Why do some MSMEs make losses?

The author highlights the various reasons why some businesses run into losses

Whenever I see a MSME manufacturer making losses, I try to fathom the reasons for the same. A summary of such reasons is produced below. This is with a view that it may be a learning experience for other units. Such reasons almost equally apply to professional and/or non-manufacturing concerns.

Lack of Profit-oriented Approach
An entrepreneur should always look for profits. Find out different ways to earn maximum profit e.g. Reduce cost and increase income. Many Goans lack this killer instinct which the two most important business communities in India have. General laidback attitude and lack of focus of many Goans contributes to lack of aggressiveness. Merely running the business in a casual manner does not beget big profits.

Lack of Financial Knowledge/Acumen and Financial Discipline
Many have only an average knowledge of Profit & Loss A/c., Balance sheet, books of account, etc. One should learn constantly about gross margins, costing (Fixed & variable costs), overheads, ratio analysis, working capital cycle, etc. I always say that late Dhirubhai Ambani was not highly qualified, nor an engineer but he had a great sense of finance, profitability, economics of scale etc. Without financial knowledge, it is difficult to have financial success.

Lack of Periodic Evaluation
One should evaluate/review one’s business every month, and every quarter. This will reveal to him how the costs are moving, the margins, sales, etc. Also, this helps to take immediate corrective action. But sadly, I see many entrepreneurs are not inclined to evaluate the business, even annually.

Working Capital Mismanagement
In many cases I have seen that debtors (receivables) and stocks (inventories) are huge and consume bulk of the working capital funds and interest piles up. On the other hand the creditors, which should be high (free working capital funds) are a modest figure. Ingenious businessmen keep minimum stock and also try to recover rapidly from debtors. For this, availability of monthly figures becomes very important, particularly debtors/stocks figures: Working capital paucity results in low morale, poor quality of goods/services, since ‘cutting corners’ becomes routine.

Quality of Goods/Services
Quality is generally ‘average’ in loss making units. New investments in machinery, etc. is not forthcoming hence there is no improvement in quality. No ‘niche’ services are rendered. Speed of rendering services or delivering goods is average, with many faults/defects.

Uncompetitive Unit:
Foremost requirement of any private enterprise is that it should be competitive in terms of quality, price, terms and service. Loss making units are generally uncompetitive and tend to be on course for closing down in near future. Their customers are already on the lookout for another supplier.

Lack of Innovation
Today, technology changes rapidly. We now have the new iPhone of Apple, which is known as iPhone 13. This means that it is the 13th version of iPhone within about 10 years! Such innovation is lacking in a loss making unit. Losses dampen the enthusiasm for innovation. Funds to be allocated for innovation are lacking. Thus there are high chances of the unit becoming outdated. The world is constantly looking for cheaper products/raw materials with more and better features. Here the loss making units lose out.

Sluggish Marketing Efforts
Perhaps one of the most important functions of a business is good marketing. You may produce top goods but if they are not known to the markets (and also acceptable to the markets); all your effort can make little to no difference. A look at the TV advertisements will convince you that the top most companies stress on high class, and continuous marketing effort. In case of a loss making unit, there may not be many marketing executives, which further depletes their sale.

Customer Centric Approach:
Today one has to give to one’s customer what s/he wants, at the right time, terms, quality and price. Such is the competition. A happy customer is one’s best advertisement. The converse is also true – an unhappy customer can spread a ‘bad word’ about you.
A loss making unit is generally not customer centric hence even higher price realisation (better margins) becomes an issue.
Attitude Towards Business
A successful businessman means business. Hence he is tough – no compassion/pity whilst doing business, which broadly means ‘business minded.’ He is uncompromising, aggressive, confident, focused, and positive and always looks for more profit. On the other hand, a loss making entrepreneur is generally not business minded, not much focused, diffident, and lackadaisical by nature. If he changes his attitude, he can convert losses into profits!

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