Chartered Accountants ANZ: Beefing up the nation's SME sector - very good article


Small business

Small and medium-sized enterprises (SMEs) are in an unusual position. They are lauded, championed and eulogised as the heartland of innovation and entrepreneurship, and yet at the same time they can be disadvantaged, and some would say even abused, by the forces of competition, by the banking system, and by the burden of regulatory compliance.

Such is the pressure on small business that the Australian Chamber of Commerce and Industry (ACCI) has an alliance with mental health support group beyondblue, to help small business owners overwhelmed by the pressure.

Individually, small and medium-sized businesses are specks on the economic landscape. Collectively, they provide around 50 per cent of private sector employment, contribute 46 per cent of GDP, while businesses with fewer than 200 employees comprise 99 per cent of all private businesses in Australia. But they are so busy competing against each other that it is hard for them to find a united voice on the issues which impact them all.

“Small businesses and family enterprise are absolutely crucial to our economy and to the wellbeing of communities right across the continent,” says federal Small Business Minister Bruce Billson, in a motherhood statement typical of those who support the SME segment.

Peter Anderson, chief executive of the ACCI, chimes in: “SMEs are the heartbeat of innovation and creativity in an economy that has to become more innovative, creative and diverse.” Well, if they are so important, what are the issues they face and how can we help them thrive, and also have SME activity in harmony – and not in confrontation – with trends such as the squeezing of suppliers by retail oligopolies and the proliferation of ‘home brands’?

The challenges of 2014

By most economic analysis, this is particularly relevant as Australia progresses through 2014. SMEs, battered by the GFC and its aftermath, are at last starting to show signs of life in key metrics such as their appetite for borrowing and other credit, like asset and equipment finance.

Banks, which have spent five years or so ignoring SMEs, are starting to notice and SME strategies are on the agenda for all banks as a key growth area for 2014. Westpac, for example, has just appointed its first general manager of small business as it attempts to become the SME banking champion, a title that rests – almost by default – with NAB.

This is despite the fact that small business people are regularly required to put their family homes up as collateral for any debt funding, and have to adhere to rigorous covenants for any loans they receive. Competition is heating up however, with the likes of niche debtor finance providers such as Bibby and Scottish Pacific already active, and mid-tier banks like Bank of Queensland, Suncorp and Bendigo Adelaide working hard on their SME footprints. But without any serious critical mass, the SME sector still awaits a banking champion to come forward.

“SMEs get a raw deal from the Big Four,” says Neil Slonim, an independent business banking expert who operates the website to help SMEs.

“Data continually shows that SMEs are posting record low ratings in how they regard their banks in terms of empathy, loyalty and advocacy, and yet the Big Four banks continue to spend large sums to convince SMEs that they really do care with slogans like “we can”, “we live in your world” and “more give, less take”.

“Home loan customers, depositors and bank shareholders have benefitted from competition between the Big Four but not SMEs, but sooner or later, from one source or another, the SME banking market will open up, and it will be interesting to see what bearing the forthcoming enquiry into the financial system will have on this.”

The Year of the SME

Meanwhile, the new federal government has flagged another inquiry, this time into competition policy, with the stated aim of protecting consumers and small business from the muscle of bigger companies. Unlikely as it seems, 2014 is shaping as the ‘Year of the SME’ in Australian business.

“The government plans are all about recognising where those pressure points are in the lives of small business people, where are the constraints and the opportunities to compete,” says Bruce Billson.

“We have a major microeconomic reform agenda because there is no one single answer, but it’s all about making things more efficient, and taking red tape and compliance out of the economy so we don’t see government imposing burdens that gum up the enterprise.”

Twenty years or more since the last government enquiry on competition policy, the Abbott government has framed a new competition review that will use its broad economic-infrastructure focus to investigate the near monopoly of recent takeover target GrainCorp, the future of the NBN Co, and disputes over private railways owned by mining companies.

“Our economy is at its best when there is fair competition and there are chances for big and small businesses to flourish,” says Billson. “Since the last root and branch review of competition laws 22 years ago, the economy has changed, and laws that were supposed to achieve certain outcomes haven’t lived up to that billing. “We’ve seen increasing dominance in key markets from very big players, and we’ve seen smaller businesses blocked or frustrated in their ability to compete on reasonable terms, as market muscle has been more a determinant of success than merit.

“We need to make sure our competition laws support both big and small business in their intent to grow and prosper, and that’s why we’ve undertaken to carry out this review.”

One of the key issues will be the potential introduction of an‘effects test’ that would give government and regulators the opportunity to act in cases where smaller businesses are impacted by the actions of larger ones – oligopolies and monopolies. Currently, competition policy can only kick in when ‘purpose’ can be shown.

At an industry level, competition policy is being addressed. The Australian Food and Grocery Council has worked with grocery retailers Coles and Woolworths, which have 80 per cent of the market, to create a code of conduct – and greater trust and trans- parency – in their relationships with small suppliers.

But even this has been controversial. The National Farmers Federation was initially involved but walked away from the negotiations after losing confidence in the ability of a voluntary code to protect farmers. Although the effectiveness of the supermarket code is yet to be proved, it comes in the context of a wave of initiatives focusing on SME issues.

