Introduction
Mexico’s small, medium, and micro enterprises (SMEs) form the backbone of its economy. However, their growth faces a significant challenge: formalization. This issue stems from various factors, including lack of knowledge in tax matters, financial education, and cumbersome bureaucratic processes.
The Five Stages of SME Development
SMEs typically progress through five stages. Initially, a single individual manages the business without formal management skills. As it grows to employ one to five people, it enters the second stage with rudimentary administrative formation. The third stage involves formalization and surviving the initial growth curve, while the final stage seeks expansion.
- Stage 1: Sole proprietorship with limited management skills
- Stage 2: Employing one to five individuals
- Stage 3: Administrative formation
- Stage 4: Formalization and surviving the initial growth curve
- Stage 5: Seeking expansion
Many SMEs remain stuck between stages one and three due to insufficient knowledge in tax, financial, and business matters, explains Héctor Pérez, President of the Enlazadot Business Chain.
Lack of Formalization Leads to Poor Practices
Besides the lack of knowledge for SME development and formalization, some remain informal to avoid dealing with budgets and obligations towards employees.
“Entrepreneurs avoid formalization to evade tax issues and social security obligations. Many workers accept these conditions due to economic necessity,” Pérez adds.
Moreover, the distribution of profits is highly anticipated by Mexicans, with 49% of workers planning to use the money for debt repayment, according to OCCMundial’s Labor Thermometer. However, unregistered micro-businesses often evade this benefit.
The Need for Early Business Education
For a venture to be successful, it typically takes 2.3 years on average. However, many close during this period due to poor business management and insufficient market knowledge, according to ASEM.
SMEs aiming for growth face several challenges, primarily due to the lack of knowledge, especially in tax matters.
Pérez notes that many SMEs fail to seek fiscal guidance, such as understanding the appropriate tax regime or their obligations.
Furthermore, integrating business education from an early age is crucial. A decade ago, the Mexican Senate proposed incorporating business education into basic education, but it didn’t succeed.
Excessive Bureaucracy for Micro-Enterprises
One major reason SMEs avoid seeking fiscal information is the perception that tax matters are complex and there’s an excess of paperwork. In Mexico, opening a business takes 2.6 years and requires 51 procedures.
Most procedures are designed for medium and large businesses, complicating the formalization process for micro and small enterprises, Pérez states.
“There have been extensive discussions about tax burdens being designed for larger companies, leaving growing micro and small businesses unprotected. This economic impact forces these businesses to optimize their resource allocation,” he explains.
Key Questions and Answers
- What are the main challenges faced by Mexico’s SMEs? Bureaucratic hurdles, tax uncertainty, and lack of financial education.
- What are the stages of SME development? Sole proprietorship, employing 1-5 people, administrative formation, formalization and survival, and expansion.
- Why do many SMEs remain informal? To avoid dealing with tax issues, social security obligations, and complex bureaucratic processes.
- How long does it typically take for a venture to succeed? On average, 2.3 years.
- What is the significance of early business education? It equips entrepreneurs with essential skills and knowledge from the outset, enhancing their chances of success.
- Why is formalization difficult for micro-enterprises in Mexico? Due to excessive bureaucracy and procedures designed primarily for medium and large businesses.
