Financial Planning - A Neglected area of Small and Medium scale

enterprises in Chennai
Mr. Dr.S.JOHN GABRIEL, Associate professor of commerce, M.C.C. College,
Tambaram.
Ms.C.K.DEEPA, Research Scholar University of Madras
Introduction:
Small and Medium scale enterprises are the backbone of all economies and are a key source of
economic growth, dynamism and flexibility in advanced industralised countries, as well as in
emerging and developing economies. SMEs constitute the dominant form of business
organization, accounting for over 95% and upto 99% of enterprises depending on the country.
They are responsible for between 60-70% net job creation in OECD countries. Small businesses
are particularly important for bringing innovative products or techniques to the market.
DEFINITION OF MSME(2006)
Classification
Manufacturing Enterprises
Service Enterprise
Micro
Below Rs.25 lakhs
Below Rs. 10 lakhs
Small
25 lakhs-Rs.5 crore
Rs. 10 lakhsRs.2 crores
Medium
Rs. 5 crores-Rs.10 crore
Rs. 2 crore-5 crores.
Microsoft may be a software giant today, but it started off in typical SME fashion, as a dream
developed by a young student with the help of family and friends. Only when Billgates and his
colleagues had a saleable product where they able to take it to the market place and look for
investment from more traditional sources.
Statement of the Problem:
In developing country like India the role and importance of SMEs is very significant
towards poverty alleviation, employment generation, rural development and avoidance of
regional imbalance through the promotion and growth of various development activities. It acts
as a catalyst for socio economic transformation of the country. Tamil Nadu stands No.1 as
Indians hub of SMEs. Against this backdrop, the present paper attempts to highlight that, inorder
to protect and promote Small and medium scale industries in the present competitive global
market, financial planning, analysis and control acts as a tool in accomplishment of the same.
Review of Literature:
Deresse Mersha Lakew et.al (2009) made an empirical research and revealed that Sound
financial management practices can bring about higher profitability which is possible
through preparation of sales paln, production plan, cost plan and expenses budget and
budgeted income statement and balancesheet and efficient utilization and control and
management of acquired fixed assets , regular repair and maintenance and proper
disposal of fixed assets will enhance the performance of firms.
Dr.Sukamal Dalta(2010) in his study on importance of strategic management
highlighted through his review Gable & Topal(1987) have found that small firms do not
commonly practice strategic management and Walts & Ormsby (1990) found positive
relationship between formal strategic planning & financial performance in Small
enterprises
Pamela Ruth Berry (2011) through his empirical study states that many manufacturing
MSEs in the Tsnware metropolitan area use financial planning be it formal, informal,
traditional (or) modern methods & there is evidence to suggest that by using any of these

forms of financial planning firms have a better change of succeeding. The more formal
the planning process is the longer the firm has been operating which would suggest that
formal Financial Planning & Control & other management accounting systems do have
an influence on the survival of the firm.
Ben Ebo Atton (2011)s in his study says that 77.78% of SME out of 305 in Central region
of Ghana have no knowledge about cash control procedures and this lead to financial
impropriety and misappropriation of cash as a resource, leading to solve growth of most
of the businesses and also only 27% of them keep proper accounts and keeping track of
their cash payments.
Tarek zarook (2013) et.al found out that management experience and education levels
have significant positive effects on access to finance and business planning and political
connection have negative correlation inregard to access to finance.
OBJECTIVE OF THE STUDY :
1. To examine the practices of financial planning , analysis and control prevailing among
entrepreneurs of SMEs in Chennai.
2. To identify the problems and prospects of neglected financial planning practices among
SMEs in Chennai.
Year

Total MSMEs
(lakh number)

Growth over
the previous
year

Production
(Rs. Crore)

Employ (Lakh
Person)

Exports
(Rs. in
crore)

