MSME SECTOR IN INDIA: AN OVERVIEW

Micro, Small and Medium Enterprise (MSME) sector has emerged as a highly vibrant and
dynamic sector of the Indian economy over the last five decades. MSMEs not only play a crucial role
in providing large employment opportunities at comparatively lower capital cost than large industries
but also help in industrialization of rural & backward areas, thereby, reducing regional imbalances,
assuring more equitable distribution of national income and wealth. MSMEs are complementary to
large industries as ancillary units and this sector contributes enormously to the socio-economic
development of the country.
The MSME sector consisting of 36 million units, as of today, provides employment to over 80
million persons. The Sector through more than 6,000 products contributes about 8% to GDP besides
45% to the total manufacturing output and 40% to the exports from the country. The MSME sector
has the potential to spread industrial growth across the country and can be a major partner in the
process of inclusive growth.

Definition of Micro, Small and Medium Enterprises in India

Manufacturing Enterprises
Service Enterprises
Classification (Investment limit in Plant and
(Investment limit in equipment)
Machinery)
Micro Rs. 25 Lakh Rs. 10 Lakh
Small Rs. 5 Crore Rs. 2 Crore
Medium Rs. 10 Crore Rs. 5 Crore
Source: Ministry of Micro, Small & Medium Enterprises, Govt. of India

Micro, small and medium Enterprises (MSMEs) are seen as a driving force for the promotion
of an economy and they contribute immensely to the economic development of any country. The
financing of MSMEs has attracted much attention in recent years and has become an important topic
for economists and policymakers working on financial and economic development. In recent times,
MSMEs have come into the forefront of development agenda due to the recognition of their
contribution in fostering growth, sustaining global economic recovery, generating employment and
reducing poverty.

Simiarly, the MSME sector in Odisha has made substantial contribution to the economic
development in general and generation of employment and contribution to the exports in particular
and has positioned itself only next to the agricultural sector in the State in terms of employment
generation. MSME in Odisha has witnessed an increasing trend in respect of number of MSME units
set up, quantum of investment made and employment generation over a period of time. Therefore, the
sector contributes immensely to the economy of the State.

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REVIEW OF LITERATURE
A review of previous work is very essential for any type of investigation which is related to the topic.
It helps to determine the objectives of the study and selecting the methodology and to analyse data
with proofs. Previous research work that has distinct relationship with the present topic has been
reviewed below.
 Stevens (1973), who studied financial characteristics of acquired firms, conducted factor
analysis on several ratios and reduced the number of ratios into the following six factors:
leverage, profitability, activity, liquidity, dividend policy and earning ratio identifying
financial characteristics. Burns (1985) analyzed financial characteristics and profitability of
small companies in the UK. He used the following ratios: quick ratio, current ratio, gearing,
long-term debt ratio, and interest cover ratio to define financial characteristics of the
companies.
 Van Horne (1986) indicated the relationship between liquidity and profitability: The greater
the relative proportion of liquid assets, the less risk of running out of cash… profitability
unfortunately, also will be less … resolution of the trade-off between risk and profitability
with respect to these decisions depends upon the risk preferences of management.
According to Van Horne, if the firm maintains a relatively large proportion of liquid assets,
its profitability probably will decrease.
 Cohen (1989) stated measures of profitability are essential in any business. In his text, he
indicated many different ratios to measure profitability of the business. They included asset-
earning power, return on the owner’s equity, net profit on sales, and return on investment.
 Mcmohon & Holmes (1991) pointed out that financial managers are crucial to the
profitability, survival and well being of small business enterprises.
 Davidson and Dutia (1991) explored whether small firms have distinctively different
financial characteristics from larger firms and determined the extent of the under-
capitalization problem. In their study, four variables: liquidity, profitability, debt and
solvency, and turnover are viewed as the variables to determine financial characteristics of
SMEs.
 Meric and Meric (1994) compared the overall financial characteristics of 562 USA and
Japanese firms from 28 different industries. However, their study did not compare financial
characteristics of USA and Japanese firms in an individual industry. Meric and Meric (1997)
followed with a comparison of financial characteristics of Japanese chemical firms and those
of the USA chemical firms by using ten well-known financial ratios.
 Meric et al. (1997) conducted a comparative study on financial characteristics of 87
Japanese and 87 USA chemical firms. In their study, they compared financial characteristics
between the USA and Japanese chemical firms by using ten financial ratios. Financial ratios

