How Small and Medium Enterprises Can Deal with the Current Problem of Recession in the United States

Abstract

The current global recession has impacted every sphere of the economy. Business entities have been hit hard owing to reduced demand for goods and services. Business entities have been hit hard owing to reduced demand for goods and services. Nonetheless, the SMEs (Small and Medium Enterprises) have been the worst hit, in comparison with the larger firms. It is therefore the intention of this study to explore how small and medium Enterprises can deal with the current problem of recession. Data collection shall be via the use of a semi-structured interview questionnaire to be administered to the owner-managers of selected SMEs. A quantitative research design shall be adopted by the study, for purposes of linking the study’s research questions with the data collected. Analysis of data shall be via the use of statistical tools, and presentation of research findings done using bar graphs and tables. Ultimately, this shall pave way for the discussion of the research findings, within the context of the research questions.

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Introduction

Background

The current global financial crisis has impacted various sectors of the economy. This has occasioned the need for various governments to attempt to bail out a number of the business entities that have affected by the economic recession, in the form of a stimulus package. However, this stimulus package has mainly been targeted towards the larger firms, at the expense of the small and medium enterprises. It is important to note that SMEs (Small and Medium Enterprises) are highly vulnerable to a global financial crisis compared with larger firms, due to their over-reliance on credit facilities from banks. In addition, their small size means that they cannot down-size as a cost-cutting measure. Their economic forecasts have also been viewed as being short-term, meaning that they are usually ill-prepared to deal with a potential economic crisis (Organisation for Economic Co-operation and Development (2009, p. 2). In light of this, it is the intention of this proposal to explore the impact that the current recession has had on SMEs in the United States. Accordingly, a self-administered and semi-structured interview questionnaire shall be administered to the survey respondents. The survey shall be quantitative in design, with the study subjects being the owner-managers of various SMEs in the United States. SPSS (scientific package for social sciences) software shall be used for data analysis and the research findings presented in the form of tables and graphs. This will then pave way for the discussion and conclusion of the research findings, as well as recommendations on how small and medium Enterprises can deal with the current problem of recession.

Purpose of Capstone project

The aim of this study is to explore how small and medium Enterprises in the United States can deal with the current problem of recession, and provide possible financial solutions to them.

Statement of the problem

Although the current recession has affected various sectors within the economy, the SMEs could be regarded as amongst the most vulnerable business entities, when compared with larger firms. During times of recession, the small size of SMEs means that they can no longer down-size further. Furthermore they are less diversified, in terms business operations. In addition, the low capitalization of these firms means that their capital structures are usually weaker than that of multinationals.

Literature review

Introduction

Entrepreneurs and SMEs play a vital role in the various economies. Furthermore, they act as the principal income and employment generators, in addition to driving growth and innovation. On the basis of their level of significance in the various spheres of the economy, SMEs therefore become an indispensable tool in as far as the recovery of the economy is concerned. At the moment, different SMEs have been greatly affected by the ongoing global financial crisis.

Compared to Multinationals, SMEs appears more prone to the impacts of a global financial crisis, owing to a number of reasons. With the economic recession having set in, those challenges that have traditionally characterised financial access for SMEs are now characterise by novel difficulties (MumbyCroft, 2006, P. 208). At this point, there is a need to point out that during the times of crisis, the level of vulnerability of SMEs increases.

Factors impacting SMEs

During the time of recession, it becomes quite difficult for owner-managers of SMEs to further downsize, given that the firm is already small in size. In addition, SMEs are less diversified individually, with regard to their economic activities. Furthermore, they are characterized by lower capitalization, meaning that their financial structure is weak in relation to multinationals, for example. Moreover, SMEs have been shown to rely more on credit, not to mention the fact that their financing options are also fewer (Canada Business, 2009). Within the global value chains, SMEs have been seen to be more to financial crisis prone in comparison to other larger firms. The innovative SMEs have especially been seen to have borne the greatest brunt in the face of the current global recession, in comparison to other firms. Innovative firms have been more vulnerable to the global financial crisis due to the fact that they are characterized by weaker financial structure, while the nature of their business is riskier. The current global financial crisis has meant a liquidity shortage for SMEs, tighter bank credits, higher delays in payments, and dwindling source for equity capital.

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Available evidence indicates that across various sectors of the economy, SMEs have been faced with a decline for both services and goods. Financial analysts have predicted two elements of stress that could impact on the SMEs, within the context of the current global financial crisis. First, there are the enhanced delays in receivables payments that when combined with an increase in inventories, lead to a prevalent working capital shortage, in addition to lowered liquidity (Koellinger & Thurik, 2009). Secondly, there is the issue of increased reported insolvencies, defaults, as well as bankruptcies.

Unmitigated receivable payment delays and more so during periods of reduced sales, have been seen to rapidly contribute to working capital depletion in a majority of the countries. For instance, in Belgium, approximately 43 percent of the SMEs that took part in a survey to assess the impact of the global financial crisis on these institutions revealed that they were experiencing receivable delays extension. On the other hand, 50 percent SMEs surveyed in the Netherlands reported that they had to contend with customers’ longer terms of payments (Organisation for Economic Co-operation and Development, 2009).

