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Future Competence in Medium-Sized Businesses
They are on the rise and have a strong sense of corporate responsibility. The desire to shape the future is strong And there is no lack of consistent action. The future for SMEs – small- and medium-sized enterprises – looks bright. SMEs continue to strengthen their economic position. This was confirmed by the study "2016 – State of the Small- and Medium-Sized Industry" (Diagnose Mittelstand 2016) conducted by a German banking association (Deutscher Sparkassen- und Giro-Verband, DSGV). This study is based on an analysis of approximately 250,000 corporate balance sheets as well as qualitative interviews with entrepreneurs.

Satisfactory profit levels
Among other things, it is quite remarkable that the majority of SMEs consistently improves their sustainability and profitability. With perseverance and tenacity. Returns on sales were weak at times in the past but took a turn for the better a few years ago.
80% of SMEs report a good or satisfactory profit situation; one fifth of them is in the problematic range, with returns on sales below 1%. However, more than 15% of SMEs achieve returns on sales of 16.3% or more.
The average return of 7% is slightly below the previous year, but still higher than that of the 110 largest listed stock corporations who achieved a margin of 6.3%.

 
A sustainable future through targeted professionalisation
Our experiences in the fields of business consultancy and auditing are consistent with the results of the DSGV study. However, the efficient management of business development presents a significant challenge, not only today, but even more so in the future.
Thanks to globalisation, the effects of the global marketplace can be felt even in a sleepy village store. This means that the products of local companies suddenly are in direct competition with products from large international corporations. Things are no different in the service sector: just take a look at Amazon and local book shops.
For SMEs and the mid-sized sector this development means, on the one hand, that consistent professionalisation is key. However, on the other hand, it would be a major mistake to blindly copy the ways larger companies do business. Small companies have to do without most of what large companies can afford thanks to economies of scale. In these cases, the key question always is: What is the best plan of action? What can we do without? This is where entrepreneurial cleverness comes to light, sometimes even genius. It helps to be a genius, but it certainly is not required.

 
Equity ratio and corporate independence
Certain aspects of contemporary professionalism in SMEs pretty much apply across the board, as they are independent of the market and the strategy of the respective company.
For example: if you have an adequate supply of capital, you sleep better at night and thus are probably more productive. Also, you can create long-term, sustainable strategies, which in turn allow you to identify solutions in a timely and reliable manner and avoid costly mishaps. The level of equity available therefore plays a key role in the corporate management of a company.
Limited equity capital is the Achilles' heel of SMEs, however, it is a noticeable trend that many of them are consistently working on improving their equity position. According to DSGV expert Sebastian Kral, SMEs have increased their equity ratio from 3% at the turn of the millennium to currently 25.5%. Various indicators suggest that SMEs will continue on their course to corporate independence. Entrepreneurs bank on long-term strategies. This gives us cause for optimism for the future of SMEs

 
Planning and controlling
Just as important, however, is ensuring transparency in all matters that may have an impact on the cash flow and profitability of the company. In this area, some SMEs have not kept up with the enormous progress made by larger companies, especially since the 1990s. These companies often underestimate the great opportunities offered by modern planning, controlling and monitoring systems. Having a precise overview of where and when costs arise would allow them to make concrete improvements – very efficiently and right away, when it matters most. Where complete cost transparency is lacking, individual errors may turn into undesirable developments which require more widespread solutions in the future. When it comes to the quality of planning and mapping company processes in numbers, forward-looking medium-sized businesses must be at the same level as large corporations.

 
Broadening the sales horizon
Nowadays, the systematic expansion of the sales horizon is also an important topic for SMEs. Higher sales mean enhanced profitability. For the mid-sized sector this is a critical issue since expanding the sales horizon also often entails a geographical expansion of the sales market and that may require the following: an export offensive.
For local providers, export activities are typically limited to nearby regions or states in the beginning. How can this best be achieved? The most efficient solution for many companies is the Internet.
In the consumer goods area, foreign transactions can be carried out completely virtually, while on-site activities are still required in many cases in the business-to-business sector, in particular in the manufacturing industry. However, the development of new markets can be greatly facilitated by partners and outsourcing solutions. Hiring permanent staff with international experience, contacts abroad and a passion for other cultures can be somewhat time consuming, but is critical from a strategic perspective.


Corporate culture motivates employees
A critical element for medium-sized businesses in many cases is the corporate culture. Employees who strongly identify with their company usually work more diligently, quickly, and more creatively than employees who have an ambivalent relationship with their employer. Medium-sized enterprises must maintain lean structures. The high flexibility and efficiency of motivated employees are the secret to the prowess of medium-sized companies.

 

Please note: SME and the mid-sized sector
There is no binding definition for the German term "Mittelstand" (mid-sized sector). The term primarily refers to the corporate philosophy and certain qualitative characteristics, e.g., the fact that assets, company management and corporate liability are in the hands of a single person, a family or an interconnected group of people.

 
The European Union bases its definition on the American terminology; the term "Mittelstand" in the German sense does not really exist there. Therefore, the EU adapted the term "SME/Small- and Medium-Sized Enterprises" – "KMU/Kleine und Mittelgroße Unternehmen" in German – for which it uses the 50/250 rule as the definitional upper limit: a maximum of 50 million euros in annual turnover and a maximum of 250 employees.
The Institut für Mittelstandsforschung (an entrepreneurial research institute) in Bonn uses the same turnover threshold but limits employees to 500.

 
When talking about medium-sized businesses and the mid-sized sector, Acconsis uses the definition of the Kreditanstalt für Wiederaufbau, KfW (a German government-owned development bank): the world's largest national development bank limits medium-sized businesses to an annual turnover of 500 million euros and a maximum of 500 employees – ten times and two times, respectively, the upper limit of the EU values.
The tax offices, however, use a completely different definition for their corporate registers. According to them, trade companies with an annual turnover of at least 7.3 million euros and manufacturing enterprises with an annual turnover of just 4.3 million euros are considered "large companies".

Commentary by  Wolfgang Stamnitz