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Stats reveal real story of small biz barriers

Date
What really stops small businesses from growing into large ones?

What really stops small businesses from growing into large ones?

Stories about big ideas and starting ventures are much sexier than those about maintaining growth. Academic literature and media seems slanted towards the creative side of new ventures, yet many entrepreneurs say managing a fast-growth venture is their biggest challenge.

In other words, we seem seduced by the idea and less interested in the more mundane, value-adding execution. New ideas and new faces make good reading, but deeper understanding of the barriers that stop venture growth – and advice to help owners overcome them – would arguably add more value.

I thought about these barriers while analysing the Australia Bureau of Statistics’ latest issue of the Selected Characteristics of Australian Business. Business statistics that shed light on the barriers for business performance and innovation in smaller enterprises are surprisingly overlooked.

My interest in the ABS data focused on businesses with 5–19 employees and what stops them getting to the next category of 20–199 employees. The ABS asked a range of businesses to identify, from a list, the barriers that significantly hampered their business activity or performance in 2010-11.

What’s your view?

  • What do you see as the biggest barriers for innovation and general business performance?
  • Do you agree that we focus too much on business ideas and not enough on good execution?
  • Is managing a fast-growth venture much harder than starting it?

Almost a third of surveyed businesses with 5–19 employees cited “lower profit margins to remain competitive” as their biggest performance barrier. This was also the most common barrier in businesses with 0–4 and 20–199 employees, but particularly acute in the 5–19 employee bracket.

Maintaining profit margins is easier said than done for emerging businesses. Some chase revenue and find their costs rise proportionally with it, or that a lack of genuine competitive advantage robs them of pricing power. As costs rise, prices stay mostly flat and erode margins.

Other businesses are hurt by rising rents and utility bills, and mandated pay rises through employee agreements and awards. Wafer-slim profit margins are crunched as these costs rises, and the entrepreneur ends up taking all the risk and working overtime to earn the same as their staff, or sometimes less.

There is no easy solution. The best advice is to think about how the venture can get to 20–199 employees with its profit margins intact. Ask how you can scale the venture without incurring significant extra cost, and create more pricing power, to boost profit margins, grow from cash flow, and avoid taking on debt or selling equity in the business.

The second key barrier was “lack of skilled persons in any location’. One in four businesses with 5–19 employees struggle to find the right people to expand. Is your business capable of expanding to other cities or overseas, and if so does it have a network of people to grow with it?

The third barrier was an old favourite: ‘outstanding accounts receivables limiting cash flow’. There is nothing worse than big companies that take forever to pay their bills, or have staff who let invoices sit in their email account without passing them to the accounts team.

I recently had to call or email a client six times to settle a three-mouth outstanding bill. As a home-based business owner, one late bill was annoying and time-wasting rather than a catastrophic problem. For a business with 5–19 employees, late-paying clients can kill cash flow and the venture.

The biggest innovation barriers for business with 5–19 employees were “lack of access to additional funds” and “lack of skilled persons in any location”. A surprising finding was that only 45 per cent of all businesses surveyed reported at least one barrier to innovation.

And only 5 per cent of businesses said a barrier was “lack of access to knowledge or technology to enable development or introduction/implementation [of an innovation]”. It seems creating and introducing the idea is not as challenging as funding it and finding the right people.

These ABS statistics are not nearly as glamorous as rich lists and profiles of successful new ventures and their owners. But I’d bet that just understanding the key business performance and innovation barriers facing growing businesses adds as much value as any profile about an overnight success.

The reality is, few ventures are able to maintain high growth over long periods. Helping more emerging ventures burst through the main barriers, and framing government policy around the most important ones, is the key to a more entrepreneurial Australia.

1 comment so far

  • It would be interesting to find out what percentage of these smaller enterprises that struggle are actually truly innovative (thinking of the HBR definition of the four types of innovation here) as opposed to 'me too' firms.

    I cannot, for the life of me, figure out why in a city with a population of four million or so people it is so difficult to find suitable staff. Then again, it really depends upon the type of business and skill sets requires as well as the level of remuneration the company can provide.

    In respect to the three questions posed.....

    1. The barriers to innovation that I have experienced are first skepticism of the basic idea and then as you noted, a willingness not to invest in the idea, either financially or emotionally. Age is a big factor too.
    2. You can only go so far with an idea. Sooner or later it is fully formed and you either act upon it or let it slide. Execution can be tricky if you have no business experience, or not even a clue. I highly recommend making a business plan and seeking out a mentor to hold your hand as you begin your new enterprise.
    3. Much harder to manage a fast growing venture. If you have no plans for growth from the outset then it can be a run-away train. I highly recommend that when you do your business plan, have a good idea of how you want to grow your business and the avenues you want to explore as it grows. Identify future leaders in your business as soon as possible. Groom them, mentor them and imbue them with your companies core values. As the business explodes, be prepared to ease up on the reigns and delegate responsibility.

    Commenter
    Neil Penny
    Location
    Singapore
    Date and time
    September 20, 2012, 10:23PM

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