth becomes really meaningful when the people participate

extensively in the path of growth. The real challenge of growth is to provide

full employment. Sukanta Kumar Sahoo, (2003), opined that the SSI sector is

the symbol of that facet of our economy which reflects production by masses

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4

rather than mass production. With decline in agricultural employment and

virtual stagnation in the organized manufacturing sector, employment in SSI

sector has emerged as the only ray of hope.

1.2 DEFINITION OF ENTREPRENEURSHIP

The word entrepreneur is derived from the French word entreprendre,

which means to undertake.

Saras D Saraswathy,(2004) found that entrepreneurs are entrepreneurial,

as differentiated from managerial or strategic, because they think effectually;

they believe in a yet- to- be made future that can substantially be shaped by

human action.

Entrepreneurship means the taking over and organization of some part

of the economy, in which peoples needs are satisfied through exchange, for

the sake of making a profit and at ones own economic risk, according to

Weber (1898) 1990.

The essence of entrepreneurship, for Cantillon as much as for Kirzner,

consists in the personal alertness to such potential sources of gain. There is a

subtle change of emphasis in Kirzners discussion of entrepreneurship from

that of Schumpeters: Schumpeter always portrayed the entrepreneur-innovator

as a disequilibrating force disturbing a previous equilibrium , whereas Kirzner

(1973), depicts him as seizing upon a disequilibrium situation and working to

restore equilibrium.

Unfortunately, the new Austrian theory of entrepreneurship reduces

entrepreneuship to any kind of arbitrage and in so doing wipes out most of the

crucial questions that have been posted about entrepreneurship. As Demsetz

has said entrepreneurship in new Austrian theory is little more than profit

maximization in a context in which knowledge is costly and imitation is not

instantaneous.

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A more promising approach to the theory of entrepreneurship is offered

in a study by Mark Casson, (1982) who syntheses and extends previous work

by Knight, Schumpeter, Kirzner and many others. Casson defines an

entrepreneur as someone who specializes in taking judgemental decisions

about the coordination of scarce resources.

These definitions of entrepreneurship give a broad idea of multi-skills

needed by an entrepreneur. In India, National Knowledge Commission has

defined as under: Entrepreneurship is the professional application of

knowledge, skills and competencies and /or of monetizing a new idea, by an

individual or a set of people by launching an enterprise de novoor diversifying

from an existing one (distinct from seeking self-employment as in a

profession or trade), thus to pursue growth while generating wealth,

employment and social good.

An entrepreneur once decided to start a business venture, it is invariably

started as a small one and may grow into a medium or large one subsequently.

There are many business opportunities which are broadly categorized as either

manufacturing or services. In each of these categories, sub-classifications as

micro, small or medium are defined.

1.3 DEFINITION OF MICRO, SMALL AND MEDIUM ENTERPRISES

( MSME) AND CHALLENGES

There is no universally accepted definition to define a Micro, Small and

Medium Enterprise (MSME). A study has identified more than 50 definitions

in 75 countries (Prasad C S). Dr. Vasanth Desai (2004) had reported that the

definition of SMEs is based on employment, gross income / sales, investment,

shareholder fund etc and it varies from country to country. Within the same

country, different definitions of MSME may prevalent for different purposes.

Such variations make inter-country comparison very difficult, even when data

are available. (Prasad C.S. 2004)

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In India the Small Scale Industry (SSI) owes its definition to Industries

(Development and Regulation) Act 1951. Prior to August 2006 an SSI, in

India, was defined as an industrial undertaking in which the investment in

productive plant and machinery, whether held on ownership terms or on lease

basis or by hire-purchases, does not exceed Rs.1crore. The Government of

India introduced Micro, Small and Medium Enterprises Development

(MSMED) Act in August 2006. It provides the first legal framework for the

concept of Enterprises (comprising both manufacturing and service) and

integrating three tiers of these enterprises namely Micro, Small and Medium-

sized. The definition given by the Act is as follows.

TABLE 1.1 MICRO, SMALL AND MEDIUM ENTERPRISES UNDER

SERVICES SECTOR AND MANUFACTURING SECTOR

Particulars Services sector

(Max Investments in

Equipments)

(Rs in lakhs) **

Manufacturing sector

(Max Investments in

Plant & Machinery )

( Rs in lakhs) **Micro enterprises 10 25

Small enterprises 200 500

Medium

enterprises

500 1000

Source: MSME Development Act 2006.

** As per the Government of India MSME Act, investment made by an

enterprise in fixed assets is reckoned for determining whether the enterprise

falls under micro or small or medium. In respect of services industry,

investment made in equipments is the criteria and in respect of manufacturing

industry, the investment in plant & machinery is the criteria.

The growth, development and futuristic prospects of MSMEs depend

upon the continuous realization of receivables and business performance,

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consisting of total income, net profit and investments in fixed assets of

MSMEs. It has been generally observed by customers of MSMEs that

production and operational issues have wider ramifications in the form of

marketing, quality and finance. This observation is reinforced by inability to

invest in high technology and being labour intensive. However the strength of

MSMEs lies in unique combination of low technology and appropriate labour

or appropriate technology and appropriate labour. The sickness of MSMEs is

not confined to a particular temporal segment. In the sense sickness may occur

for an MSME at any stage of its growth. Due to low bargaining power of

MSMEs, supplier has a strong impact on inability to enforce repayment dues.

