The report not surprisingly found that the failure rate of small businesses is significantly higher than that of large business ("large" being defined as those businesses having greater than 200 staff)
A definition of "small business"
The report used one of the most common definitions of "small business" here in Australia as ".... an entity which is independent and privately owned and which employs less than 20 staff". If they are actively trading, then these entities will require an ABN - which in turn enables the ABS (Australian Bureau of Statistics) to gather and collate data to gain a demographic profile of small business. In practice, most small business owners "manage" their business and closely control it's operations.
The wide range of small businesses in Australia
The small business sector in Australia comprises three broad parts. One part provides a range of professional services to other businesses and households such as tradespeople (electricians, plumbers, roofers, landscapers, painters), mechanics and auto sales dealers, skilled professionals (lawyers, accountants, financial planners, consultants), doctors and dentists, other health and exercise practitioners, real estate and insurance agents, information technology providers and tourism-related businesses (bed and breakfast facilities, tour operators).
Another part represents various types of retail outlets, including small shopkeepers (grocers, petrol stations, hardware, hairdressers, beauticians, newsagents, jewellers, dry cleaners, small clothing, home and hardware stores) and processed food and drink providers (liquor stores, bars, take outs, restaurants).
Finally, there are a number of companies that produce a range of niche and other goods in the manufacturing, construction and agricultural sectors
Most owners of small businesses are "self-employed"
The Reserve Bank of Australia report identified that there were over 2 million small businesses that were actively trading in Australia. This figure represents over 95% of firms trading in the Australian economy - of which more than two-thirds do not employ staff (ie. the owners are "self-employed"). And one quarter employ 1- 4 staff, and are defined as micro-businesses.
Furthermore, the report identified that over one-third of small businesses are trading within the "business services" industry.
Small business contribution to the economy
In terms of employment, the small business sector is a substantial employer - in many industries small business represents the biggest employer.
In regional and rural areas around the country (outside of the mining industry), economies of scale are reduced and do not offer large business the same advantages as what they do in metropolitan areas - so it tends to be small business that is delivering services and goods.
One of the most interesting points the research found was that although the actual amount of R& D expenditure of small business was understandably less than large business, the actual number of firms engaged in "innovative activity" was greater in small business. Over 85% of small business firms reported that they were engaged in some type of innovative activity. This represents a large number of entrepreneurial innovation activities and as such the small business sector can be an important source of bringing new products to market.
The motivation of the small business owner
The report ( The Economic Trends, Challenges and Behaviour of Small Businesses in Australia )referred to recent research in the United States which identified three of the most common motivators for those entering small business ..... Typically it was a life-style choice, where the establishment of the firm is driven by either one or a combination of the following -
- A desire to be one’s own boss,
- To have more control over the hours of work,
- To engage in a passion and hobby, that also produces income
A low survival rate for small business
Many of us have heard that there is a disturbing high incidence of "failure" in the small business sector. Anyone running a small business, particularly those in the retail sector, will tell you that it's tough and that selling prices have come under intense pressure. Hence the number of "sales" and "huge discounts" regularly advertised now-days - great for consumers, challenging for business owners. Small business have scaled back both their hiring and their capital spending - playing it cautious.
The Reserve Bank report identified that "..... less than half of the firms that were established in 2009/10 are still operating" Although some of these figures would likely represent owners who had decided to retire, and some businesses that may have merged - the report concluded that the vast majority of these businesses that are no longer operating were the "consequence of business failure". It is debatable however, whether this is indeed a valid conclusion. Mind you, in the same way, it could be said that just because a small business continues to operate and trade, it does not mean that it is doing so successfully.
Challenges faced by small business
The report confirmed some of the major challenges faced by small business owners and which were contributing to the high exit rate ....
- Unpredictable fluctuations in demand, typically associated with fluctuations in economic conditions and consumer confidence
- Cash flow strains - with customers delaying or defaulting in payment
- Difficulty to compete on prices against larger businesses who are able to take advantage of economies of scale. This advantage id not limited to production and procurement costs, but extends to costs associated with compliance
- Access to and availability of capital which can limit, or at least delay investment and expansion plans
- Management deficiencies - with technical experts taking on responsibility for things like staff recruitment and staff management, financial management and marketing - areas in which they lack capability and have received inadequate training
- Succession planning
An additional report that was prepared for the Australian Government Department of Trade (Dec 2012) provided some further statistics on the entry and exit rates for small business. At the time that report was written, it was interesting to note that the highest number of small business entrants were located in New South Wales, followed by Queensland ahead of Victoria.
So what can you take away from this report - particularly if you are a small business owner?
Well, you probably don't need a government funded report to tell you that running a small business isn't all a bed of roses. It confirms though, that there is no room for complacency as a small business owner - one of the keys is to keep on learning and improving. This allows you to adapt to changes in the marketplace. And the report is a reminder of the need for resilience and mental toughness
But if you are new to small business, let me say this. If you find there comes a time in the future when you do need to exit the business - do NOT regard this as a failure. The failure would have been to never have attempted it. And you will have learned from the experience - so that next time, you will be wiser and better prepared should you decide to commence another business. It is a fear of failure that prevents may people from trying new things - so regardless of whether you achieved the business goals you set for yourself, never-the-less congratulate yourself for having the courage to invest in yourself.
It may well be that one of the lessons you take away from an unsuccessful outcome is the need to gain more mentoring and guidance from experienced business people to help you launch your new business next time.
Business incubators have become an increasingly utilised resource that provide both physical locations for start-ups, as well as networking opportunities with other entrepreneurs. Small business accelerator programs are also offered throughout Australia that support entrepreneurs take their ideas and commercialise them to the next level.
In closing, let me say that a smart business person knows when to walk away from an unprofitable venture. And as Richard Branson says "Business opportunities are like a bus - if you miss one, don't worry because another one eventually will come along"
About the author
Brian Carroll is the founder of Performance Development, a training business in Melbourne, Australia. He is an experienced management coach with a passion for helping people achieve their goals in life and business. You can find out more about Brian at his Google + profile