An Investigation into the Profitability of UK SMEs

This report delves into the profitability of Small and Medium-sized Enterprises (SMEs) in the United Kingdom, examining their operations, sources of income generation, and key growth indicators. The study investigates various factors influencing SME profitability, including revenue, costs, and manag...Read More

Profitability of Small and Medium-sized enterprise in UK
1

Table of Contents
INTRODUCTION AND BACKGROUND OF THE STUDY............................................................3
PURPOSE AND REASON OF THE PROJECT.................................................................................4
Aims and objectives.........................................................................................................................4
Rationale..........................................................................................................................................4
PRELIMINARY LITERATURE REVIEW.........................................................................................4
Theme: 1. Operations of small and medium sized operations.........................................................5
Theme: 2 Source of income generation for SMEs...........................................................................5
Theme: 3. Growth indicators of SMEs............................................................................................5
Theme: 4 Factors affecting SMEs profitability...............................................................................6
SOURCES OF DATA...........................................................................................................................7
ANTICIPATED PROBLEMS..............................................................................................................7
EXPECTED TIME SCHEDULE.........................................................................................................8
RESEARCH METHODOLOGY.........................................................................................................8
Research approach...........................................................................................................................8
Research philosophy........................................................................................................................9
Research design...............................................................................................................................9
Research type...................................................................................................................................9
Data analysis..................................................................................................................................10
Ethical consideration......................................................................................................................10
Validity and reliability...................................................................................................................10
REFERENCES...................................................................................................................................11
2

INTRODUCTION AND BACKGROUND OF THE STUDY
According to European definition, all the enterprises that employ less than 250 employees, =
annual turnover up to the maximum limit of 50million Euro and total of balance sheet does not
exceed 43million Euro are called small and medium-sized enterprises (SME). With the change in
time, the role of SME in the economic growth and development is rapidly rising. They make an
effective contribution to the nation’s growth in terms of gross domestic product (GDP), more
employment opportunities and bringing innovations. With reference to United Kingdom (UK), in
the beginning of 2016, 5.5 million private sector enterprises operating as SMEs which has been
increased by 97000 from 2015 (UK small business statistics, 2016). Moreover, 99.9% of the private
entities are SMEs that is a clear sign of increasing role of SMEs in the country’s development. They
are also offering job opportunities to number of people, which in turn, reduces unemployment rate.
In 2016, SME provided employment to 15.7 million people that represent 60% of overall
employment in private sector (UK small business statistics, 2016).
The main aim of all the UK-based SMEs is to get larger return through their daily operations.
In order to maximize their net return, entrepreneurs are focusing their efforts to get larger revenue
and manage their cost effectively. Although UK statistical data clearly represent that number of
SMEs are growing rapidly, but still, SMEs are facing financial obstacles in getting sufficient
amount of funds to support their operations. Due to lack of required capital and funding difficulties
their profitability earning capacity are affected adversely. In order to encourage SMEs, UK
government also took number of initiatives to financially support the entities, but still, performance
is still not improved to the required extent. Along with this, SMEs who are able to get sufficient
capital are suffering difficulties due to lack of management skills and experience. Entrepreneurs
have no great knowledge of financial management and unable to utilize the funds and revenues in
efficient manner, which in turn, increases business cost and results in declining profitability.
However, in the present time of volatile external market conditions, only those entities can survive
who are operating successfully. Further, with the increasing number of SMEs, the level of
competition also has been enhanced. Therefore, it becomes essential for the entities to maximize
their net return, so that, they can compete effectively with the rivalries. Proposed investigation will
be conducted to examine the profitability of UK-established SMEs. Moreover, this research will
also determine various factors that impact firm profitability. Furthermore, it will also compare the
profitability of a small sized business with a medium sized organization of UK. In the end,
appropriate decisions will be recommended to enhance the net earnings of the firm, so that, it can
reach success in the market.
3