This aspect was found to be one of the major reasons for sickness in different

research studies conducted in India. This inability makes the MSME units

dependent on financial institutions for working capital support. The severe

competition and technological revolutions always pose a threat to MSMEs in

their growth and prospects.

The receivables management for the purpose of this research and

generally accepted is as follows.

1.4 DEFINITION OF RECEIVABLES MANAGEMENT AND ITS

CURRENT STATUS IN MSMEs

Trade credit occurs when there is a delay between the delivery of goods

or the provisions of services by a supplier and their payment. For the seller this

represents an investment in account receivable, while for the buyer it is a

source of financing that is classified under current liabilities on the balance

sheet. The literature offers various theories to explain the use of trade credit

based on the advantages for suppliers and for customers from the operational,

commercial and financial perspective (Pedro Juan Garcia-2010)

Trade credit enables firms to create operating efficiencies and cost

improvements by separating the exchange of goods and their payment. This

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supply of goods and services. The ability to extract advance for supply

depend on different factors such as uniqueness of product or service, low level

of competition, low pricing and proximity of MSME; the listed factors are

only indicative and not exhaustive.

The credit period and acceptance of advance have the same analogy on

the receivables effects of MSMEs. They extend credit period from less than 60

days to above 120 days based on the regular orders and smooth relationship in

business terms. The credit limits and its extension are its discrimination directly

affecting the relationship between MSMEs and the suppliers. It is also

important to note that credit limit and acceptance of advance are having

multiple effects over the receivables management variables. The stage wise

approach is found necessary for the MSMEs to avoid credit delay and

interrupts in receivables management.

The multi-stage receivables realization process may be discerned as

follows:

1) Receipt of advances before supply of goods,

2) Receipt of advances at the time of supplying the goods,

3) Whether credit period extended or not, if extended the duration of

such period,

4) Realization of debts within the stipulated credit period or not, if

extended the duration of such extension

5) Debts doubtful of recovery

The ideal instance is to obtain 100% advance before supply. However

this is rarely realized. The other extreme is to give the supply and wait for

payment to the extent of 120 days or in certain circumstances up to 180 days.

Between these extremes, these stage processes of receivables management are

discerned.

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Since the opportunity cost often changes, the MSMEs are baffled in

their progress and obtain the debacles of financial aspects. Amid these

changing scenarios, it is the duty of MSMEs to fix the credit period, short term

or long term based on the customers convenience as well as convenience to

the effective business cycle. During the discussions with Bank Managers of

specialized industrial estate branches of Nationalized Bank, it was gathered that

the credit period of MSMEs has been extended for the period, ranging from 30

days to 120 days. At the same time, they must be well equipped to meet the

challenges of violation of credit periods. The credit period and its fluctuations

depend upon the number of customers they deal.

The domestic sales, export sales and job work are predominant in

segmenting the influence of receivables management on MSMEs. It has deep

correlation with total revenue generated and net profit derived from the various

sources of customers.

These definitions of MSMEs and receivables management are guiding

this research in formulating a structure.

1.5 BACKGROUND OF THE STUDY

In order to obtain greater insight of the Micro and Small Enterprises

(MSMEs), Global Impact of Entrepreneurship, Global Experience of Small

Enterprises and Performance and Growth of MSMEs in India and Tamil Nadu

are discussed.

1.5.1 Global Impact of EntrepreneurshipThe Global Entrepreneurship Monitor (2007) observed very high

incidence of entrepreneurship throughout the world, particularly in Asia, with

Thailand and India leading the way.

Entrepreneurial Activity (EA) was measured as a percentage of

countrys GDP by Global Entrepreneurship Monitor (GEM). During 2001-

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2009, EA is reported as: World average 10.6%, Asia average 11.2 % and

India average 12.1%. The GEM report covered 21 countries that were divided

into three levels of entrepreneurship. Highest level of entrepreneurial activity

was found in five countries namely, Australia, Canada, Korea, Norway and

United States. Average levels of entrepreneurial activity were found in

Argentina, Belgium, Brazil, Denmark, Finland, Germany, India, Israel, Ireland,

Italy, Singapore, Spain, Sweden and United Kingdom.

(www.gemconsortium.org/2000).

1.5.2 Global Experience of Small Enterprises

The experience of Small Enterprises development during the last two

decades all over the world has proved it so. MSMEs are a key component in

economic life, because of their number, variety and also of their involvement

in every aspect of the economy. Various aspects of the economy include

generation of large scale employment at lower capital cost, contribution to

dispersed regional development, generation of exportable surplus, the

complementary role they play in support of the large sector and on the ground

of innovativeness, flexibility, adaptability, labour intensity, exploitation of

local factors of production, small requirement of inventory, satisfying local

requirement, cost effectiveness and development of entrepreneurship. Small

enterprises exist in the form of factories, workshops, trading and service

organizations.

The fruits of industrial development are noticed in terms of increase in

per capita income, higher standard of living, increased individual saving, and

revenue to the Government in the form of income tax, sales tax, import duties,

and balanced regional development. Many a time, MSMEs have forced the

reallocation of resources away from existing users to new and more productive

users. Many innovations have transformed the society and altered the pattern of

living. Many services have been introduced to alter or create new service

industries.

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1.5.3 Performance and Growth of MSMEs in India

The role of micro, small and medium enterprises (MSMEs) in the

economic and social development of India is well established. This sectorcontributes 8 per cent of the countrys GDP, 45 per cent of the manufactured

output and 40 per cent of its exports. The labour to capital ratio in MSMEs and

the overall growth in the MSME sector is much higher than in the large

industries. Thus, MSMEs are important for Indias objectives of growth with

equity and inclusion.

