Friday, October 31, 2014

Many family-owned SMEs in India do not even get a return equivalent to the interest on the value of the capital invested

Suppose there is a hosiery factory in Ludhiana, India. Suppose it is family owned, and that the net value of all the assets/liabilities of the factory [current market value of land + current market value of infrastructure + current market value of stock + value of receivables - value of paybles] is INR 5 crore. Also, the current interest rate on a secured business loan is about 12% per annum.

This implies, roughly, that if the owners of the factory sell their factory/firm in its entirety, they'll pocket INR 5 crore, and if they lend out this money into the market, they'll start to earn INR 5 lac per month, purely as interest income, without having to make any additional/further physical or mental effort.

The sad truth about many SMEs in India is that these SMEs aren't able to earn even the equivalent of this 12% per annum. You will find many such 5-crore-value SMEs in India which generate only about INR 2-3 lac of net income per month, and that too after a significant amount of physical and mental labor put in by the owners.

A truth that is even more unexplained is that if these owners are made aware of the above calculations, they're still not willing to sell-off the factory/firm in order to almost double their monthly net income and eliminate their physical/mental efforts almost completely.

2 comments:

  1. Before reading the last paragraph, I was thinking that why would the owner do that. Why wouldn't he sell of his assets if told that he could make more money after selling them. The main reasons according to me are:
    1. Social Pressure - What society would say, that he sold off everything and ab ghar par vehle betha hai.
    2. He himself would not be comfortable selling all those assets whom he built, grew, just like a plant from seed.

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  2. I agree, both reasons are valid points. It is perhaps because of this type of irrational decision-making that most SMEs remain SMEs and never grow into large companies.

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