PURPOSE AND REASON OF THE PROJECT
Aims and objectives
Research aim: “To examine and evaluate the profitability of small and medium sized enterprise in
UK”
Research objectives:
 To evaluate operations of small and medium sized enterprises.
 To determine various growth indicators of SMEs profitability.
 To examine numerous factors that impact profitability of small and medium sector enterprises.
 To compare profitability and growth of medium enterprises with that of small scale enterprises.
 To recommend appropriate ways to maximize SMEs net return in future period.
Rationale
Although many researches has been conducted earlier to evaluate the profitability of SMEs,
but still, none of the investigation has been done to examine the profit earning capacity of a small
sized enterprise. Moreover, in the historical years, none of the investigator compared the operational
performance of a small sized entity with that of medium sized entrepreneur. Therefore, this research
study helps to bridge both the gaps as in this study, researcher will analyse the net earnings of one
small sized entity and will also compare it with another medium sized business. Furthermore, this
investigation will also assist other scholars who will be willing to conduct the similar kind of study
in forthcoming period. Along with this, as already said earlier, that UK government also consider
the importance of SMEs in the nation progress and growth. They are taking necessary actions and
initiatives to encourage and promote SMEs. Thus, through this investigation, government and
regulatory bodies can determine the obstacles that SMEs are facing in their wider development.
With the help of this, they can formulate better policies and make decisions for encouraging SMEs.
Along with this, firms will be get benefited because they can determine numerous ways to
maximize their profit potential. This in turn, they can run their operations without any hazards,
enhance strategic and competitive strength and ensure long-run sustainability as well.
PRELIMINARY LITERATURE REVIEW
Literature review is regarded as the process of examining current knowledge and findings of
the different scholarly articles regarding to a particular topic. Before conducting any research,
scholar has to review, examine and evaluate theoretical as well as methodological framework in
relation to the field of study, called literature review.
4

Theme: 1. Operations of small and medium sized operations
As per the view point of Williams and Schaefer (2013), UK-based SMEs who are operating
at larger level are comparatively more able to get high profitability yield while businesses which
operates at lower level are not very much able to get high return through their daily operations. The
main reason behind this is it companies who operates at larger level have more customer base, this
in turn, they will be able to get maximum turnover and profitability or vice-versa.
Contrary to this, according to Jernström and et.al., (2017), sometimes, it may be possible that
SMEs that are operating at small level but still growing at faster rate. Greater economies of scale are
the main reason behind such operational success. It is because, high scale based benefits assist
entities to enhance their turnover and get more return on their total sales. While, on the other hand,
small and medium sized corporations who are operating comparatively at larger level, but still, may
be unable to enhance their sales rapidly because of less scale benefits. Supporting these arguments,
Timans and et.al., (2016), said that micro entrepreneurs are comparatively more able to enhance
their total sales at faster rate. While, on the other side, in medium sized entrepreneurs growth rate in
sales is constant or comparatively lower than that of small sized companies.
Theme: 2 Source of income generation for SMEs
It is essential for each and every small and medium sized entity to generate income from
different sources so as to support their daily expenditures. According to Etuk, Etuk and Michael,
(2014), sale of quality products and services is the main source of SMEs revenue. In such respect,
every entity wishes to get maximum revenue through sales by delivering best quality of products
and services at affordable prices. Thus, larger the sales volume and value helps firms to enhance
their total revenue to a maximum extent. This in turn, firms will be able to enhance their net return
and reach success. On the other hand, as per the view point of Meslier, Tacneng and Tarazi, (2014),
UK government also take initiatives to promote SMEs, henceforth, entities can collect funds from
government and meet their capital requirement. Moreover, they can invest their retained earnings in
other profitable purpose and earn return on it. Higher the income generation enable businesses to
enlarge their return and accomplish targets easily.
Theme: 3. Growth indicators of SMEs
According to Garay and Font, (2012), there are wide range of components that indicates
growth position of the SMEs. Out of all, growth in sales is the most essential indicators as high rate
of turnover increase clearly reflects that company is delivering services to greater customer base.
SMEs can enhance their yield through rendering best quality of products and services to the
customers. Moreover, attractive and reasonable prices also assist firms to attract large number of
5

