In Kosovo, firms have smaller sizes when compared to the firms in developed economies. In a research we conducted a few years ago, we found that the largest 1,000th company in Germany was 30 times bigger than the largest 1.000th company in developing countries with respect to their turnovers. We know that our small and medium enterprises (SME) have always been spending great efforts to grow for such reasons as keeping up with competition, increasing operational efficiencies and decreasing the costs. The other reason is the motivation of owner entrepreneurs to grow. However, the Covid-19 pandemic has shown us that when there are extraordinary circumstances, what is really important is profitability, not growth or size.
SMEs generally walk through growth channels with highly optimistic assumptions. They never think about the possibility of encountering small or big failures. We have observed that in the times of crises the major reason behind SME failures is the investment debts they had incurred before the crises took place. When an SME makes an investment to grow, the owner concentrates himself on increasing the sales and turnover as primary targets since he is faced with increasing finance costs. Investment also consumes the working capital reserve of the firm. For these reasons, increasing the net profit margin of the firm remains to be a secondary target. This creates a spiral of increasing profits and decreasing profit margins which, in turn, necessitates growth.
The Covid-19 Pandemic has shown that it is more important to grow profit margins than growing the incomes. During the pandemic, those SMEs which had used their working capitals and slack resources for internal growth and external investments (investments that are not related to the firm e.g. real estate purchase) struggled to survive while high profit margin firms have managed to survive the crisis with minimum loss.
How is it possible for an SME to manage its profit margin? To answer this question, let’s analyse the root factors of profitability. If an SME wants to increase its profit margin, it has to either increase its incomes or decrease its costs without changing the amount of sales, or it has to increase its sales in a way to increase the profit margin. Massive closures during the pandemic have unveiled how fixed costs such as rents, staff salaries, vehicle expenditures, communication costs etc. can create inefficiencies for a company. SMEs should carefully analyse these costs which need to be under better control in the new normal.
The other way of increasing the profit margin is to increase the incomes of the company. This means that an SME should be able to reach higher levels of incomes with the same amount of sales as measured by numbers, tonnes etc.
It seems that the effects of the pandemic will continue to remain for an unknown period of time. For this reason, SMEs should develop their distance sales competencies in their struggle to increase their sales levels. Existing sales systems and sales staff should be made ready for sales activities which are not based on one-to-one relations but through system development studies, staff training and digital infrastructure development. This is a way to develop competencies to fight against uncertainties and to adapt to new conditions.
We have mentioned above that increasing incomes at the same level of sales is a way to increase the profit margins. This means to increase the prices. A company can increase its prices by mainly two ways. 1) by finding new customers/markets 2) by offering new products/services. With regard to the first one, SMEs should view the current times as an opportunity to develop their marketing and sales competencies. They need to endeavour to find new customer segments, new markets and export opportunities. Although the markets have become smaller due to the effects of the pandemic, at the same time, some opportunities (market gaps) have appeared since some competitors left the markets. For those SMEs which are able to fill these gaps without being late, such gaps mean new customers and increased turnover. Today, every SME should be aware of the importance of online marketing opportunities and make use of support mechanisms offered by government agencies in this respect.
Another way to increase profit margins is to offer new products or services to the customers. During the pandemic, consumers’ new and changing needs have triggered innovations. SMEs should be able to satisfy these needs by making small or even radical innovations in their offers. Innovation means less competition and higher prices in the market. This is an essential factor of increasing the profit margins. For this reason, SMEs need to look at the market from a different angle after the pandemic is totally over. There are not only troubles but also opportunities in front of us in the new period when the pandemic ceases.
In summary, SMEs have to strengthen their working capital structures so that they can more easily survive any unexpected crisis. In such crisis times, the main concern should be increasing the profit margins, not growth. Growth should be seen as a tool for increasing the profit margins. In this approach towards profitability, cost management has utmost importance. If an SME tries to survive a crisis by only decreasing the costs, the result may be even more harmful. This should be accompanied by increased sales and increased prices. This is made possible by new sales and marketing methods and applying these methods by on line means. SMEs should be more active in the digital marketing world from now on and should remember that innovation will be the main factor of competing successfully in the market in the new era.
