Section 4: Growing SMEs
Based on our experience in business, our knowledge of a range of SMEs and the learnings from our involvement with the Small Business Day Events 2004, in this, our first annual report to the government, we have decided to highlight four areas where the unique features of being an SME can act as a barrier to business growth.
Capability
Small enterprises face a much stronger need for assistance in building their business capabilities than larger businesses. In many SMEs both owners and employees are required to play a number of, often disparate, roles. Managerial capabilities in particular may be stretched, as entrepreneurs, often with little training or experience, become responsible not only for management, but also marketing, accounting, and various other tasks involved in running a successful business. The mentoring activities we undertook during the Small Business Days events reinforced for us the critical need to enhance the mentoring and advisory services currently available to SMEs.
Finance
SMEs are usually funded largely through the personal savings of the owner, often augmented either by loans from financial institutions or, occasionally, through equity finance. SMEs may have trouble accessing debt finance as they have little to offer as collateral. Also, many potential entrepreneurs may lack the knowledge and skills required to create the formal business plans needed to access the finance that is available, particularly venture capital. Training, aimed at assisting entrepreneurs to identify potential sources of finance, structure their financial plans appropriately, and present their proposals in a suitable way, can help. However this may not be as effective for SME survival and growth as providing direct, targeted financial assistance or enabling access to available finance.
Business Environment
An Industry New Zealand survey in 2003 found that business, and the economy in general, is not a high interest subject for most New Zealanders. When New Zealanders do take an interest in business, they frequently do so with a negative attitude.2 Such attitudes discourage potential business owners from considering self-employment. Also they influence the priority given within government generally to the promotion of measures designed to foster business growth. SMEs do not have the time or resources to, for example, form lobby groups to pursue their interests or to research for themselves the most effective ways of accessing new export markets. However, SMEs do not lay claim to special treatment or subsidies based solely on their size and limited resources. What they seek is for government to recognise, endorse and encourage their role as engines for innovation, growth and employment in the New Zealand economy.
Regulation
Inappropriate and costly regulation was the most frequently cited impediment to SME growth in New Zealand at the Small Business Day events. The costs of regulation are associated with both the substance of the regulation itself, such as the impact of labour laws on hiring additional employees, and the direct compliance costs incurred in fulfilling regulatory requirements, including the time taken to complete paperwork.
Although all businesses face costs in complying with regulations, the fixed costs associated with compliance create a higher relative burden for SMEs. The implementation of a new system is basically the same whether the firm is small or employs 100 people. The paperwork involved in compliance does not relate directly to the scale of the business, and can divert a significant amount of a small business owner's time away from productive activities.
The direct costs are compounded by a lack of specialised knowledge in SMEs. As many small business owners take on a variety of roles within the business, they are assumed to have the capacity to absorb a wide range of information about regulation. They are expected not only to deal with the complexity and weight of regulation but also to stay abreast of the multitude of changes and the local variations in the application of the law. Uncertainty about the details and consequences of regulation may prevent SMEs from making optimal decisions.
Conclusion
Our report therefore sets out a number of recommendations for government action aimed at addressing each of those barriers to SME growth.
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