people and thereby enhance their overall sales and profitability to a great extent. However, it has
been critically argued by Kuivalainen and et.al., (2012), because he said that innovations and
technological advancements is the important growth indicator. The reason behind this is, in the
present age of volatile market conditions, it becomes essential for the SMEs to make use of
advanced technological tools and equipments. Referring UK, number of SMEs is operating in the
market; therefore, the level of competition among them is widely increasing. As a result, now, only
those organizations can survive in the market that is able to bring technological innovations in their
operations, otherwise, it will be defeated by rivalries. Moreover, it also enables companies to
enhance their strategic capabilities by enlarging their net return. While, as per the view point of
Chatzoglou and Chatzoudes, (2016), competitive strength is the most significant growth indicator
component. In such regards, high value of assets, larger customer orientation, Information and
Communication Technology (ICT) adoption, greater profitability, strong financial strength, trained
personnel etc. are the factors that enable SMEs to enhance their competitive strength, so that, they
can compete effectively with the rivalries.
Theme: 4 Factors affecting SMEs profitability
There are various factors that affect the profitability of micro and medium sized enterprises.
According to Pollack and Adler, (2016), revenue is the main factor which directly affects total
earnings of the enterprises. Higher the turnover helps to enhance the total return to a large extent or
vice-versa. In other words, entrepreneurs can maximize their yield by delivering quality products
and services to the customers so that they can attract larger number of consumers so as to gain
maximum return. Contrary to this, Sidik, (2010), argued that cost is the essential factor that
determines net earnings of the company. The reason behind this is companies who are receiving
larger income through sales, but still, may be unable to get better return due to high cost. Therefore,
it becomes essential for the entrepreneurs to control their cost and thereby improve their profit
generating capability. Supporting these, Mitra Arzeni and Volpe, (2016), said that SMEs managers
need to monitor their daily activities and functions so as to administrate their business cost and
reach profit goals. In such respect, they are also advised to use budgeting techniques to maintain
effective control over cost of routine functioning and maximize their yield.
However, on the critical note, Yaacob and et.al., (2016), commented that desired or target
mark-up percentage is the most important factor that determine profitability. In such respect, mark-
up profit % is regarded as desired or target profit % that SMEs are willing to gain through their
operations. Thus, entities can decide high selling price through adding high profit-percentage on
total cost. It directly increases the net return of the firm or vice-versa. Despite this, as per the point
6

of view of Wynarczyk and et.al., (2016), quality of goods and services offered by the company is
the essential component. Hence, by offering best quality of products, SMEs can attract larger level
of consumers and maximize their profitability whilst worst quality of items influence profit
adversely. Contrary to this, Blass and et.al., (2014), argued that entity’s managerial skill is the main
component because it helps to employ better financial management practices to administrate the
operations more effectively and efficiently, which in turn, results in larger yield.
SOURCES OF DATA
Before conducting any investigation, it is essential for the researcher to gather sufficient
quantity of data. Source of data are the ways to generate required quantum of information regarding
the chosen topic to conduct the study thoroughly and effectively. There are two sources available to
every researcher to collect required data that are primary and secondary. In such respect, primary
data refers to that information which is collected by the investigator for the first time. Such kind of
data never has been generated by any other scholar for conducting his/her study (Wright, 2010).. In
short, data which researcher collected himself/herself through interviews, questionnaires, surveys
and observation are called primary sources. The main benefit of this is, it helps to generate fresh
and timely information to tailor specific demand of the researcher. While, its negative aspect is, the
data collection process takes a lot of time and financial resources of the investigator. However, on
the other side, information that is already gathered by other scholar for some other purpose is called
secondary source of data (Bryman and Bell, 2011). It comprises both published as well as
unpublished data sources. This kind of information can be collected through the previous scholarly
articles, books, newspapers, organizational annual reports, internet, company surveys, statistical
reports etc. It provides huge assistance to gather data very quickly whereas it does not helps to meet
the specific information need of the researcher that is its drawback.
In order to conduct the present investigation, data will be collected from secondary sources.
In this, researcher will gather the profitability information about both the small and medium sized
enterprise through their annual financial statements. Moreover, by reviewing historical articles and
management report, investigator will be able to analyse different factors that affects firm
profitability. This in turn, appropriate actions and plan can be recommended to the firm to maximize
the net profitability and reach success.
ANTICIPATED PROBLEMS
While conducting the present investigation, researcher may several following problems and
complexities. As stated earlier, that it will be a secondary investigation, therefore, lack of content-
specific and appropriate quantity of information is one of the main issue that scholar may face
7

