Our economy is dominated by small, under-performing businesses that soon go bust. Paul Watson suggests there is an alternative.
Did you know in New Zealand, only 6% of business have sales of over $2M; 26% report losses and only 3% of businesses make profits over $500k. On top of this, 50% of all new businesses fail within four years. How can this be good for our economy or our SME business owners? (Source- Stats NZ)
For the majority of business are sole traders, small teams or partnerships, getting a business to grow and achieve critical mass takes a different kind of effort: management effort vs technical skill, or working “on” not “in” the business. It’s a common observation in our industry, but frankly, the stats bear out the impact of not working “on” your business, you are unlikely to grow your business to over $2M or make an income that is commensurate with the effort and risk that most business owners endure.
So why is it that NZ is dominated by SME’s that are so small, do not provide the owners with a satisfactory income and usually fail?
- The dream does not match reality: running a business is HARD! Managing clients, staff, cash is a constant and immediate pressure that requires new skills. Many businesses have evolved rather than being designed, so they do not have adequate systems in place to take the pressure off the owner.
- Total immersion (drowning): consequently, the owner is under stress which often leads to poor decision making, errors, time and cash pressures. This puts stress on the team, the owner and the owner’s family and lifestyle.
- Lack of motivation: given this pressure, why would an owner want to take on more stress by employing more staff, investing more cash and time in growing the business?
My premises are that most SME business owners start out with a dream; that dream is rarely fulfilled because it’s “too hard”, and the business either fails or the owner gives up or settles for a small, easy-to-manage business that provides them with a mediocre income.
One of the consequences of this is that our economy is classified as “low productivity”. NZ’s output per hour worked is USD41.47 vs Australia’s USD55.05, and the OECD average of USD54.52 (source OECD), which is 25% below Australia. The majority of our businesses are just not of the scale to be comparatively effective or productive, and that puts a strain on our whole economy, keeping wages relatively low and costs to operate a business relatively high.
Consolidation is a good thing. Imagine if all the ineffective businesses were consolidated into larger firms that had the critical mass to be more efficient, there would be less stressed owners, less failed businesses and broken marriages, improved productivity, lower costs (as a percentage of sales), greater output, higher wages and potentially lower prices to the consumer.
At the moment, the government is encouraging individuals to get into business, providing them with financial incentives. In my opinion, this has the potential to be a disaster given our track record as a country. Instead, we need to support and upskill owners of good businesses that will grow and employ staff from failed businesses and also unlock the skill of the owners, which will result in more productive companies that reward their owners for their efforts. The first step is to align these good business owners with resources to provide the management effort to get them through the $2M barrier.