2000-01

101.10

261297

238.73

69797

2001-02

105.21

4.07

282270

249.33

71244

2002-03

109.49

4.07

314850

314850

86014

2003-04

113.95

4.07

364547

364547

97644

2004-05

118.59

4.07

429796

429796

124417

2005-06

123.42

4.07

497842

497842

150242

2006-07

261.01

111.48

709398

709398

182538

2007-08

272.79

4.51

709759

790759

202017

2008-09

285.16

4.53

880805

880805

N.A

2009-10

298.08

4.53

982919

982919

N.A

Source :Annual report of MSME

SME are vital for economic growth and development in both industralised and developing
countries, by playing a key role in creating new jobs. Financing is necessary to help them set up
and expand their operations, develop, new products and invest in new staff or production
facilities.Finance is one of the important prerequisites to start an enterprise. Infact it is the
availability of finance that facilitates an entrepreneur to bring together land, labour, machinery
and raw material together combine them to produce goods. The significance of finance in
production is elucidated like a lubricant to the process of production. Financing an enterprise

whether large or small is a critical element for success in business. The decisions taken by the
entrepreneur well in advance regarding the future financial aspects of the enterprise is called
financial planning. In other words financial planning deals with futurity of present decision in
terms of financial aspects of an enterprise. In short financial planning is a financial forecast made
for the enterprise in the beginning itself.

Source: Annual report of MSME

Why is Planning so important to small businesses?
To become an effective business owner-manager, the entrepreneurs must look ahead. Planning
should be the first step in performing a series of managerial functions because it sets the future
course of action for all aspects of the business. Planning which is the process of setting
objectives and devising actions to achieve those objectives, planning helps in answering
questions such as What business am I in?, what finance do I need? What is my sales strategy?,
where can I find needed personnel? How much profit can I expect?
Why Small Business owners need to plan?
Planning is one of the most difficult activities an entrepreneur must do.Yet it is essential that an
entrepreneur do it because taking action, we must know where you are going and how to get
there. Outsiders who invest to lend money need to know your chances of success . plans provide
courses of action, information to others, bases for change and a means of delegating work. In
short well developed plans can
1) Interest money people in investing in the business
2) Guide the owner and mangers in operating the business
3) Give direction to and motivate employee
4) Provides an environment to attract customers and prospective employees
Research Methodology:
The research is undertaken in Chennai by circulating 125 questionnaire, out of which 25
unfilled and half filled forms were returned by the entrepreneurs. The study is based on both the
primary data and also secondary data from published sources such as articles, websites and
books. The convenience sampling method has been applied and statistical tools such as
percentage analysis for evaluating the reasons for neglected financial planning, analysis and
control among SMEs
Why small business owners neglect planning?
Although planning is so important it is one of the most difficult managerial activities to perform.
Many small business owners neglect planning because
a) Day to day activities leave them little or no time for planning

b)
c)
d)
e)

They fear the problems and weaknesses of the company will be revealed
They lack knowledge of how to plan
They fear that future changes cannot be planned for
It requires original thinking, takes time and is difficult to do but it does help one to take
advantages of promising opportunities and cope with unexpected problems.
To make the company competitive finances must be adequate to maintain current level of
activities and to take advantage of future opportunities.
Findings :
The result indicates that 95 out of 100 respondents do not set any financial short term
objectives. In addition none of the respondents sets long term financial objectives. 90% of smes
in Chennai do not compare financial objectives with their performance. Furthermore 75% of
them do not undertake financial analysis to determine the trend in sales, cost and profit. A plan
allows a business to set certain goals for the business and to measure expectations against actual
performance. This will enable the business to put in control measures to ensure that actual
performance meets expectations. Lack of financial analysis implies that SMEs do not have an
idea of how to enhance sales, reduce costs and maximize profitability.
Recommendations:
Owners of SME need to take greater responsibility for their own learning. Therefore they need
to create a positive attitude towards entrepreneurship and training. They should attend training
programs organized by governments and NGOs on financial management for non-financial
managers . In addition owners should move from manual to computers for record keeping .
Owners should purchase computers and go for training on e-accounting. In addition owners of
SMES should realize the importance of planning, analysis and control. Training on how to set
the goals, measure performance and institute the control process is very important to the survival
of smes.
Conclusion:
The requirements for success in small business include an understanding of the
importance of financial management, knowledge of how financial relationships affect
profit or loss and the devotion of time, energy and initiative to planning and controlling
financial activities. Such planning and control ensure that the business will not only
survive but also grow and develop. In order to survive, sustain and compete the global
environment the small and medium scale enterprises has to plan their financial needs,
analyse their financial competencies and control their activities by foreseeing their future
dynamic environment. SMEs in Chennai do not have long term perspective which is a
great threat to its survival.
References:
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association of Australia and Newzealand, Ballarat.
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