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 used to define financial characteristics in their study included: (1) operating profit margin,
(2) total asset turnover, (3) return on assets, (4) return on equity, (5) fixed charge coverage,
(6) common equity ratio, (7) long-term debt ratio, (8) current ratio, (9) quick ratio and (10)
inventory turnover.
 Kieu (2004) found out that efficiency in financial management practices such as accounting
information system, financial reporting and analysis, working capital management, fixed asset
management and financial planning and good performance in financial characteristics such as
liquidity and business activity has a positive impact on profitability.
 Paramasivan, et al. (2009) The effect of financial management practice on profitability was
found to be positive. The researcher argued that financial management helps to improve the
profitability position of business organizations with the help of strong financial control
devices such as budgetary control, ratio analysis and CVP analysis.
 Chung & Chuang (2010) also reveals efficiency in capital structure management, working
capital management, financial reporting and analysis; capital budgeting and accounting
information system has a positive impact on profitability of business organizations.
 Recent literature examines the profitability of companies in different countries and sectors of
the economy through indicators such as return on total assets (ROA) (Deloof, 2003), financial
return (Padachi, 2006), invested capital (ROIC), return on assets (ROA) (Narware, 2010). In
these cases, the elements considered in the analysis of profitability, independent variables, are
financial indicators expressing working capital. The profitability at the micro level was also
studied based on indicators such as turnover, working capital, etc.
 (Hakinson et al, 1997; Woldie et.al, 2008) There aren’t numerous studies on the factors that
influence financial performance only on SMEs. Even if these companies have certain issues,
however financial factors influence does not differ much from those observed among large
companies.

STATEMENT OF THE PROBLEM

Problem definition is essential before undertaking a research study. Therefore, the researcher
clearly identifies the problem in the following few lines. Despite of commendable contribution to the
nation's economy, MSMEs in India are currently facing a lot of challenges and difficulties such as
shortage of capital for expanding and renovating equipment and technology, low productivity and
competitiveness, lack of experience in terms of marketing, production management and financial
management. Among these difficulties, lack of financing resources and experience of financial
management is currently one of the most serious issues.
Most of the enterprises in MSME sector in Odisha have not appointed financial managers to
be in charge of financial management of the company. Usually the owner-mangers with the assistance
of accountants manage the financial resources of the organisation. Lack of knowledge of financial

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management combined with the uncertainty of the business environment often leads to serious
problems regarding financial performances of these enterprises. Irrespective of owner-manager or
hired-manager, if the financial decisions are wrong, profitability of the company will be adversely
affected. Consequently, MSME profitability could be affected because of inefficient financial
management. MSMEs have often failed due to lack of knowledge of efficient financial management.
Moreover, undercapitalization and uncertainty of the business environment cause MSMEs to rely
excessively on equity and maintain high liquidity and these financial characteristics probably affect
SME profitability. Most commercial banks refuse to offer loans to MSMEs because the banks think
SME profitability cannot cover loan risks.
It is observed that there is lack of research on MSME with respect to its profitability in
Odisha. Therefore, the problem to be addressed in this research is to investigate the simultaneous
effects of financial management practices and financial characteristics on MSME profitability, and
then, to determine the best measures for improving MSME profitability in Odisha by using efficient
financial management tools. Firstly, it investigates financial management practices and financial
characteristics of MSMEs, and then, examines the impacts of financial management practices and
financial characteristics on MSME profitability.

NEED AND SIGNIFICANCE OF THE STUDY

Most previous researchers focus on investigating and describing financial management
practices whereas there has been little research examining the impact of financial management
practices on SME profitability (McMahon et al. 1993). This lack of empirical evidence from the
view point of Indian in general and Odisha in particular and the lack of examination of the impact
of financial management practices and financial characteristics on SME profitability are major gaps
in the knowledge of financial management practices and financial characteristics of SMEs in India.
Therefore, a study of the impact of financial management on SME profitability is justified and a
model of the impacts of financial management practices and the financial characteristics should be
developed and tested by using the empirical data.
The outcome of the study would be helpful in convincing business financial management
practitioners of the need for changes in practices. The evidence of the effects of financial
management practices on SME profitability and the relationship between the two variables will
contribute to the above purpose. Further, results will indicate relationships between financial
management practices, financial characteristics and SME profitability and will assist owner-
managers and financial managers to improve performance and profitability of their businesses by
managing financial matters efficiently and effectively.

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OBJECTIVES OF THE STUDY
i) To examine whether the Accounting reports are perfectly and accurately maintained by female
entrepreneurs than male counterparts across gender groups.
ii) To analyse if the Payback period and net present value of capital are more effectively managed
by young entrepreneurs across all age groups.
iii) To inspect if Accounting reports are perfectly and accurately maintained by entrepreneurs
engaged with company type business across the business types.
iv) To measure if there is any significant relationship between the reasonable use of capital
budgeting techniques and profitability of MSMEs in Odisha.
v) To assess the involvement of owners in preparing master budget in financial planning.

