Most small and medium size businesses in India are heavily dependent on Capital especially if they are in the manufacturing or trading space. In the last few years, many of these businesses have begun to bear additional costs of compliance with GST. When a business enjoys scale, costs of maintaining mandatory compliance related to industry’s requirements, GST and income tax as a proportion of revenues is small.
Many business owners don’t maintain accounts in a professional manner. Many hire part-time accountants who come near year-end to maintain accounts. Most of these business owners have only a instinctive understanding of how their businesses are performing. For instance, they don’t have readily available data on metrics such as margins, ROCE, ROI, ROA. I come across many business owners who acknowledge that the core business isn’t doing well, but they have become wealthier due to appreciation in value of the real estate that they bought to conduct the business with. Either a office, shop or factory premises. Creating wealth by coincidental ownership of illiquid Real Estate is not actual value creation in business terms. It’s not because it isn’t scalable.
If most small business owners were to accurately calculate the cost of capital and assets that they have introduced into the business and then calculate actual profitability of the business, the numbers would be dismal. Many would be better off divesting their own small and medium size businesses and investing the capital in Public Markets. Better allocation of capital would lead to better value generation for these business owners. They themselves would lead more fruitful lives away from the stresses that these businesses create. But the reality is that most of these business owners don’t have the inclination, skill or understanding to conduct such an exercise. They are happy maintaining a status quo.