The Small Scale Industrial (SSI) sector is one of the most vital sectors ofthe Indian Economy in terms of employment generation, the strong

entrepreneurial base it helps to create and its share in production. Effective

policy formulation and implementation pertaining to the promotion and

development of this sector, requires a sound database.

The First Census was conducted in 1973-74 in respect of 2.58 lakh SSI

units registered up to 30-11-1973. The reference year for this Census was

calendar year 1972 in respect of units not maintaining accounts and the actual

accounting year closing between 1-4-1972 and 31-3-1973 for those units

maintaining accounts. Some information was also collected for 1970 and 1971.

During that Census, only 1.4 lakh units were found working.

The Second Census was conducted during 1990-91 in respect of 9.87

lakh SSI units registered up to 31-3-1988. The reference year for this Census

was financial year 1987-88. During this Census, only 5.82 lakh units were

found working.

The Third All India Census was conducted during 2002-03 for the

possible proximate reference year, i.e., 2001-02. There were 9.01 lakh numbers

in the registered sector and 35.44 lakh numbers in the unregistered sector.

Findings of the Third All-India Census included the following :

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i. Manufacturing, assembling, processing accounted for 63.45% in

the registered sector (8.72 lakhs) and 36.12% in the unregistered

sector (33.03 lakhs).

ii. Services accounted for 34.45% in the registered sector (4.74

lakhs) and 45.38% in the unregistered sector (41.50 lakhs).

iii. Proprietary type of organisation account for 88.85% in the

registered sector (12.22 lakhs) and 96.90% in the unregistered

sector (88.62 lakhs).

iv. The reasons for sickness / incipient sickness as per the report

were lack of demand, shortage of working capital, non-

availability of raw material, power shortage, labour problems,

marketing problem, equipment problems and management

problems.

As per the Quick results of Fourth All India Census of MSME 2006-

2007, there are 261 lakhs number of units in India, with reference year 2006 -

2007. Out of this registered units are only 15.52 lakhs. Traditionally there had

been a phenomenon of a group of units manufacturing same or similar product

in close geographical proximity to each other. Such groups were called

clusters. They were 1223 clusters covering 321 products in the registered SSI

sector.

These clusters had a 32.68% share in total number of registered units,

18.95% in total market value of Fixed Assets, 16.99% in total Gross Output

and 27.66% in total value of employment of manufacturing activity of the

registered SSI sector.

According to the Handbook of Statistics on the Indian Economy,

published by the Reserve Bank of India (2008-2009), there were 128.40 lakhs

of MSME units in India as on fiscal year 2006-2007. During the fiscal year

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2006-2007, these units generated employment potential of 312.50 lakhs and

achieved production of value Rs 585, 11,200 lakhs.

The MSME sector in India is highly heterogeneous in terms of the sizeof the enterprises, variety of products and services produced and the levels of

technology employed. While one end of the MSME spectrum contains highly

innovative and high growth enterprises, more than 94 per cent of MSMEs are

unregistered, with a large number established in the informal or unorganized

sector.

The special attention received by Small Scale Industry (SSI) sector hascontributed to its rapid growth. The development of SSI sector is entirely

dependent on the initiatives taken by entrepreneurs.

1.5.4 Performance and Growth of MSMEs in Tamilnadu

Tamilnadu is one of the well developed states in terms of industrial

development. In the post-liberalization era, Tamilnadu has emerged as one of

the front-runners by attracting a large number of investment proposals. MSME

units in Tamilnadu has been contributing to the economy of Tamilnadu. During

the 10 years period commencing from 1991-1992 till 2000-01,

i. there was an increasing in number of registered SSI Units from

1.38 lakhs (1991-1992) to 3.87 lakhs (2000-01).

ii. there was an increasing in investments in SSI Units from

Rs.321,020 lakhs (1991-1992) to Rs.1156,722 lakhs (2000-01).

iii. there was an increasing in the production of SSI Units fromRs.1674,700 lakhs (1991-1992) to Rs.7826,166 lakhs (2000-01)

iv. there was an increasing in the employment generated by SSIUnits from 11.76 lakhs (1991-1992) to 29.02 lakhs (2000-01).

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As per the Quick Results of Fourth All India Census of MSMEs with

reference year 2006 - 2007, they were 131 clusters in the State of Tamil Nadu.

They were 34741 units in this clusters with fixed assets investment of

Rs.239844 lakhs and their manufactured gross output was generated

employment of Rs.524417 lakhs.

Hosiery and Readymade garments activity (89,464 units) tops the list of

SSI accounting for 22.2% of the total number of units. Other manufacturing

activity (58,777 units accounting for 15%) and Food products (37,152 units,

accounting for 10%) followed the Hoisery and Readymade garments.

The State Government of Tamilnadu introduced a separate policy during

February 2008 to aid the rapid growth of MSMEs. During 2008-09, about 11

new industrial estates were established in the state. Further, Rs 30 crore would

be disbursed as subsidy. 20 per cent land would be allotted to MSMEs in the

schemes undertaken by State Industrial Promotion Corporation of Tamil Nadu

Ltd with rebate of 50 per cent on stamp duty and registration.