A concerted campaign of support

In 2013, the ACCI launched a campaign to lobby for small business entitled ‘Small Business: Too Big to Ignore’ which aims to put small business issues firmly on the political agenda. The campaign identifies 16 issues on which the government should act in four key areas: regulation and compliance, financial and taxation, employment, and infrastructure.

“The SMEs have much more limited capacity to deal with the regulatory compliance burden, and the compounding impact of dealing with regulation can become as big as the regulation itself,” says CEO Peter Anderson, who says the pattern for many small business people is to work on compliance issues late into the night after putting in a full day at the office or factory.

“In terms of financial and taxation issues, SMEs require the same lubricant of capital in order to make their businesses successful and yet they are subject to very different rules by the bank sector and the financiers in terms of access to capital.

“They not only have to put their own assets on the line, they have to put the assets of family members on the line and that creates enormous pressure, and that is human pressure which can manifest itself in tragic ways.

The third area, says Anderson, is employment. “There is an assumption from some decision makers that small business people are out there to try and take advantage of staff, but they are actually much closer to their staff, who are like family in many cases,” he says. “It is a different dynamic and yet small business is regulated the same way that large businesses are.

“You won’t succeed in business unless you believe in innovation and entrepreneurship and want the freedom that comes from being able to test your own ideas and succeed in the market. But in so many ways small business people find that innovation gets dumbed down because of the burdens and the long hours, and there is a need to try and assist small business people in areas such as the prohibitive penalty rates for service industry businesses operating in tourism, for example.”

The fourth focus of the ‘Too Big to Ignore’ campaign is infrastructure. “Our final issue is good community infrastructure, and small business people are very similar to individual consumers and members of the community in this way. When electricity goes up, they feel it, and they are generally not compensated by government. “Often they are on the road, in traffic jams, trying to deliver products and goods, so in the same way they experience frustrations when infrastructure fails.”

Emphasising that SMEs are “not victims,” Anderson is also keen to talk up their adaptability. “The nature of a private market economy is that there is fierce competition for the provision of goods and services,” he says.

“Competition does produce efficiency but it also does force greater degrees of innovation, and many small business people have succeeded to defeat more powerful competition, because they have been more agile and innovative.”

“Twenty years ago when retail shopping hours were expanded and supermarkets were allowed to sell meat and bake bread, that was supposed to be the end of the butcher and baker and yet now we see small business people with much superior offerings in meat and bread than the big supermarkets, because they have been more innovative and adaptable.”

Hamstrung by structure

It is not all innovation and adaptability for SMEs, however. Sue Prestney FCA, the Institute’s spokesperson on SME issues, says that in many cases small businesses are hamstrung by their ownership structure and its demographics, which can make them risk averse and conservative – the antithesis of the popular perception.

“Many small business owners are baby boomers, so with that wave of baby boomers moving to retirement, they avoid risk and are focused on security and retirement funding,” says Prestney, describing the results of an Institute survey from 2012.

“Retirement funding was a big issue so they were concerned about exit strategies, because when you get to 58 you have to ask those questions about how you are going to retire, and if your superannuation got hammered in the GFC most of the money you have is invested in your business.

“So what they then say is ‘well, I am reliant on this business to retire on, and if I can’t realise that now by selling then I have to hang in there and keep the profitability going’ and this forces them into a defensive way of thinking, which goes against borrowing money, or even just innovating.”

With many small businesses being family enterprises, succession planning is an issue which many of them are facing – and to a great extent at the moment because of the demographic dynamic of retiring baby boomers.

“Often family succession will happen automatically, and where the next generation has been exposed to modern business practices and innovation and has had a chance to learn outside the business, then they can inject some new thinking into it.”

But in situations where there is no family member to take the business forward, younger employees should be encouraged to take equity positions in the business, says Prestney, although this would require significant regulatory change.

“One of my bug bears about the current tax system is that there are no incentives to provide employees of SMEs with shares,” she says. “Those people are going to be key employees going forward, but there is a positive disincentive for them to take employee shares because they have to pay tax on them, and if you pick out one or two employees to give shares to, they have to pay tax on something they cannot realise the value of.

“So our tax system positively discourages trying to set up this succession ownership going forward, which would shore up the next generation, whether that is part of the family or not.”

Another ‘bug bear’ of the system for Prestney is the lack of investment incentives for SMEs. “The government throws money at SMEs with one hand, and has just taken away the $6500 asset write off away, so what we need is encouragement for SMEs to invest in things that are going to boost their productivity and inter- national competitiveness,” she says.

“We have to give them incentives to acquire equipment and technology that will increase their productivity, as Singapore has done. We had an investment allowance for a minute there, through the GFC, and I think we really do need that again but in a very targeted, specific way for productivity and competitiveness.”

One thing just about all SMEs lack is time, and this manifests itself in a lack of strategic planning. “SMEs are not just resource poor, they are time poor,” says Prestney. “A large percentage of them in our survey do not have a strategic plan, and you cannot just sit there and let that happen to you, because you need to develop a competitive advantage and find ways to do that through innovation and that requires a formal process.

“If you have a business that is entrenched in conservatism for those reasons I’ve outlined then any sustainable competitive advantage you have had over 20 years or so will dissipate, and sales and market share will go backwards, and those business owners will have nothing compelling to offer, and nothing compelling to sell.”

Article last updated 4 February 2014