This article was first published in the May 2012 Malaysia edition of Accounting and Business magazine.
The SME Masterplan, launched last year, is a reflection of the government’s seriousness in propelling the country’s small and medium-sized enterprise (SME) sector towards greater heights, and an acknowledgement of its importance to the nation’s economic wellbeing.
Last November, the National SME Development Council (NSDC) endorsed the second phase of the SME Masterplan for the period 2012–20. It included macro targets such as increasing the contribution of SMEs to gross domestic product (GDP) from 32% in 2010 to 41% in 2020, employment share from 59% to 62% and export share from 19% to 25%.
While the masterplan itself is a step in the right direction, commentators say that a plethora of challenges – spanning human capital issues, access to financing and enhanced competitiveness and innovation –remain a thorn in most SMEs’ side.
They agree that the ability to achieve the masterplan’s broad targets is dependent on the proper execution of its initiatives to prime the sector to achieve its full potential and consolidate its role as a major pillar of the economy.
Based on SME Corp’s bi-annual survey, CEO Datuk Hafsah Hashim says that in 2010 and 2011 the three key challenges affecting the SME sector were rising raw materials and input costs, rising overhead costs and cashflow constraints.
PwC Malaysia executive director Farah Rosley notes that SMEs often face difficulties in obtaining loans from financial institutions and the government due to the lack of knowledge on the channels available, or delays due to the application process. In addition, financial institutions’ interest charges are high, she says: ‘This poses a problem for SMEs both during the startup process and in their efforts to expand further as they may not be able to survive the critical period in the initial years.’
Likewise, Chen Voon Hann, managing partner of accountancy firm CAS & Associates, notes that fast-rising operational costs certainly affect competitiveness of SMEs as not all costs can be passed on to customers immediately.
In addition, Rosley observes that SMEs, due to their smaller size, limited training facilities, resources and managerial skills, face challenges in innovating and continuous improvement. She adds that SMEs may have problems employing professionals or a competent workforce due to cost.
On top of all these challenges, SMEs also need to commit towards enhanced communication with the market, product innovation and quality – elements that really deliver competitive advantage. However, this is easier said than done. ‘Entrepreneurs do not place much importance on research and development (R&D) as it requires a huge investment,’ Hafsah concedes. ‘The utilisation of technology, which is still relatively low [among SMEs], poses another problem in addition to constraints faced by the entrepreneurs to move forward.’
Innovate to survive
A lack of understanding on how to market products also results in SMEs losing out on business opportunities. In terms of being more innovative, Rosley believes that SMEs cannot slack in being relevant to the market or they will be defeated by bigger organisations which have the strength and financial muscle.
‘In a recent global survey conducted by PwC – the 15th Annual Global CEO Survey – many of the 1,258 CEOs from across the globe indicated that improving the effectiveness of innovation continues to be a major strategic priority,’ she says.
In this case, innovation does not just mean from the end product or services customers will buy. It can also mean taking costs out of processes or forming strategic alliances to collaborate, enhancing SME competitiveness, says Rosley.
While the SME Masterplan maps out the strategic direction for the development of the sector, the government has sought to give it a boost through various initiatives covering microenterprises, rural SMEs and women entrepreneurs, SME Corp’s Hafsah says. These include new financing schemes such as the RM2bn sharia-compliant SME Financing Fund; a RM100m SME revitalisation fund offering a second chance to genuine entrepreneurs to revive their businesses; and a RM10m emergency fund to help SMEs face natural disasters.
As an implementation agency, SME Corp has developed and implemented programmes aimed at assisting SMEs in gaining greater market access, improving their capacity and capability, encouraging better adoption and utilisation of technology, and enhancing their overall competitiveness,
Some of these include the Business Accelerator Programme (BAP) and Enhancement and Enrichment Programme (E2) which enable SMEs to be assisted through an integrated approach with guidance, including strengthening their core business, building capacity and capability, and facilitating access to financing.