(Mackey and Gass, 2015). Moreover, investigator may be unable to gather latest profitability data
about the organizations. In other words, availability of out-dated information is also a difficulty
exists in the field of current study.
EXPECTED TIME SCHEDULE
Activity/Time period (In quarter) 1 2 3 4 5 6 7 8 9 10 11
Develop a brief understanding of the topic
Formulating aims and objectives of the
research
Conducting literature review and examine
the conceptual findings of different scholar
Selection of data collection technique
Problem identification
Constructing proposed methodology
Collection of data through secondary
resources
Analysis and evaluation of gathered
information
Writing conclusion of the dissertation
Give recommendation and appropriate
actions
Submission of the report to the tutor
Modifying the changes required
Submission of the final report
RESEARCH METHODOLOGY
Research approach
There are two types of research approaches available to the investigators that are inductive
and deductive. Out of these, first is used to develop or design new theory based on the findings
whilst second is aimed and testing theory. Deductive approach starts with the formulation of
hypothesis to examine the issue, contrary to it, inductive approach starts with research questions to
8

narrow the scope of the entire study (Rasinger, 2008). Present investigation is about evaluation of
profitability of UK SMEs; therefore, inductive approach has been applied, in which, investigator
will formulate various questions addressing the problem to find out the best solution of it.
Research philosophy
Philosophy is regarded as the process of data gathering, examining and analysing.
Interpretivism and positivism are the two philosophies that researchers usually use to conduct the
entire investigation thoroughly. In the interpretivism, the objective of the investigators is to interpret
the element of the study, used in quantitative researches (Wright, 2010). However, on the other side,
positivism philosophy demonstrates their knowledge based on natural phenomena, its
characteristics and relationship as well. Proposed investigation is a kind of quantitative nature;
therefore, researcher will use interpretivism philosophy to examine profitability of UK small and
medium sized firms. With the help of this, investigator will be able to resolve the research issue or
problem effectively.
Research design
Design refers to the process of integrating all the components of the study logically and
coherently to address the chosen issue. Exploratory, descriptive, analytical, experimental etc. are the
types of research design. Out of these, descriptive research design is considered appropriate to
conduct the current investigation. By applying this research design, scholar will be able to describe
each and every element of the study in an accurate way and thereby find out the best solution of the
problem (Mackey and Gass, 2015). Through this, investigator can identify various indicators and
analyse and compare the profitability position of a small enterprise with medium sized organization.
While, on the other hand, analytical design is used to critically evaluate the facts and figures
regarding the topic and exploratory is like a primary investigation to gain insight towards the
selected issue.
Research type
Quantitative and qualitative are the two types of investigation, out of these, first use
numerical values whereas qualitative study comprises reasons, opinion and other non-numerical
factors (Silverman, 2016). Proposed investigation emphasizes on analysing and comparison of net
return of two organizations. Thus, it will make use of quantitative values about profit, revenue and
expenditures, henceforth; it will be a type of quantitative study.
Research questions
Q.1. What are the factors that indicate growth in SME’s profitability?
9

Q.2. How various factors like size, growth, current ratio, gros profit, gearing and asset-turnover
impact SME’s net yield?
Q.3. How small and medium sized enterprises can maximize their net project’s yield in forthcoming
period?
Data analysis
After gathering sufficient information, it is important for the researcher to analyse and
examine the information. There are various data analytical methods and techniques available to the
investigators such as SPSS, MS Excel and thematic approach (Rasinger, 2008). The selection of the
technique is highly based upon the type of research. As said earlier, that in the present study, scholar
will use secondary resources, henceforth, data will be examine through thematic technique. In this,
researcher will develop various themes based on the findings of the information.
Ethical consideration
In every research, it is essential for the investigator to consider ethical aspects so that
effectiveness of the outcome can be raised. In relation to the present study, scholar will maintain
ethnicity through maintaining high level of confidentiality of gathered information about the SMEs
(Bryman and Bell, 2011). Investigator will secure softcopy of the information in computerized
software and hardcopies can be prevented from authorized use through keeping it in locked safe.
Moreover, arguments will be evidenced through giving credit to the references and doing citations,
otherwise, material will be considered copied.
Validity and reliability
In order to make data more reliable, information will be gather from authentic websites of the
companies. In such regards, data will be generated from copyrighted material which is considered
highly reliable as compare to other. By doing so, scholar will be able to reach the better solution of
the problem (Mackey and Gass, 2015). However, on the other hand, validity of the information will
be maintained by gathering timely and updated information about the profitability of both the small
and medium-sized enterprises.
10