1.5.5 Current Scenario of MSMEs in Tamilnadu

As per the Policy Note for 2011-2012 of Government of Tamilnadu, the

state accounts for the largest number of (15.07%) Micro, Small and Medium

Enterprises (MSMEs) in the country with 6.89 lakhs registered MSMEs,

producing over 8,000 varieties of product for a total investment of more than

Rs.32,008/- crores.

Tamilnadu state has obtained approval for maximum number of

Common Facility Centre proposals from Government of India during the XI

Plan period for the following clusters.

TABLE: 1.2 DETAILS OF CLUSTERS PROPOSALS IN TAMIL NADU

SANCTIONED BY GOVERNMENT OF INDIA

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Sl.No. Cluster NameNo. of

Enterprises

Employment

( numbers)

1. Wet Grinder, Coimbatore 700 20000

2. Safety Matches, Gudiyatham 525 1000

3. Safety Matches, Virudhunagar 825 1500

4. Safety Matches, Sattur 1225 1500

5. Safety Matches, Srivilliputtur 525 750

6. Safety Matches, Kazhugumalai 525 1225

7. Safety Matches, Kovilpatti 1025 1100

8. Sago & Starch, Salem 550 25000

9. Brick Tirunelveli 50 150

10. Ceramic, Virudhachalam 300 1200

11. Coir, Sivaganga 7219 7500

12. Engineering, Ranipet 200 26000

13. Printing, Sivakasi 600 12000

14. Rice Mill, Keelapavoor 163 3720

15. Auto Components Hosur 1500 18000

Source : Government of Tamilnadu Policy Note 2011-12

Tamilnadu is a leader in Auto parts and components, Readymade

Garments and Leather and leather goods. In order to give special drive the

following 13 Industries have been identified as thrust sector:

1. Electrical and electronic Industry

2. Leather and leather goods

3. Auto parts and components

4. Drugs and phamaceuticals

5. Solar energy equipment

6. Gold and Diamond Jewellery for exports

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7. Pollution Control equipments.

8. Sports Goods and Accessories

9. Cost effective building material

10. Readymade Garments

11. Food processing

12. Plastic and

13. Rubber

Tamilnadu Government has initiated action to establish Flatted Factory

complex in 5 locations (Guindy in Chennai District, Perungudi in

Kancheepuram District, Ambattur in Thiruvallur District, Madhavaram in

Thiruvallur District and Thirumazhisai in Thiruvallur District) exclusively for

Micro enterprises.

1.6 NEED FOR THE STUDY

The performance of SSI was focused mainly at national level, while

issues like size, growth, structure and productivity were left to the States,

which paid inadequate attention to these issues.

Liberalization has exposed Indian MSME to unequal competition with

its counterparts in the industrially advanced countries. It has been recorded in a

span of five years after 1991, SME growth was blurred due to heavy

competition in the global market. With the removal of Quantitative Restrictions

(QRs) on import of 715 items with effect from 1 4 2001 and those done earlier,

a large number of items are now under Open General License (OGL).

The history of funding of the MSME for the last 50 years reveals that

the sector has been mostly relying on self finance and debt finance through

banking system. Jain S K (2001) observed that financial agencies have

developed a preference for investing their funds in the medium, large scale and

the bigger ones among the small scale units.

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Lack of demand and shortage of working capital are the main reasons

for acute and incipient sickness in both the registered and unregistered SSI

sectors.

Task force of Prime Minister on MSME (2010) reported that shortage

of capital, particularly working capital, is the major problem faced by the

enterprises in the unorganized sector, which constitutes 94 % of MSMEs in

India. According to the Task Force on MSMEs, workable legal options should

be developed for the securitization of trade credit receivables and for the

promotion offactoring services

During the discussions with bank managers, it was ascertained that

MSMEs with export dealings normally, found difficulty in realization of the

dues. The difficulty in realization of receivables within the due dates will result

in reducing the eligible current assets for bank finance.

While the MSMED Act, 2006 provides for more rigorous provisions to

counter the problems of delayed payments to the MSMEs, the sense of

insecurity of contract prevents them from taking legal action for recovery of

dues.

The research problem encountered in the present research depends upon

two important aspects of receivables management. One is how the receivables

are affecting the business flow and creates sickness in the MSMEs. The other

aspect completely enumerates various factors influencing MSMEs receivables

management. These two collusion and cooperation of receivables management

effects preserve the growth and prospects of MSMEs

It is found that both National and International literature failed to

acknowledge the effects of receivables management in increasing the business

potentiality of MSMEs. Nevertheless, the literature uniquely emphasized the

dimensions of the problems on the basis of marketing, financial, human

resources, operations. The conglomerated view of receivables from the

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customers is also playing the vital role in determining the risk involved in the

business. There is scope for and urgent need to undertake a complete research

on receivables management of MSMEs in Tamilnadu.

1.7 RESEARCH PROBLEM

The MSMEs are not set for smooth business ventures and continuous

profit. They are forced to face problems of finance, marketing, human

resources, power problems as well as issues of government. Their prospects are

also viable within the defined framework of direction of government.

Considering the need for managing receivables, it is decided to find out

how many MSMEs are able to adhere to efficient receivables management

practices. Further the type of problems that could be caused by this inefficient

management of receivables in MSMEs, need to be investigated so that

appropriate corrective and preventive measures could be designed and

commissioned in these MSMEs. While the entrepreneurial ability in the

entrepreneur may motivate an individual to start a business, whether such

entrepreneurs have the capability to manage the receivables effectively has to

be examined.

It is decided to determine the growth of MSMEs in India during the 10

years period from 1999-2000 to 2008-2009 in terms of number of MSME

units, employment potential in MSMEs and production of MSME units.

