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MGT601 - SME Management - Lecture Handout 37

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EXPORT POTENTIAL OF SME IN DEVELOPING COUNTRIES – I

Definition and Role in Economy

The small and medium-sized sector is a varied one and plays a predominant role in the economies of most developing countries. It comprises factories, workshops, traders and other service facilities. It ranges from the most modern and up-to-date to the simple and traditional, from independent enterprises to ancillaries and subcontractors, and from units mainly catering to the domestic market to exporters.

Small and medium-sized enterprises (SMEs) are a key component in economic life, not only because of their number and variety but because of their involvement in every aspect of the economy, their contribution to regional development, the complementary role they play in support of the large sector, and their role as proving ground for innovations and adaptations. They can be seen as a kind of industrial breeding ground, a source of constant renewal of industry and commerce, and a wellspring of competition and dynamism.

There is no universally accepted definition of an SME. One study has identified more than 50 definitions in 75 countries. Frequently, criteria defining as SME in a country may be based on the purpose for which the identification is required.

Again it is possible notionally to group manufacturing SMEs in three broad categories:

  • Cottage or Artisan Units.( less than 10 employees)
  • Small Scale Units.( up to 50 employees)
  • Medium Sized Industries.( Between 50 and 200)

These would not be watertight compartments and such a grouping would be arbitrary. SMEs play a significant role in the economies of most countries, industrialized as well as developing. Organized small and medium-scale industries in many African countries are relatively smaller in number and their contribution to GNP more limited.

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MGT601 - SME Management - Lecture Handout 25

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WORKING CAPITAL

Working capital management or current asset management is one of the most important aspects of overall financial management in an enterprise. It is basically concerned with the management of current assets and current liabilities and inter relationship between them.

Meaning of Working Capital

Working capital is the amount of funds needed by an enterprise to finance its day to day operation. It is the part of capital employed in short-term operation such as raw materials, semi finished products, sundry debtors. Because of its variable nature, the working capital is also referred to as circulating capital. It may be pointed out that the total working capital is composed of two parts.

  1. Regular Capital
  2. Variable Capital

Regular Working capital is required for permanent investment in any business for holing certain minimum quantity of raw material, finished product or cash. Such investment is irreducible minimum and remains permanently sunk into business.

The remaining portion of working capital is variable. The variable portion first gets tied up into raw materials which are then converted into finished goods. On the sale of goods it gets converted into account receivables or cash and circle is then completed. It is depicted in following figure.

Working Capital

Different Senses of “Working Capital”

The term working capital is usually used in two different senses namely.

  1. Gross Working Capital
  2. Net Working Capital

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