CHALLENGES FACED BY SMALL AND MEDIUM
ENTERPRISES: A CASE STUDY
Chirasthi Umayangana Amarasingha
206009L
Faculty of Business
University of Moratuwa
Sri Lanka
September 2021
EXECUTIVE SUMMARY
The COVID – 19 pandemic has caused many difficulties to people, especially small and medium
enterprises that do not have the financial security as large firms. This report aims to discuss the
challenges faced by small firms and the negative impacts of COVID – 19 on them. Then, a case
study of Creative Design Company has been done discussing the challenges they faced with
proposed resilient measures to overcome them.
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TABLE OF CONTENTS
Executive Summary ......................................................................................................................... i
List Of Tables ................................................................................................................................. ii
1.
Introduction ............................................................................................................................. 1
2.
Challenges Faced By Retail Sellers During COVID– 19 ........................................................ 2
3.
Impact Of COVID – 19 On Small Businesses ........................................................................ 5
3.1
Positive Impacts Of COVID – 19 .................................................................................... 5
3.2
Negative Impacts Of COVID – 19 ................................................................................... 6
4.
Measures To Aid Small Businesses......................................................................................... 8
5.
Case Study Of Creative Design Enterprise.............................................................................. 9
6.
5.1
Introduction ...................................................................................................................... 9
5.2
Challenges Faced.............................................................................................................. 9
5.3
Proposed Resilient Measures ......................................................................................... 10
Conclusion ............................................................................................................................. 11
List of References ......................................................................................................................... 12
LIST OF TABLES
Table 1: Challenges reported by entrepreneurs before and during COVID - 19 (Looze & Desai, 2020) ...... 4
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1. INTRODUCTION
The Coronavirus pandemic originated in Wuhan, China back in 2019. The disease, harmless at
first, can cause deaths if left untreated. It quickly spread to the rest of the world and WHO declared
a global pandemic in March 2020. Since then many countries have imposed restrictions on
travelling, nationwide lockdowns to stop the spread of COVID -19 with social distancing.
During these lockdowns, most businesses were not allowed to operate unless they were providing
essential services. This curtailed the operations of many businesses and they faced many
challenges. The world is experiencing the largest global recession since the Great Depression due
to supply and food shortages, agricultural disruptions and closure of business firms. In this study,
we aim to discuss the challenges faced by small and medium enterprises (SMEs) during COVID
– 19 and how they face these challenging situations.
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2. CHALLENGES FACED BY RETAIL SELLERS DURING COVID –
19
Retail sellers are businesses who directly engage with the end customers. All businesses were
adversely affected by the global pandemic. The largest impact was felt by the small and medium
enterprises. They faced many challenges during these troubling times.
Cash is required by all businesses to finance their economic activities. The COVID – 19 pandemic
affected the cash position of many businesses. There were less customers than before and most
transactions would occur on credit basis. They also have to make payments to suppliers. Therefore,
many firms were having cash shortages. Even emergency savings would be insufficient with the
uncertainty of the duration of the lockdown. Many businesses had to close down due to defaulting
on necessary payments. Surviving with limited cash was a hard challenge for many businesses.
The COVID – 19 pandemic added many hardships to firm owners. The hardest challenge for small
enterprises is to survive in high competition with colossal enterprises. For example, many retail
grocery shops are ceasing operations as they cannot compete with the low prices and deals offered
by supermarket giants. The pandemic gave even more stress and worry to firm owners. To operate
in the new normal of the global pandemic, companies have to adhere to social distancing
guidelines. Although the primary objective of the company is to earn profits, it must take the wellbeing of its employees and customers into account. Thus, owners had to ensure that their company
and employees are well protected to continue operations. The safety regulations are an added cost
that is essential. Many small and medium retail sellers couldn’t cope with the added stress and
ceased operations.
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Another challenge faced by retail sellers is the reduction in customers. The strict regulations and
quarantine imposed by the government meant that all should stay indoors. Even when regulations
were lightened, people were hesitant to venture outside due to the fear of contracting the disease.
This meant that firms had a large reduction in revenue due to reduced customers. All firms had to
adapt to the new normal. Many firms adopted online operations. Large entities had the resources
to adopt online methods. For example, Keels Supermarkets already had an online platform to sell
its goods and services. They only had to promote the website to customers and expand the website.
Small and medium entities do not have the resources to develop an online presence. However,
many firms found creative low cost methods to build an online presence. Many retail sellers used
online platforms such as WhatsApp, Facebook and Instagram to spread the message. They also
collaborated with online platforms designed for online selling such as Pick Me, Uber Eats and
Daraz.
Another challenge faced by retail sellers is the disruptions in their supply chain. Many firms were
facing difficulties during these trying times. This meant that they either curtailed or ceased
operations. This meant that there were many disruptions in the supply of raw materials. For
example, the agriculture industry underwent many hardships. Along with the pandemic, the
government discontinued the import of pesticides and fertilizers. Many farmers ceased cultivating.
