Background
There is no unequivocal definition of what is meant by an SME. McLaney (2000) identifies three characteristics:
1. firms are likely to be unquoted;
2. ownership of the business is restricted to few individuals, typically a family group; and
3. they are not micro businesses that are normally regarded as those very small businesses that act as a medium for self-employment of the owners. However, this too is an important sub-group.
The characteristics of SME's can change as the business develops. Thus, for growing businesses a floatation on a market like AIM is a possibility in order to secure appropriate financing. In fact, venture capital support is usually preconditioned on such an assumption.
The SME sector is important in terms of contribution to the economy and this is likely to be a characteristic of SME's across the world. According to the Bank of England (1998), SME's accounted for 45% of UK employment and 40% of sales turnover of all UK firms. This situation is similar across the EU.
Future developments mean that the importance of the SME sector will continue, if not develop. The growth in small, new technology businesses servicing particular market segments and the shift from manufacturing to service industries, at least in Western economies, means that economies of scale are no longer as important as they once were and, hence, the necessity for scale in operations is no longer an imperative. We know, also, that innovation flourishes in the smaller organisation and that this will be an important characteristic of the business in the future.
The cost of capital is 12% and AICO depreciates all its fixed assets on the straight-line basis. By cost of capital is meant what it costs to raise the required finance for the project.
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