Six long term threats to small business

by Michael Woodhouse

Between 80% and 90% of small businesses in Australia are "small". Almost half are run from home. Really, it's an astoundingly high figure. It used to be higher. Genuine big business was a twentieth century phenomenon.  Global brands are only 50 years old.

In the near future big and global businesses will continue to expand, not as an addition to the base of small businesses, but at their expense. 

A combination of six broad trends is driving the decline of small business.

1. Triple compliance costs

Once a month small business owners sit down to struggle with monthly accounts and GST. They forget how they did things last time, learn new requirements and solve problems some of which are typical and some novel.

Relying more on determination than an understanding of the tax law, they muddle through (well, that's the way it is for me).

In a large organisation, this work is done by accountants who spent years studying and now do it all day, over and over: they do the same work in half the time. In multi-site organisations with standardised central accounting, they may do the same work in one twentieth of the time.

But the imbalance is greater than this.

In a small business, a one hour increase in compliance time means the owner (who's already working as many hours as humanly possible) spends one hour less on sales and management.

The cost to the business is both in supplying the compliance hour and losing the sales/management hour.

Big business does not pay this double cost. It may have to pay for extra accountants, but this doesn't reduce the sales output. Big business sales people don't do accounting.

Compliance costs small business twice as much to do, plus a triple cost in owner time diverted from the making of money – and compliance demands continue to escalate.

A footnote to compliance costs is the fatal incident, such as an ATO desk audit. A desk audit can consume you for a week or more. It will uncover all the decisions you made, based on your incomplete understanding of ambiguous rulings, which the ATO deems to be wrong. Then you will be fined for them. What proportion of small businesses collapse within six months of a desk audit? Sorry, that information is not available. But you can be sure it is much higher for small than for large businesses with negotiating strength, legal and accounting resources and media visibility.

2. Double technology costs

One copy of Microsoft Office costs two to three times as much per seat as a one hundred site licence.

Adobe's full font pack (essential for graphic designers) comes in a minimum 20 seat pack: large studios pay about 20% of the per seat cost imposed on a solo operator.

Postal barcoding software (now mandatory for discount mail) and the necessary regular updates cost the same whether you occasionally mail your clients or you are a mailing house spreading your purchase cost across a hundred clients and ten million items.

Across the board, typical volume discounts have expanded, especially in increasingly important technology categories where the marginal cost to the supplier is low.

It costs a small operator up to twice as much to set up an employee with an equipped work station and to keep that work station up-to-date.

3. Proportionately higher overhead costs

In the late 60s in the regional town where I grew up, the local electrician employed three sparkies and two apprentices. The owner's wife came in one afternoon a week to do the books. They did no advertising. Their charge out rate for labour was about double the actual wage rate.

Thirty years later I consulted to one of those apprentices, by then working for himself. His charge out rate was about triple his actual wage rate.

Why? Because he was employing a part time office person and me to help meet the increased management and promotional requirements of business survival. Because he spent one day a week doing quotes/client contact/ordering and one day a week on paperwork (including learning the constant flow of new standards, technology and compliance), leaving just three days of saleable hours to support all those overheads.

Every extra management and promotional hour had to be paid for from a correspondingly diminished pool of saleable hours. If the shift continues at current rates, within a decade self-employed tradespeople will be spending half their time on management etc and pushing charges to four times their wage rate, seeking to recover overheads from an effective 20 hour chargeable week.

Big business also faces increased management and promotional costs, but can amortise them over many locations and greater sales. It's even possible that technology and marketing innovations (dare I say CRM and ecommerce?) may improve the efficiency of big business.

Certainly it's a fact that the price leader in any given industry is now more likely to be a big business benefiting from amortised overheads and lower input costs. In the 60s it might have been a hungry small business with low overheads.

4. Big likes big

In the recent past, big business bought from small business and had a bad reputation for playing one against the other on price, with consequences often fatal to the supplier.