This meant that grocery retail sellers faced problems, as they had none to sell. Therefore, many
firms had to navigate through supply disruptions.
The stringent laws and policies were another challenge faced by retailers. They had to adhere to
these laws restricting them from opening their businesses. Only a limited number of businesses
were allowed to operate due to them providing essential services to the population. Retail sellers
had to ensure that all employees had sanitary masks on and that sanitizer stations were accessible
to customers. Although this was an added cost, it is quite necessary for the well-being of both the
employees and the customers (Partida, 2020).
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Pre–pandemic
Pandemic
(%)
(%)
Finding customers
60
80
Funds to start the business
64
72
Funds to grow the business
54
64
Self-doubt and fear
50
58
Laws, policies and regulations
23
52
Skilled employees
39
52
Networks and connections
63
51
Information, education or knowledge
39
48
Social support
36
43
Time to devote to the business
36
41
Location, region or geography
17
39
Mentors who can provide guidance
27
34
Inclusion
17
28
Challenge
Table 1: Challenges reported by entrepreneurs before and during COVID - 19 (Looze & Desai, 2020)
The table above shows a study conducted which shows how many entrepreneurs were facing the
aforementioned challenges. It is evident that they are facing more challenges that are difficult
during COVID – 19 than before. The challenges that were faced by many are finding new
customers and having insufficient funds to start or improve the business.
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3. IMPACT OF COVID – 19 ON SMALL BUSINESSES
The industries that were affected by the pandemic the most are the tourist, apparel, and handcraft
industries in Sri Lanka. The country had to close its borders to stop the spread of the disease.
Lesser and lesser of tourists arrived in Sri Lanka. This resulted in the loss of one of the major
income earners for Sri Lanka.
3.1 Positive Impacts of COVID – 19
COVID – 19 is a tragedy that nobody expected. As it is with human nature to survive through
challenges, many businesses adapted themselves to survive. With no physical interactions, firms
had to find new ways to find and engage with customers. COVID – 19 forced businesses to
improve their digital presence in order to survive. Small businesses used low cost online platforms
such as WhatsApp, Facebook and Instagram. They also collaborated with online platforms such
as Pick Me, Uber Eats and Daraz.
COVID – 19 also provided small businesses with the opportunity to innovate and expand their
businesses. With the rise of pandemic, sanitary masks, sanitizers were in high demand. This
allowed many retailers to expand their businesses, Cloth vendors and fashion stores offered
matching masks to their clothes. Retail stores also offered sanitizer products. With the increase of
online activities, many new businesses also originated. Firms came up with technological products
such as health and medical apps.
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The pandemic introduced a new working environment for businesses. Employees had the
opportunity to decompress and work from home. This allowed employees to have a novel
experience in working. It allowed them to connect more with their families and engage in work at
the same time. This is a source of motivation for employees and has a positive impact on the wellbeing of employees. This has led to a rise in productivity levels and efficiency within
organizations.
The rise in productivity levels, the discontinued use of office space, and layoffs has reduced the
costs of businesses. In a time, where there is reduced revenue due to reduced customers, companies
must have lower costs in order to survive. The new situation has forced companies to adapt and
find efficient ways of conducting businesses.
3.2 Negative Impacts of COVID – 19
The Coronavirus pandemic had many adverse effects on small businesses. The largest impact was
on the customer business of firms. Small businesses depend on physical interactions and methods
to sell their products often by having a small physical store or mobile selling. The social restrictions
imposed and the possibility of contracting the disease hindered the conduct of small businesses.
This has reduced the revenue and profits of small businesses where they are struggling to survive.
Small businesses depend heavily on their supply chains. With the cessation of many businesses
and frequent curfews and movement restrictions, firms are having difficulties securing raw
materials and products for sale and production. Imports were also restricted recently, which will
have negative impacts on companies. For example, the apparel industry depends heavily on
imports arriving from China. Nevertheless, with the import restrictions imposed by the government
to control the currency flow from and to the country, many businesses are facing difficulties in
continuing production activities.
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Companies were struggling hard due to COVID – 19. Because of this, they had to reduce costs to
survive. Therefore, there were many layoffs. Many employees had to work for lesser wages or
became unemployed. Many lost their sources of income during the time they need it the most.
Businesses also had to let go of their most productive and efficient workers which is a loss of
valuable human resources. Because of this, companies would be less efficient and productive than
before.
The accumulation of all these negative impacts has resulted in many firms closing down. Many
small and medium firms had to face more challenges than before. If there were no proper controls
and plans in place to face the situation, the business would close down. In addition, if there is not
sufficient support from regulatory authorities and the government, it becomes difficult to maintain
operations. The COVID – 19 has resulted in many small and medium businesses ceasing
operations. This adversely affects the economy as businesses derive an economy. They are a source
of income, employment opportunities and economic growth. The loss of such valuable resources
would affect the future of the country (Gunawardana, 2020).