It is decided to assess the current status of MSMEs which were started in

the past, for their receivables management. The research also endevours to

develop an empirical model to establish the influence of receivables on the

problems of MSMEs for better receivables management. Every MSME can

evaluate itself with reference to the model constituents and determine the

direction to strengthen the management of receivables. Rather this model could

become a tool for raising the alarm, when the management of receivables is

exceeding limits.

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The study is intended to explore receivables management of MSMEs in

manufacturing and services sector in the geographical base of Tamilnadu. The

study also categorized the effects of receivables management of MSMEs in

domestic sales, export sales and job work receipts. This coverage plans to

ascertain the dimensionality and contribution of receivables to the profits.

1.8 CHAPTERISATION SCHEME

The first chapter of this study explains the problems and prospects of

MSMEs at all India level and Tamilnadu level in a lucid and concise manner.

This chapter also covers the definitions of Entrepreneurship, Micro, Small andMedium Enterprises (MSME) and Receivables. Besides these highlights,

Chapter I explained the need for the study, exact research problem encountered

in this research.

The second chapter thoroughly analyzes both national and international

literature pertaining to entrepreneurial characteristics of MSMEs, receivables

management of MSMEs, problems faced by MSME entrepreneurs and their

prudential existence in the form of prospects. The foreign studies and their

methodology are thoroughly analyzed in this chapter to downsize the research

gaps those can be ventured innovatively by the researcher.

Chapter III of this study covers detailed methodology followed to reach

the culmination of research. It explains the rationale of study, objectives and

hypothesis of the study, development of research instrument, validity of the

receivables management variables, pilot study, sample design and main study.

Chapter IV of this study is dedicated to present an anatomical analysis

using the statistical tools viz parametric tests, non-parametric tests. Percentage

analyses, Factor analysis, non-parametric Chi-square analysis, Kearl Pearson

coefficient of Correlation, and Discriminant analysis are subsequently used to

analyse both primary and secondary data. An empirical model is also derived to

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establish the factors influencing problems and receivables management

variables of MSMEs at Tamilnadu level.

Chapter V summarizes and gives a clear picture of the present research

work. The major findings are profoundly stated and the suggestions to the

MSMEs and the governments are suitably drawn out of the findings. An

appropriate conclusion is traced out conspicuously to culminate the research

and scope for further study and their respective sections are also given.

1.9 OBJECTIVES OF THE STUDY

This research is undertaken to determine the variables of Receivablesmanagement of MSMEs and to find hidden association of receivables with

other variables in managing the business. The specific objectives of the study

are:

1) To analyze the growth (in terms of number of Units, Employment) and

its and performance (Production) of MSMEs in India and Tamilnadu,

during the years 1999-2009

2) To find the association of Receivables Management variables and Sales

Revenue / Total Income (Domestic sales, Export sales and Job work

receipts) achieved by MSMEs in Tamilnadu, during the fiscal year 2008

- 2009.

3) To find the association of Receivables Management variables and Net

Profit earned by MSMEs in Tamilnadu, during the fiscal year 2008-

2009.

4) To find the influence of Problems normally faced by MSMEs in

Tamilnadu, on their Receivables Management variables, during the

fiscal year 2008 2009.

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5) To find the association of Personal characteristics of entrepreneurs and

Business characteristics of MSMEs and the Receivables Management

variables.

6) To find the association of Investments in Plant & Machinery

(Manufacturing sector) / Equipments (Services sector) of MSMEs and

their Receivables Management variables

7) To construct an Empirical Model for Receivables Management strategy

of MSMEs in Tamilnadu

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CHAPTER 2

REVIEW OF LITER TURE

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CHAPTER 2

REVIEW OF LITERATURE

CHAPTER OVERVIEW

The second chapter thoroughly analyzes both National and International

literature pertaining to entrepreneurial characteristics of MSMEs, receivables

management of MSMEs, problems faced by MSME entrepreneurs and their

prudential existence in the form of prospects. The foreign studies and their

methodology are thoroughly analyzed in this chapter to downsize the research

gaps those can be ventured innovatively by the researcher. The following areas

are covered:

role of MSMEs in overall economic development;

MSMEs in utilization of resources;

role of MSMEs in social development;

economic and other incentives for MSMEs by State - current status

This chapter also covers the following;

drivers of MSMEs;

financial management and its role in success of MSMEs;

receivables management from the literature and

researchgaps

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2.1 ROLE OF MSMEs IN OVERALL ECONOMIC DEVELOPMENT

The Industrial Policy Resolutions of 1948 and 1956 highlighted the

importance of small scale sector in the generation of additional employmentopportunities with lower capital investment.

Raj (1956) revealed that the value added per employee in the large

sector is no doubt around double that in the small sector. It has been around six

to seven times higher than the organized sector. Staly (1962) emphasized that

the economic development process implies a shift in the manpower from

primary sector to some other sectors of the economy.

According to Habib (1973) it is only small-scale sector through which,

economic prosperity may reach remote sections of the society. He concluded

that small-scale industries play an important role in the economic development

by providing numerous chances of income and improving the standard of living

of the masses. Singh S N (1990) found that traditional industries such as the

leather group alone recorded a significant rise, in terms of employment and

production.

According to the study by Rana Bijoy Deb (2004), in developed nations

also, the employment potential of small-scale industrial sector has gained

universal recognition. The bulk (66%) of new jobs created in the United States

during the last two decades was in the small-scale enterprises (SSEs). The

small-scale sector in Great Britain creates more than 2.5 lakhs jobs every year.