More recently (and aided by computer technology) big business realised the value of just-in-time supply. Supply reliability became essential, forcing a shift to suppliers with greater resources and a track record.

Now big business is developing e-based procurement which requires on-line integration with supplier systems.

The result is a strong big business preference for big business suppliers.

The trend extends to government purchasing. Compliance requirements for tenderers has forced many small businesses (including mine) out of the system.

The demand for quality assurance certification has been important in the continuing exclusion of small business suppliers. Certification is too expensive (in time and money) for small businesses, the systems developed are largely inappropriate and the benefits apply mostly to large businesses.

The minimum requirements to be a supplier to large buyers increasingly exceed the financial, technical and management capacity of small business.

5. The cost of knowledge

We've been told a few times that we live in the knowledge age.

Actually, a business has always been a knowledge based system. It's about how to do whatever it is you do, how to sell the result and how to manage it all for profit.

Systems are a tool for storing information in the form of organised behaviour, management structure, record keeping and documentation.

Small businesses are weak on systems. They don't document. Knowledge resides in individual heads. It's gets harder to access that knowledge when time demands on those heads increases, so people sit around waiting to be told what to do. If the owners are sick, the business is sick. And their knowledge is lost when they leave (which is why most small businesses fail when the owner quits or dies).

There are not enough heads to support knowledge specialisation so everyone must be a generalist with wide, shallow knowledge.

In practice this means, for example, that a small business spends much more time and money trying to keep its computer systems running. Everyone will have a few ideas on solving the problem, but no-one will have a detailed understanding of the software architecture –€“ or the time to spend studying and refining it.

After an uncosted disruption to productivity, management will scream for a consultant and pay a high price for whoever isn't currently working for big business.

Intense knowledge systems such as knowledge bases, knowledge management, R&D units and even useable customer databases, are beyond the capacity of most small businesses.

6. Social costs shift to business

Western governments have become obsessed with cost cutting. At the same time they must meet public demands for greater social services. The answer for governments is to shift costs to others.

People want better retirement incomes, so business is paying superannuation. They want income security when they are sick or pregnant, so business pays sick leave and the push is on for maternity leave. They want lifestyle support, so the future may include workplace creches, gyms, work-from-home technology support and flexible hours.

All of these social objectives are laudable and I support them. Perhaps I might suggest that, as social benefits, they should be paid for by society – all of society, not just business.

The reality however is that "all of society" – represented by government –€“ is going to make business pay whenever it can.

In the overall this may not be so bad. Employers who give their employees more may get more back from them and gain a competitive edge in employment.

In a small business however the impact is more capricious and the cost a higher proportion of resources.

Suppose I have two employees and one of them takes maternity leave for six months. I must employ a temp. Assume the staff member is a skilled, trained person, at the top of their game. Will I be able to find someone just as skilled who is sitting around waiting for a 6 month contract? Probably not; if they wanted a job they would have one. So I'm going to end up paying perhaps 50% more in wages for a very reduced output and as I have only two employees that drop will be a big proportion of my total sales. Will I survive?

The same is not true for big business, where maternity leave will be a fairly stable across-the-board average. They can budget for this and keep permanent back-up staff, incidentally making them a more attractive employer.

But the costs of providing social benefits will be a capricious, sometimes fatal imposition on individual small businesses. Big business is favoured.

Who cares anyway?

There are approaching two million small businesses in Australia. Their owners, their families and their employees have some interest in this. Regrettably, they don't have much say in it. The factors that are leaching away their viability are diverse and not much under the control of any one authority – if indeed they are under control at all. Certainly neither of our main political parties understands small business.

We're facing a serious loss though. People get into small business for reasons ranging from challenge through wanting to work with family members to dislike of being told what to do – and, of course, making money. The option to work for yourself is a key part of our culture, part of our sense of freedom and for many of us is central to our aspirations for the future.