REFERENCES
Books and Journals
Blass, V. and et.al., 2014. Top management and the adoption of energy efficiency practices:
Evidence from small and medium-sized manufacturing firms in the US. Energy. 65(3). pp.
560-571.
Bryman, A. and Bell, E., 2011. Business research methods 3e. Oxford university press.
Chatzoglou, P. and Chatzoudes, D., 2016. Factors affecting e-business adoption in SMEs: an
empirical research. Journal of Enterprise Information Management. 29(3). pp. 327-358.
Etuk, R. U., Etuk, G. R. and Michael, B., 2014. Small and medium scale enterprises (SMEs) and
Nigeria’s economic development. Mediterranean Journal of Social Sciences. 5(7). pp. 656-
680.
Garay, L. and Font, X., 2012. Doing good to do well? Corporate social responsibility reasons,
practices and impacts in small and medium accommodation enterprises. International
Journal of Hospitality Management. 31(2). pp. 329-337.
Jernström, E. and et.al., 2017. The main factors affecting the entry of SMEs into bio-based
industry. Journal of Cleaner Production. 141(3). pp. 1-10.
Kuivalainen, O. and et.al., 2012. Internationalization patterns of small and medium-sized
enterprises.International Marketing Review. 29(5). pp. 448-465.
Mackey, A. and Gass, S. M., 2015. Second language research: Methodology and design. Routledge.
Meslier, C., Tacneng, R. and Tarazi, A., 2014. Is bank income diversification beneficial? Evidence
from an emerging economy. Journal of International Financial Markets, Institutions and
Money. 31(2). pp. 97-126.
Mitra, J., Arzeni, S. and Volpe, M., 2016. 15th International Entrepreneurship Forum (IEF)
Conference The Venture Academy Essex Business School, University of Essex, UK Ca
Foscari University of Venice, Italy and International Network of Small and Medium Sized
Enterprises (INSME).Journal of Entrepreneurship and Innovation in Emerging
Economies. 2(2). pp. 199-207.
Pollack, J. and Adler, D., 2016. Skills that improve profitability: The relationship between project
management, IT skills, and small to medium enterprise profitability. International Journal of
Project Management. 34(5). pp. 831-838.
Rasinger, M. S., 2008. Quantitative Research in Linguistics: An Introduction. SAGE
Silverman, D., 2016. Qualitative research. Sage.
11

Timans, W. and et.al., 2016. Implementation of continuous improvement based on Lean Six Sigma
in small-and medium-sized enterprises. Total Quality Management & Business Excellence.
27(3-4). pp. 309-324.
Williams, S. and Schaefer, A., 2013. Small and medium‐sized enterprises and sustainability:
Managers' values and engagement with environmental and climate change issues. Business
Strategy and the Environment. 22(3). pp. 173-186.
Wright, S., 2010. Research Methods: A Modular Approach. Australia: SAGE.
Wynarczyk, P. and et.al., 2016.Managerial labour markets in small and medium-sized enterprises.
Routledge.
Yaacob, N. M. and et.al., 2016. Factors Affecting the Performance of Small Business Start-Ups
Under Tunas Mekar Programme. In Proceedings of the ASEAN Entrepreneurship
Conference 2014. Springer Singapore. 113(6). pp. 3-14.
Online
Sidik, G. I., 2010. Conceptual Framework of Factors Affecting SMEs. [PDF]. Available through: <
http://www.sciencedirect.com/science/article/pii/S2212567112003516>. [Accessed on 19th
October 2016].
UK small business statistics. 2016. [Online]. Available through: < http://www.fsb.org.uk/media-
centre/small-business-statistics>. [Accessed on 19th October 2016].
12