The Challenges For SME’s In The Present Climate

This article first appeared in the Monash University Business Review

The well trodden road for SMEs is littered by the failures and short coming of many who tried and enlightened by the success of those that made it. One thing they all had in common was a set of challenges that could undo the best of intentions. Andrew Pegler takes a look at a few.

In Australia an SME is defined as a firm with less than 200 full time employees and/or less than $10 million turnover. Of our 624,010 SMEs, more than two thirds employ between one and four people with a further 180,880 employing between five and 19 meaning that 93.5 per cent of people employed by SMEs in Australia are employed by what can be described as ‘micro-SMEs’, namely companies with less than 20 employees. These mostly independently owned and operated businesses survive by adapting the crucial issues of return on investment, debt-equity ratio, break-even analysis and cash flow to their particular business. Meanwhile an emphasis on liquidity, rather than profit, gets them through the everyday reality of skills shortages, stretched finances, and the short-range management lens determined by the erratic and intensely competitive environment they operate in.

It’s about confidence stupid

One of the things SMEs are most sensitive to, more so than their than their bigger business counterparts, is confidence. This intangible but crucial determinant of profits and losses was revealed to be waning in a recent National Australia Bank survey of SMEs which took in 650 with an annual sales turnover of between $2 million and $10 million. It found most felt conditions were worsening with labor market pressures, interest rates and demand the main constraints. “The role of confidence is all important,” claims Tony Steven, Chief Executive of small business peak body the Council of Small Business of Australia. “When the economy is going well SME confidence builds with it, but when the Reserve Bank puts up interest rates we get a critical mass where consumers and SME confidence crashes at once. I believe this has now happened and confidence won’t return quickly. I also think SMEs are still carrying too much debt which can impact heavily on confidence. These debt levels also reflect the most important issue to us at the moment which is education around how to run a business.”

Skills, Skills, Skills

Broadly speaking, in an era of high employment as we have in most Western Economies at the moment, small businesses suffer skills shortages because the staff they need are already hired by larger organisations offering better salaries with more bells and whistles. “Skills has been an issue for us but we’ve developed a successful response to the challenge,” explains Dianne Taylor, joint owner of Stug Australia, a Melbourne based mechanical engineering company with 32 employees. “We literally had to take a marketing strategy approach and ask ourselves what is our unique value proposition and we discovered our advantage is size. So we’ve focused on creating a more family friendly work culture where the boss knows your name and it has worked really well.”

It’s not all bad news moving forward, for SMEs with the Federal Government about to boost Australia’s skilled migrant intake by 30%, taking skilled migrant numbers to 133,500 for the year, by far the largest component of the country’s total migrant intake of 190,300.

Innovation on the global playing field

Countries and regions like China, India, Brazil, South East Asia and now Eastern Europe now attract the majority of Foreign Direct Investment and increasingly dominate global supply chains. Brazil, Russia, India and China combined – the BRIC economies – are putting over 3 billion highly competitive workers on the global playing field and not just in low-wage manufacturing and information labour but increasingly in high-skilled areas like engineering, programming and design. Some sobering figures back this – while China produces over 350,000 tertiary qualified engineers a year the US only produces 138,00; over 400,000 American tax returns will be processed by Indian accounting firms this year and Brazil’s second largest source of exports is now passenger jets made by Embraer, the world’s fourth largest civilian airplane maker. With those sort of figures it’s not hard to see why Goldman Sachs estimates that in less than 40 years the BRIC economies will be larger than the G6.

In order to gain a niche in this fiercely completive global economy Australian SMEs need to find something that nobody is doing and innovate on it. To quote one of Australia’s leading innovation researchers, Steve Dowrick Head of the School of Economics at the Australian National University “…although the rest of the world provides a huge source of ideas and technologies, a country like Australia cannot rely on a strategy of passive absorption to maintain strong productivity performance. In order to benefit from the global public good of world knowledge, countries need to have well trained scientists, a technologically capable workforce and active engagement in cutting edge research.”