In Germany, Spain and the Netherlands the SSE sector is equally important.

It is important to mention that although there is no association between

the capital intensity and size of units, the small enterprises are generally more

labour intensive compared to large firms. One of the reasons for higher

intensity of labour in small enterprises is that most of the small entrepreneurs

set up units not to maximize return on investment but to create job

opportunities for themselves or their family member who otherwise would

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remain unemployed due to lack of education. If the capital investment

generates employment not only for the entrepreneur himself but also for one or

more of his underemployed relatives, the investment is justified.

Patnaik (1990) revealed that the small-scale industries sector occupies a

strategic position of unique importance in the Indian economy. The superiority

of small scale industrial sector in generation of employment is empirically

proved by the Annual Survey of Industries 1979-80 in India, which observed

that employment of one worker in large scale sector calls for more than thirteen

times investment in fixed capital as compared to that of small scale sector.

MSMEs role in utilization of resources is discussed below.

2.2 MSMEs IN UTILISATION OF RESOURCES

Stephanak and Prien (1950) depicted to raise capital for many small-

scale units than for a few large ones; because, the small scale industries may

involve those, who have little savings and may satisfy their instinct of

creativity. Lewis W., Arhur., (1954) concluded that development works might

be done by human labour with very little capital. Surplus labour may be used

to make even capital goods without using any scarce factor.

According to Dhar and Lydall (1961) the small scale sector, with its

labour intensive technique would not only preserve scarce capital resources for

being utilized more rewardingly in the sector of basic industries but also

channels the purposeful productive use of the abundant labour resources of the

region.

Jha L K(1980) in a country where capital is scarce and manpower is

going to waste, the plea or relying much more on labour-intensive techniques

of production than one those which necessitate heavy capital outlays is entirely

sound. He argued that proper appreciation of the role of the technology for

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improving the productivity of labour, which he considered to be as important as

the provision of new jobs.

Goldar (1985), in his study, estimates a frontier production function(of Cobb-Douglas form) using firm level data from CSME for the small scale

washing soap industry to obtain measures of technical efficiency. Measures of

partial and total factor productivity and an analysis of technical efficiency

reveal that tiny units are inefficient compared to relatively bigger units within

the small scale washing soap industry. The positive relationship between unit

size and efficiency, and high capital intensity of relatively larger units suggest a

tradeoff between output gain and employment loss.

Little et al (1987) discover very little regularity in the patterns of partial

and total factor productivity and in their relationship with firm size in five

SMEs when size is measured either by number of workers employed, or by the

value of fixed assets. Within each of the five industries, variation in technical

inefficiency (measured by the difference between actual and predicted output)

is substantial and there is no systematic relationship between employment size

and technical efficiency. Only in Machine Tools industry, technical efficiency

is correlated with firm size.

Goldar (1988) uses a total factor productivity index based on the Cobb-

Douglas production function, to assess relative efficiency of industrial units.

The data for this study are drawn from the statistical reports of a sample survey

of SME units undertaken by Reserve Bank of India (RBI), with 1976-77 as the

reference year. Data on large-scale industries are drawn from census sector

results of the ASI for 1976-77. It is observed that in almost all industries

labour productivity in small-scale units is less than that in large-scale units. On

the other hand, capital productivity in small units is higher in 22 industries

when gross invested capital is used and in fifteen industries when net invested

capital is used as a measure of capital input.

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Ramaswamy (1990) estimates partial productivity of labour and of

capital, and relative efficiency using unit level data for four industries: Motor

Vehicle Parts, Agricultural Machinery and Parts, Machine Tools and Parts, and

Plastic Products. He uses the same relative efficiency index as Goldar (1985)

does. His analysis indicates that capital intensity and partial productivity are

sensitive to alternative measures of firm size. His analysis suggests existence

of increasing returns to scale and thus rejects the assumption of constant return

to scale. His result is consistent with those reports by Little et al (1987).

Using firm level data drawn from CSME, Bhavani (1991) makes an

attempt to measure technical efficiency of metal products industries using a

transom production frontier with three inputs, viz. capital, labor and materials.

It is observed that for all the four metal products industries and five size groups

within each one of them, the average level of efficiency is quite high and that

efficiency measures increase with the increase in size upto a size class and then

decreases.

The research conducted by Goldar 1985,1988; Ramaswamy1990; and

Bhavani 1991 provides inputs with respect to three important indicators for

MSMEs, macro variables, technical efficiency and labour employed; capital

productivity. The relationship of capital, labour and technical efficiency could

not be discerned. While MSMEs are assumed to be low capital intensive, their

technical efficiency may not be comparable to the large scale units. However

generalization across different industrial sectors may not be possible.

Furthermore issues relating to receivables management appear to have

commonality, according to Ponniah V. M. (2007).

Goyal (1991) revealed that there have been a variety of new trends in

Indian Corporate Sector, in general, and the small-scale sector in particular.

Tinbergen J (1974) felt that in a country like India the strategy of

industrialization should lay emphasis on labour-intensive industries, which will

create maximum employment and will also maximize income.

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Sarangadharan M A (1994) indicated that competition from large-scale

firms and similar type of small-scale units in the local area ranks the most

important reasons for underutilization of capacity of small-scale industries of

Trivandrum District. Lack of demand for the product and shortage of finance

can also be considered as crucial problems faced by the small-scale industries

in the district.