Taking into consideration uncertainties and reduced sales expectations in the face of the current recession, most SMEs in various countries have been forced to reduce their demand for bank credit. Sufficient evidence also exists to support the claim that in all the various countries, it has become increasingly hard for small businesses to acquire credit facilities from banks. Indicators for constricted loan conditions by lending banks to SMEs in the face of the global recession include rising spreads, lack of guarantee requirements, higher collateral, wide disparities with respect to funds requested and amounts granted, increased loan processing delays, as well as increased lending fees (Koellinger & Thurik, 2009).

On the basis of the aforementioned unfavourable environment for lending, SMEs have no choice but to seek for alternative sources of funding such as new equity, self-financing, private equity, venture capital, and factoring (Organisation for Economic Co-operation and Development, 2009). In a bid to respond to the aftermath of the current economic recession, most of the SMEs have employed three strategies. To start with, there is the issue of cost-cutting (National Bubble, 2009), in a bid to adjust the level of production and restore business profitability in view of the existing low demand for goods and services. Such measures often crop up at a time when there is a lower wage bill. Secondly, SMEs are involved in an endeavour to look for extra liquidity sources, through such means as suppressed or reduced dividends, and payment delay extensions. Thirdly, SMEs have sought to postpone expansion and investment plans. For example, there are a number of entrepreneurs who have had to completely cancel novel business ventures.

Conclusion

The collapse of consumer demand, thanks to the current economic recession, has in effect led to trade collapse. As a result, those SMEs that are dependent on trade are facing a bleak future, with those amongst them those that rely mainly on exports bearing the greatest brunt. Economists contend that since the financial analysis capacity of SMEs for potential economic effects that could be occasioned by the occurrence of an economic incident is somewhat lacking, they are not in apposition to predict with certainty the potential calamities that could befall them (Organisation for Economic Co-operation and Development, 2009). When SMEs attempts to fine-tune their internal management so that they are better able to handle potential problems, such as an economic crisis, they are usually faced with a difficulty.

On the other hand, larger firms have been shown to have better mechanism for handling a potential financial crisis, in addition to the fact that their business perspective is usually long-term.

Statement of research question

  • How has the current recession impacted the business operations of SMEs?
  • What are the areas of operations of SMEs that have been hardest hit by the current recession?
  • How have the owner-managers of SMEs reacted in response to the current recession?

Methodology

Participants

The participants for this study shall be the owner-managers of selected SMEs in the United States.

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Instruments

The instruments for data collection shall be a semi-structured research interview questionnaire.

Design

A quantitative research design shall be adopted by this study, for purposes of data collection and analysis of the study. Punch (2005, p. 63) argues that the design of a research study should be such that is connects the data that is collected with the study’s research questions. Accordingly, a quantitative research design shall assist the research to obtain answers for the study’s research questions. In addition, this design shall also enable the research realize reliable and valid results.

Procedure

Prior to the carrying out of the study, permission shall be sought form the Ethics Review Board (ERB) committee of the institution from which this researcher is a student. A semi-structured questionnaire shall be designed by this researcher, and presented to the supervisor for review and approval. Following this, the questionnaire shall be pre-tested prior to its being administered to the study subjects. A database for the owner-managers of SMEs in the area of study for this research shall be used to select the study participants. Accordingly, a systematic sampling procedure shall be used, on the basis of the surnames of the owner-managers from the available database. The study anticipates recruiting a total of 60 participants. The research questionnaire shall be mailed to the premises of the chosen respondents, upon their agreeing to take part in the study. A phone call shall follow the mailed questionnaire to ascertain its reception. Throughout the entire process of data collection and analysis, ethical procedures shall be followed.

Data analysis plan

For purposes of data analysis, use shall be made of such statistical tools as SPSS, and Microsoft Excel (MS Excel).

Results and Discussions

The results for this research finding shall be presented in the form of tables and charts, and the findings discussed with respect to available and relevant literature.

Conclusions

A summary of the study results shall be provided, as well as directions for future studies on the same area of study.

References

Canada Business. (2009). Marketing during a recession. Web.

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Koellinger, P. & Thurik, R. (2009). Entrepreneurship and the Business Cycle.

Tinbergen Institute Discussion Paper No. 2009. Web.

Mumby-Croft, R. (2006). SMEs, Growth and Entrepreneurship: The Steady Rise and Precipitous Fall of Seaking. Journal of Entrepreneurship, 15, 2, 205-21.

National Bubble. (2009). Roubini: risk of a W-shaped recession. Web.

Organisation for Economic Co-operation and Development (2009). “The Impact of the Global Crisis on SME and Entrepreneurship Financing and Policy Responses”. Web.

Punch, K. (2005). Introduction to social research: quantitative and qualitative. London: Sage.

Appendices

Time Schedule

It is anticipated that this research study shall take 4 months to complete, from the point of data collection to the presentation of the final report.

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