Small business have been facing a large number of problems compared to large scale industries.
The scale of operations, shortage of funds, procurement of raw materials are some of them.
The detailed description of such problems are given below (i) Finance The most serious problem faced by SSIs is that non availability of adequate finance to carry out their operations. Small scale sector lacks the credit worthiness and collateral required to raise capital from the capital markets or financial institutions and hence they depend on local money lenders who charge high interest rates. These units also suffer from lack of adequate working capital, either due to delayed payment of dues to them or locking up of their capital in unsold stocks.
(ii) Raw Materials Another major problem of small business is the procurement of raw materials. If the required materials are not available, they have to compromise on the quality or have to pay a high price to get good quality materials. They purchase raw materials in small quantities due to lack of storage capacity and hence their bargaining power is low.
(iii) Managerial Skills Small business is generally promoted and operated by a single person, who may not possess all the managerial skills required to run the business. Many of the small business entrepreneurs possess sound technical knowledge, but are less successful in marketing and may not find enough time to take care of all functional activities. At the same time they are not in a position to afford professional managers.
(iv) Less Productive Labour Small business firms cannot afford to pay high salaries to their employees, which affects employee willingness to work. Thus, productivity per employee is relatively low and employee turnover is generally high. Small business organisations are unable to attract talented people because of lower remuneration. Division of labour cannot be practised in small scale units, which results in lack of specialisation and concentration.
(v) Marketing Effective marketing is a weaker area of small organisations. These organisations depend excessively on middlemen, who at times exploit them by paying low price and delaying payments. Direct marketing is also not feasible for small business firms as they lack the necessary infrastructure.
(vi) Quality Small business organisations generally concentrate on cutting the cost and keeping the prices low. In doing this, they are unable to maintain the desired standards of quality as they do not have adequate resources to invest in quality research and expertise to upgrade technology.
(vii) Capacity Utilisation Small business firms have to operate below full capacity due to lack of demand. Due to this, their operating costs tend to increase which gradually leads to sickness and closure of the business.
(viii) Technology Use of outdated technology is a serious shortcoming of small industries which results in low productivity and uneconomical production.
(ix) Sickness Small industries become sick due to both internal and external causes. Internal problems include lack of skilled and trained labour and managerial and marketing skills. Some of the external problems include delayed payment, shortage of working capital, inadequate loans and lack of demand for their products.
(x) Global Competition Small businesses are threatened with global competition from multinational corporations and cheap imports. It is difficult for them to compete with the quality standards, technological skills and marketing capabilities of the large multinationals.