Donde W B (2001) reported that the Small industry plays a key role in

the generation of employment. Case histories of medium and large sized firms

show that their expansion has brought about a sizable growth in employment.

This strengthens the argument that the growth of small industry would both

improve the earning opportunities for both the industrial workers as well as

entrepreneurs and also promote regional development. These arguments have

largely been accepted in most of the developing countries and the respective

governments have initiated special programmes to support the SME.

In India the emphasis on small industries emanates from their role in

industrial dispersal and adoption of labour intensive technology, which has

been assumed to partly compensate heavy investment on large size

establishments.

Melissa S Cardon and Christopher E Stevens, (2004) stated that while

much of our knowledge concerning traditional HR topics (e.g., recruiting,

compensation, or performance management) in large firms might also apply in

small or emerging organizations, evidence suggested that new ventures were

different and that management of people within them may not clearly map to

management within larger, more established organizations. Their review

suggested that we lacked much of the theory and data necessary to understand

how small and emerging firms train their employees, manage their

performance, promote or handle organizational change, or respond to potential

labour relations and union organization issues.

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Susam Mayson and Rowena Barrett, (2006), looked at the science and

practice of human resource management in small firms. While there is

growing evidence that the practice of human resource management in small

firms is characterized by informality, there is less evidence about the science,

or explaining why this is the case. The researchers looked to writing on

strategic human resource management, which has at its heart the resource based

view of the firm.

According to Sarah Jack, Jefff Hyman and Fraser Osborne., (2006),

effective management of people was increasingly recognized in the literature as

a vital contributor to organizational performance and indeed survival.

Nevertheless, studies of the dynamics of human resource management in small

entrepreneurial ventures were relatively sparse. In their paper, the authors

demonstrated that a culture of owner-influenced individualism and informality

pervaded these ventures, affecting prime human resource issues such as

performance related practices, training and development, worklife balance and

other critical dimensions of employee welfare.

Sandesera J C (1980) emphasized that there was no relationship between

age of entrepreneur and the utilization of incentives scheme. George J

Avlonitis and Helen E Salavou (2007), in their research paper focused on

entrepreneurial orientation (EO) profiles of SMEs to suggest variations in

product innovativeness dimensions of different performance potential. Based

upon a sample of 149 manufacturing companies, the study identified two

opposite groups with the help of a cluster analysis, namely the active

entrepreneurs and the passive entrepreneurs. Taking a step further, subsequent

analysis of variance demonstrated that these groups consist of product

innovators, who take equal care of reducing customers' burden (e.g. time,

effort, purchase risk) in adopting new products.

MSME not only contribute to economic development but also contribute

to social development. From the literature, such contributions towards social

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development are found many, out of which those related to the research

problem are listed below.

2.3 ROLE OF MSMEs IN SOCIAL DEVELOPMENT

The small industries have characteristics of low capital intensity, high

employment potential and use of indigenous technology having feasibility

particularly in the rural areas, where there are limited infrastructure facilities.

United Nation Report 1951also emphasized on the use of labour intensive

technology in the developing countries. The report noted, labour saving

technology is not great value to an economy which is over- populated.

It is gathered from News papers that small-scale industrial units provide

employment opportunities for a large number of people and tap sources of

capital to contribute to the countrys capital formation and industrial growth.

Papola T S (1980) emphasized that SSI using available traditional skills and

requiring little capital, are providing suitable employment to the rural

households, without involving any migration.

According to Subbaraman K R (1991)job generating capacity of village

industries cannot be over emphasized. Unemployment breed poverty and it can

be eradicated by spreading the network of village industries in every nook and

corner of the country.

According to Balakrishnan G (1974), during the second Five Year Plan,

significance of the small-scale sector was emphasized in order to ensure that

consumer goods sector does not draw up on scarce resources of the society,

which were needed for fast expansion of the heavy industry sectors.

Staley and Moore (1965)

had recommended the implementation of

dispersal programmes in phased manner which involve: (a) selection of

intermediate size cities and town to be developed into industrial growth points,

(b) integrated development of small, medium and large scale industries at these

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growth points and (c) promoting linkages from these growth points downward

to the villages by sub-contracting certain work from factories in the towns to

workshops and households in the villages while the upward linkages with the

major cities would be in the form of supply of larger amounts and new variety

of farm products to the growing urban areas. They suggested that the growth

of industry would increase the demand for agricultural and manufactured

products and hence diversify the commercial activities in the region.

According to Vepa (1971), small-scale industries in India are distinct

from traditional and village industries. Small-scale industries are generally

modern small firms employing modern techniques to produce modern products.

According to Mayur K (1971),due to vast changes in the political sphere and

rapid industrial growth, there were the following three major efforts in the

Indian scene (i) few entrepreneurs belonging to particularly social strata

dominated the industrial centers, (ii) industrial growth was restricted in a few

industrial centers, and (iii) only the industry which met the result of war grew

fast and in the case of others, the growth rate was restricted.

Battacharya S.K. and Akburi M M P (1975) independently observed

that National Bank for Agricultural and Rural Development (NABARD) has

been providing assistance not only for the development of agriculture but also

for the development of rural industry. The bank has, of late, reviewed the

rationale for the development of rural industry. Its coverage and scope

included planned strategies, priorities and thrust areas for development.

Rele S K (1980) revealed that small-scale industries are not only a better

job creator but they also promote technical innovation. Dorda and Jawaharlal

(1993) stated that core areas were targeted for special support in the new

industrial policy.