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4. MEASURES TO AID SMALL BUSINESSES
Small and medium enterprises require aid to survive in these trying times. The government has
taken many steps to provide relief. Many companies are financing their economic activities with
loans obtained. During these times, it is difficult to repay loans and companies are more likely to
default on payments and close down. The government offered concessions for existing loans that
needed to be paid. They also introduced additional loan facilities for working capital requirements
of entities. The government also provided Samurdhi recipients with an additional Rs. 5000 and a
loan of Rs. 10 000. Micro and self-employed entities were also granted Rs. 5000 to overcome their
difficulties.
Many innovations were made, especially in the health industry during this period. It is essential
that the government support these enterprises to promote growth and innovations in the country.
In addition, many businesses initiated their online presence during COVID – 19. It’s important
that these initiatives have enough working capital to continue operations. The government must
provide appropriate financing schemes to such companies.
The government can also take steps to reduce corporate and income taxes of small and medium
enterprises. This will ease the liquidity problems faced by them. The government can also take
steps to promote companies who are doing essential services and online business. The recent
import restriction also poses challenges to companies. Proper relief must be provided for this.
For the supply disruptions that occur frequently, companies must have a proper supplier network.
They must take steps in securing more than one supplier. This will enable them to produce and sell
without any disruptions. Businesses must also make changes to their business models. With the
current situation, online marketing and selling is necessary. Digitalizing the business will help to
get more customers and increase revenue.
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5. CASE STUDY OF CREATIVE DESIGN ENTERPRISE
5.1 Introduction
Three entrepreneurs initiated “Creative Design” in 2017. Their vision was to support local
businesses by providing a platform to market their products. Their product range includes coasters,
placemats, coconut shell spoons, bamboo straws, floating pool trays, cheese boards and serving
platters. They only use sustainable, natural resources in the creation of their products. The
company caters to the local market and international markets such as Australia and France as well.
5.2 Challenges Faced
Exporting products brings its own challenges to a business. Exporters compete not just on price,
but quality and reliability as well. Often export companies must wait two to three months to receive
payments of sales done. This creates a short-term cash shortage. The impact of this issue is felt
more by SMEs than large firms. SMEs are treated as high-risk borrowers by banks as they do not
have sufficient collateral. Due to this, they will incur higher borrowing costs as well. All this results
in exporting companies such as Creative Design not having adequate capital to export their
products. They would be unable to expand their business as they wish (Sri Lanka Export
Development Board, 2021).
Another challenge faced by the company is the COVID – 19 pandemic. The business was affected
by the frequent curfews imposed. However, they managed to develop their online presence and
conduct online delivery services. This has only brought in limited income and they wish to expand
their online presence. They were unsuccessful in obtaining the concessionary 4% interest loan
offered by the government.
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5.3 Proposed Resilient Measures
The company must secure adequate funding to sustain and expand its operations in the future. This
can be done by obtaining loans from banks. As they are currently unable to do so, reasons must be
examined and rectified. The company can also look for low interest loan schemes and financial
grants offered by other financial and non-financial institutions.
The Colombo Stock Exchange and the Securities and Exchange Commission has taken steps to
improve the SMEs access to finance. The EDB has also launched a SME training program that
helps entrepreneurs to explore new markets and financial opportunities.
The company also needs to expand its online presence. If the company is currently using social
media platforms like WhatsApp. Facebook, it can expand into sites that cater to online selling such
as Daraz. The company can also create its own website where the products can be featured and
sold online. It can also expand to international markets online. Goods can be bought online and
shipped to its destination.
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6. CONCLUSION
The COVID - 19 pandemic has been hard for many people. The impact was mostly felt by small
businesses. They faced many more challenges than large firms such as cash shortages, supply chain
disruptions. These created negative impacts on SMEs. Most found it difficult to conduct
operations. The government offered many solutions. In conclusion, we can say that SMEs need
our support more than ever.
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LIST OF REFERENCES
Gunawardana, D. P. (2020). The Impact of COVID 19 to SME Sector in Sri Lanka. Colombo: United
Nations.
Looze, J., & Desai, S. (2020, Dec 16). How Does COVID -19 Affect Challenges Facing Entrepreneurs?
Trends by Business Age. Retrieved from Ewing Marion Kauffman Foundation:
https://www.kauffman.org/entrepreneurship/reports/how-covid-19-affects-challenges-facingentrepreneurs-by-business-age/
Partida, D. (2020, Nov 14). 7 COVID-19 Struggles Small Businesses are Facing and How to Overcome
Them. Retrieved from Due: https://due.com/blog/small-businesses-struggle-in-pandemic/
Sri Lanka Export Development Board. (2021, Jan 18). The Role of SMEs in Sri Lankan Exports. Retrieved
from Export Development Board: https://www.srilankabusiness.com/blog/role-of-smes-srilanka.html
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