All in the execution
Both Rosley and Chen agree that effective execution of the initiatives contained in the masterplan are what will determine whether the country achieves its SME sector goals by 2020.
‘With clear and proper implementation, the aspirations of the masterplan are achievable as it covers all the critical issues facing SMEs,’ Rosley says. ‘These critical issues – the need for funding, resources, market opportunities, capacity building, innovation and logistics support – are included in the masterplan and the implementation of the plan, in two phases, has been properly drawn out.’
While there are many incentives and measures outlined by the government from time to time, the main challenge is about the effective implementation of those policies and incentives, Chen says. Although the public sector plays a supporting role to assist SMEs reap the benefits from the measures, joint efforts from both the public and private sectors are needed to make the masterplan a success, he adds.
To ensure the goals are met, Rosley says, all parties involved – including SMEs, government authorities, relevant agencies, financial institutions and other stakeholders – should play an active role and create a value chain.In addition to the initiatives, she also suggests the establishment of better cooperation between SMEs and government-linked companies.
There is also a need to simplify processes and enhance transparency and equality in the distribution of resources such as funding, loans and grants, as well as government procurement process.
Syed Zed al-Qudsy, CEO of financing firm SME Factors, says that the government could look into promoting the private financing sector for SMEs. ‘With greater participation, we believe that accessibility to financing [for SMEs] will be enhanced,’ he says. ‘One possible option that the government may implement to promote this is to provide tax incentives to these private financing companies.’
Although the masterplan has been announced, nothing is carved in stone and there will be a need to constantly review the policies to ensure relevance. ‘The masterplan is aligned to the overall national policy and will be fine-tuned in line with the changes in the environment. It is running until 2020, so it has to be flexible,’ says Hafsah.
She adds that the targets set are based on typical characteristics of a developed economy and ‘we hope to be able to meet them by 2020, which is when Malaysia is set to achieve developed nation status’.
It is clear that the path ahead for SME sector development lies in collective effort from different stakeholders through innovative approaches. This is not something to be achieved by SMEs alone; the entire ecosystem has to form a chain to support the growth of the industry.
*SME Masterplan – High-Impact Programmes
- Integration of registration and licensing of business establishments to create a single registration point through interfacing of the current National Business Registration System (MyCOID) and the National Business Licensing System (BLESS).
- Introduction of a technology commercialisation platform to promote innovative ideas right through from proof of concept to the commercialisation stage.
- The SME Investment Programme will provide early-stage financing through the development of investment companies which would invest in potential SMEs in the form of debt, equity or a hybrid of both.
- The Going Export (GoEx) Programme offers customised assistance to new exporters and SMEs venturing into new markets.
- The Catalyst Programme will create homegrown champions through a targeted approach with financing, market access and human capital development support.
- Inclusive Innovation is specifically designed to empower the bottom 40% of the income group to leverage on innovation to promote transformation of communities, including microenterprises in rural areas through handholding and technical and management support.
For more information, visit www.smeinfo.com.my
*Financial reporting for SMEs
In July 2009, the International Accounting Standards Board (IASB) published the IFRS for SMEs, designed for the financial reporting needs of entities that do not have public accountability and publish general purpose financial statements for external users including existing and potential creditors, and credit rating agencies. The standard is available for any jurisdiction to adopt, whether or not it has adopted full IFRS.
In ensuring the standard’s relevance, the IASB plans to initiate a review in the second half of 2012, expected to include a request for public comments on possible amendments. More information is available at the IFRS for SMEs segment at www.ifac.org
Currently in Malaysia, SMEs adhere to the Private Entity Reporting Standards (PERS), a set of standards issued by the Malaysian Accounting Standards Board (MASB) for application by all private entities.
PERS are an alternative mechanism for private entities to present their annual financial statements without compliance with international accounting standards. They remove certain disclosure requirements in accordance with the information required for decision-making at a non-public interest entity. The regulators have yet to announce any tentative date for the adoption of the IFRS for SMEs.
Asha Gopalan, journalist