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Tiwari and Sarita (1992)revealed that industrialization is a highly

complex and important phenomenon. The concept has helped in making

choice of the important factors that determine the process. Pace and pattern of

industrialization in evaluating various measures can be made use for assessing

and analyzing inter regional pattern of industrialization.

Kulkarni B K (1994) raised various issues such as ownership and

control, subsidiary, control management and brand name etc., relating to small-

scale industries.

According to the study of Ms.Kiran Varma (2004), when structuralchanges are taking place at a rapid pace, the role of small scale industries

(SMEs) have become more and more vital in a countries development. To face

the era of change and challenge successfully, a need for change in strategy of

SMEs development by evolving variety of linkages between economic cost and

social benefits should be built. This is essential to ensure sustained growth of

this sector and concluded that the long journey of the SMEs during the last 50

years could be classified in to three distinct phases, 1947-1977 (period of

conceptualization), 1977-1990 (period of consolidation) 1991 onwards (period

of confrontation). The last 50 years have seen SME sector emerging as a

vibrant and dynamic sector of Indian economy. It has a vast potential yet to be

tapped. Today, employment in agriculture is declining and large scale

industries are showing stagnation, the only ray of hope is small scale sector.

Rajendra Prasad T (2004) studied the working of the small scale

industries in various divisions of Karnataka with respect to parameters like

number of units working, amount of investment and employment generation,

growth, quantum of capital invested and employment generation and industrial

concentration in each division. He concluded that small enterprises occupy a

crucial position in the Indian economy not only because they contribute to

GDP, income, exports and employment but they also imply self group

initiative, self-employment and small livelihoods and small business. And it is

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important to create and ensure space and more opportunities for such a sector

because in todays world, creating and ensuring space for small enterprises is

not that easy, but needs to be done on a war footing given the vulnerability of

small enterprises and economic pressures and uncertainties under which they

are performing.

According Yulo Nikaiho (2004), the focus of policy-making for SME

was on protection. With the onset of liberalization in 1991, SME was

recognized as a growth engine of the economy and the government was urged

to make the attendant policy changes. Section III analysed the impact of firm

size and individual agglomeration on the measured technical efficiency in order

to arrive at policy implications for SME sector and examined the technical

efficiency of two-digit industry-groups belonging to SME and the relationship

between the measured technical efficiency and firm size and location.

According to the author Sukanta Kumar Sahoo (2004) small scale

industries has acquired pre-eminent position in the economic structure of the

country and helps the economic development and removal of disparities. It is

the symbol of our economy and reflects production by masses rather than mass

production. The SME sector has proved its mettle even in the changed

liberalized economic environment of the country. The gradual and impending

applications of WTO Regulations and removal of Quantitative Restrictions

have added to its woes. With decline in agricultural employment and virtual

stagnation in the organized manufacturing sector, employment in this sector

has emerged as the only ray of hope and concluded that the small scale sector is

the symbol of that facet of our economy which reflects production by masses

rather than mass production.

According to Prasad C S (2004), the objective of the policy-makers as

well as small industry associations should be to enable the sector to be vibrant

and competitive without a considerable reduction in its size and thereby enable

it to make a sustainable contribution to national income, output and exports.

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Small industries cannot remain small forever. In the long run, the

Mahalanobis P C (1963) strategy visualized a process of transformation of

small and household enterprises into high efficiency and low cost mechanized

units of production.

MSMEs are able to contribute economic development and social

development, as elaborated above in various part of the world. However these

contributions are possible, mainly due to concessions being provided by the

State. Various concessions being extended to MSMEs are briefed as under.

2.4 ECONOMIC AND OTHER INCENTIVES FOR MSMEs BYSTATE-CURRENT STATUS

Shirkov G K (1973) emphasized the need for the development of small

scale, village and cottage industries, which was realized by the government

from the very beginning. Verma J D (1973) concluded that the origin of the

small industry movement in India was traced to the Industrial Policy resolution

of the Government.

Kaveri V S (1990) concluded that small industrial sector has acquired

greater importance in Indian economy. In term of employment generation, this

sector is next only to agriculture and accounts for about one fourth of the total

exports of the country. The importance of small industry in the Indian economy

was recognized at the beginning of the Plan period itself. Various policy

measures were taken over the years to promote employment and investment in

this sector. The various agencies set up by the government and the financial

institution have been rendering consultancy services mainly technical

consultancy to the small scale industry.

According to the authors, Raghurama A., Hala Naik N. (2004)

marketing problem is not an independent one, it is related issue and it is a

complex problem of marketing finance, marketing infrastructure like forward

and backward linkages, product decision, pricing decision, promotion policy,

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selection of distribution channel problems. But small scale industries are faced

with marketing problems. It requires a well-devised future marketing strategy

to overcome this problem. The problem of marketing of small scale units in

future can be tackled if all engaged in the process realize their responsibility

and put forth concerted efforts with commitment, dedication and real will to

solve the problem.

Bala Subrahmanya, M.H. (2004) studied the impact of globalization and

domestic economic reforms on small industry. Small industry has suffered in

terms of growth of units, employment, output and export. But the policy

changes have also thrown open new opportunities and markets for the sector.

To avail these, the focus must be turned to technology development and

strengthening of financial infrastructure in order to make Indian small industry

internationally competitive and contribute to national income and employment

and concluded that concerted efforts are needed from the government and small

industry to imbi