HYPOTHESIS OF THE STUDY

A hypothesis is a proposition that is empirically testable. The present study will be based on
following hypothesis.

H01: Accounting reports are perfect and accurately maintained by female entrepreneurs than male
counterparts across gender groups.
H02: Payback period and net present value of capital are more effectively managed by young
entrepreneurs across all age groups.
H03: Accounting reports are perfectly and accurately maintained by entrepreneurs engaged with
company type business across the business types.
H04: There is no significant relationship between the reasonable use of capital budgeting
techniques and profitability of MSME.
H05: There is no significant involvement of owners in preparing master budget in financial
planning.

WORK PLAN AND METHODOLOGY

The following methodology will be adopted:
1. Research Type - This research study is designed to describe characteristics of financial
management practices of MSMEs and investigate the impact of the financial management
practices and financial characteristics on MSME profitability. Thus, descriptive research is
viewed as an appropriate research type. Moreover, this research is designed to identify the
cause-and-effect relationships between efficient financial management practices and
profitability of MSMEs. Thus, causal research was also implemented in combination with
descriptive research. In summary, a combination of descriptive and causal research has been
chosen for this research.

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 2. Research Technique - Survey is chosen as a research technique in this study to investigate
and describe financial management practices of MSMEs in Odisha. Questionnaires will be
designed and directly delivered to MSMEs to collect data relating to financial management
practices. The argument for choosing survey are twofold. Firstly, surveys provide quick,
efficient and accurate means of assessing information about the population. Secondly, surveys
are more appropriate in cases where there is lack of secondary data. The secondary data
method will be used to examine the financial characteristics of SMEs. The variables such as
liquidity ratios, financial leverage ratios, activity ratios, and profitability ratios will be derived
from financial statements. These financial statements are available from Office of Ministry of
Micro, Small and Medium enterprises and business directly.
3. Scope of Study- The proposed research work will be conducted in the state of Odisha
covering a period of 10 years i.e. from 2005-15.
4. Sources of Data and Collection Methods- In terms of data sources, there are two main
sources of data i.e. primary data and secondary data. This study used both types of data.
Secondary data are usually historical, already assembled, and do not require access to
respondents or subjects. To obtain secondary data, it is proposed to visit the Office of Ministry
of Micro Small and Medium Enterprises, Workplace of MSME Enterprises in Odisha.
Primary data is proposed to be collected through personal interviews with the Owners,
Managers, Accountants of various offices of business houses in the MSME sector in Odisha.
Besides, Personal interviews, detailed questionnaire will also be prepared to obtain primary
data and information. This questionnaire will be pre-tested and modified if required.
5. Sampling Size & Technique Selecting a sampling frame is the next step after determining the
target population. A sampling frame is the list of elements from which the sample may be
drawn. In this research, the list of MSME.s provided by Office of Ministry of Micro Small &
Medium Enterprises in 2015 is chosen as the sampling frame from which the sample of SMEs
are drawn for interviewing. Generally, it is not feasible to compile a list that did not exclude
some members of the population. Thus, sampling frame error is unavoidable.
6. Tabulation, Analysis and Interpretation of Data: Collected data and information will be
compiled, collated, analyzed and interpreted using necessary statistical and mathematical
tools. Use of graphs, charts, diagrams will be made use of to present the study in a more
logical and clear manner. After analyzing the data statistically, recommendations and
suggestions will be given for improvement.

SCHEME OF CHAPTERS
The tentative scheme of Chapters will be as follows:
CHAPTER 1: INTRODUCTION

CHAPTER 2: MSME SECTOR IN INDIA

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 CHAPTER 3: RESEARCH METHODOLOGY

CHAPTER 4: DATA ANALYSIS AND INTERPRETATION

CHAPTER 5: SUMMARY, CONCLUSION AND SUGGESTIONS

 ANNEXURE

 BIBLIOGRAPHY

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Research Guide: Research Scholar:

(Dr. Kishore Kumar Das) (Sandeepan Banerjee)

Registrar, Ravenshaw University Reg. No. - 12PH-COM-009
Reader, Department of Commerce P.G.Department of Commerce
Dean, School of Commerce Ravenshaw University, Cuttack
Ravenshaw University, Cuttack

Date : 28.01.2016 Date : 28.01.2016

Place: Cuttack Place: Cuttack