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.