Misperception of policy makers

As a founding father of entrepreneurship, the late Mike Scott of Stirling University in the UK, once famously quipped “a small business is not a little big business”. It is easy to assume that all businesses are the same, regardless of size. That they have the same structures, competencies, capacity to delivery on customer requests, capability to handle legal issues, HR etc, etc but they don’t. Policy makers often overlook these facts and treat all businesses as the same, because they are dealing at a meta level, on policy, law and so on. “About the only thing small and large businesses have in common is they sell goods or services,” says Associate Professor Mark Dibben of the Monash University School of Business & Economics. “SMEs don’t exist for the benefit of shareholders and don’t have any capacity to generate big funds like big business. Also their raison d’etre is often worlds apart, big business is about growth and shareholder value while an SME is more often about putting the owner’s kids through school and keeping a roof over the family’s head. This generally smaller scale of SMEs means that things like company tax laws, GST registration, employment law, data warehousing and health and safety compliance are a disproportionate burden to SME’s compared to their larger competitors. It’s not to say that the laws are wrong, or should be changed it’s just that the burdens on SMEs are not at the forefront of legislators minds.”

Funding high technology

High technology SME’s come in all shapes and sizes ranging from IT and Biotechnology to makers of advanced materials and medical device. They need state-of-the-art equipment for optimum results, marketability and contract retention and the challenges they face include problematic legal definitions of patentability, the high risks of research, long lead times to the commercial exploitation and, particularly in biotech, sticky moral/ethical issues like embryonic stem cells use. However, according to Prof. Nick Birrell Director, Monash Asia Pacific Centre for Science & Wealth Creation, their main challenge is getting finance. “If you are a bio tech and you want to undertake a clinical trial it costs a lot of money. Banks are not that keen to lend unless you have established revenue and profit so typically a high tech will look to venture capital which is often very hard to get.

And things just got a whole lot tougher since Commercial Ready, a Federal Government SME grants program that subsidised innovation and commercialisation, was scrapped in the recent Budget,” says Prof. Birrell “Companies used to be able to claim 50% of innovation project costs under the program, up to AU$5 million and its demise is considered by most high tech SME’s as a disaster.” Any new grants programs will not be introduced until the next year’s budget, which will mean that SMEs looking for help with their innovation projects will have to wait.

Weaving a web

Meanwhile, on today’s web-enabled playing field SMEs can work together or compete, regardless of geography, time zones or soon, even language. This means business not only has the ability to move jobs wherever there’s a factory, but now wherever there’s broadband. Tech savvy SMEs with an internationally viable product can exploit serious exporting opportunities with the right web presence. However, as Mark Dibben warns, a global presence, especially in emerging industries, can be problematic because of the possibility of an unexpected and considerable surge in demand. “The demands placed on an SME will be commensurate with the quality of its website in other words if they look like a big business they’ll be expected to deliver like one. This can crush a business much like it nearly did with Amazon when it first started. ”

Regulation: Better the devil you know?

Important to any functioning SME sector are the invisible but all powerful tillers of regulation. According to research from Ibis World our least cumbersome sectors, in terms of regulation, are health and community services, personal services and cultural and recreational services while the most regulated are the construction, agriculture and mining sectors. Not surprisingly mining enjoys the best growth conditions.

Regulation takes many forms from licenses to permits to quotas some examples include limits on taxi licences, taxes on exports, anti merger legislation and, although often derided, industry codes of conduct like those in advertising and television. “The two big issues for most SMEs remains compliance associated with GST and the State payroll tax,” reveals Graeme Chipp, Managing Director of the Growth Solutions Group which employs 20 and consults to senior management in Strategy and Marketing. “The associated paperwork with the GST is not insignificant given quarterly BAS requirements and State payroll tax is a clear penalty for growth particularly in our industry where creating new productive jobs for people is as much a key driver of growth as it is an outcome.”