Small and Medium-sized Enterprises (SMEs) play a crucial role in socio-economic development and contribute significantly to the state budget. Recognizing their importance, the government has implemented various policies to encourage sustainable and robust growth of SMEs, further enhancing their positive impact on the economy. However, SMEs face numerous challenges, necessitating a reliance on internal capabilities for survival. Proactive engagement in production and business activities enables SMEs to formulate realistic competitive strategies. Forecasting capabilities allow them to anticipate and address market changes promptly. Internal capacity ultimately determines a company’s existence.
Defining Small and Medium-sized Enterprises
SMEs are registered businesses that are categorized based on assessments of capital and labor utilization. There are three size categories: micro, small, and medium, collectively referred to as SMEs. According to the World Bank Group’s criteria, micro-enterprises employ fewer than 10 workers while small enterprises employ between 10 and fewer than 200 workers, with capital of less than 20 billion. Medium-sized enterprises employ between 200 and 300 workers, with capital ranging from 20 to 100 billion. In Vietnam, the SME scale is determined by the industry in which the business operates. Medium-sized enterprises employ 200 to 300 workers, small enterprises employ 10 to 20 workers, and micro-enterprises employ fewer than 10 workers. SMEs constitute a significant portion of the national business landscape, providing stability to the economy and serving as pillars of local economies, contributing a substantial portion of the GDP.
Current Situation of SMEs in Vietnam
Currently, Vietnam has approximately 1.7 million SMEs, accounting for 96% of all registered businesses nationwide. This number is expected to increase to around 2.4 million by 2030. Annually, SMEs contribute about 45% to the GDP, 31% to total state budget revenue, 33% of industrial output value, 30% of export value, and employ 60% of the workforce. However, most SMEs face challenges related to their small scale in terms of capital, labor, management, and competitiveness. Specifically, 98% of small and medium-sized enterprises encounter the following issues:
- The majority of SMEs in Vietnam lack a specific or clearly defined business strategy. A business strategy serves as a guiding principle for the operations of an enterprise. Without a well-established strategic vision, leadership and the company’s workforce may struggle to align toward common objectives.
- Limited and Challenging Capital Sources. Most SMEs face issues related to capital scarcity, with constrained access to funding and limited ability for self-financing. This imbalance in capital resources may result in inefficient production and business operations, stemming from the misallocation of capital or its ineffective utilization.
- Inadequate Human Resources. Human capital is a critically vital factor for business entities. In certain cases, the core of an enterprise’s vitality lies in its human resources. Improper personnel arrangements can lead to suboptimal work efficiency, potentially diverting the company from its strategic course. Moreover, deficiencies persist in the management capabilities for production, business operations, technical expertise, and professional skills among SME owners and the labor force.
- Lack of Processes, Management Tools, and Governance. Enterprises often struggle to establish clear operational procedures or face challenges in executing them. The business sectors of most companies tend to operate in a fragmented manner, making it difficult for business owners to gather accurate and timely administrative information. During the developmental phases, companies fail to construct suitable systems and operational procedures, resulting in high operational costs without corresponding effectiveness.
- Limited Product Competitiveness. Products manufactured by these enterprises have inherent limitations, and the market for their consumption remains modest. The capacity for linkages, collaboration, and participation in industry associations among SMEs is also restricted. Consumer awareness of these products may be low, or demand for them may not be sufficiently robust, resulting in limited consumption.
Necessity of SME Restructuring
In the current challenging and competitive business environment, restructuring is a crucial step for SMEs, providing them with opportunities for adaptive and sustainable development. Restructuring offers several benefits for SMEs:
- Pivotal for a company’s strength. A sound vision determines the future trajectory of a business. In various circumstances, a business strategy can be adaptable and not rigid. If it is observed that circumstances have changed and the business strategy is no longer aligned, it is entirely possible to flexibly adjust to remain relevant.
- Optimized Capital Arrangement. The majority of small and medium-sized enterprises heavily rely on bank borrowings. Pursuing revenue without tight control over cash inflows leads to financial instability. Capital imbalance arises from short-term capital investments in medium-term projects. Restructuring capital flows and diversifying capital sources are essential keys to assist SMEs in overcoming challenges for sustainable development.
- Operational Cost Optimization. Every business faces various operational costs. Cost optimization is an ongoing effort to improve the cost-to-revenue ratio, maximize business value, and profitability. It is a necessary solution to address economic issues, making business operations more manageable. This solution is implemented through restructuring operational costs, enabling businesses to have better control and smoother operations.
- Enhancing Cash Flow Management and Efficiency. Managing cash flow is a crucial activity for any business. For businesses, cash management is vital for maintaining financial stability. While cash flow and profits are both important in business, they are not the same. Understanding cash flow and developing and implementing a cash flow management plan is an area where many small and medium-sized enterprises have room for improvement.
- Assisting Business Owners in Controlling and Managing the Company. Any changes or developments in a business, or the emergence of new factors in the business environment, can lead to a mismatch in the company’s management structure. Furthermore, to thrive in today’s competitive environment, businesses must constantly evolve in all aspects. This leads to conflicts in management structures at various levels. Effective control and management of the company are essential for sustainable business development.
- Establishing a Comprehensive Human Resources System to Meet Development Needs. Restructuring human resources helps filter and build a competent workforce – a decisive factor in a business’s success. Better organizational management of human resources, with greater stability, enhances leadership effectiveness and motivates employees, thereby retaining talent.
For businesses, especially small and medium-sized enterprises (SMEs), the objective is to rejuvenate the enterprise, enabling them to reflect, prepare, seize opportunities, and achieve sustainable development. So, when is the appropriate time for a business to undertake this activity? The current state of the business will be both the cause and the suitable time for the business to carry out restructuring. The signs for a business to consider restructuring at the following times are as follows:
- When the business is facing numerous issues leading to ineffective operations. In some cases, businesses may operate sluggishly, facing the risk of dissolution or bankruptcy.
- The business encounters difficulties in formulating a strategy and plan.
- The leadership team operates ineffectively.
- The financial structure is not aligned and lacks systematicity despite being an extremely crucial control tool.
- The human resources management department exhibits several weaknesses.
- The business departments lack close coordination with each other.
And many other instances… If a business exhibits signs as described above, it is time for the business to develop a plan for corporate restructuring. Corporate restructuring is not only an adaptation for small and medium-sized businesses to thrive and develop in the new era. Similar to how the body requires regular health check-ups, businesses also need to perform the task of “preventing illness” through frequent restructuring to enhance internal strength.
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