• Business Edge

    Winter 2017

Small companies “too busy” to grow

NZ productivity can be boosted if small businesses are helped to grow.

Adam Davy
Head of Advisory

They were husband and wife. They opened a business together, working side by side. They shared a bed. But they didn’t realise they were at cross-purposes over how to develop their business.

I remember them well. I was applying BDO’s Business Review Program to the company, one of the many thousands of SMEs (small to medium enterprises) populating the New Zealand business landscape.

 What we found was that these two people were integrally involved in their business but didn’t realise what the major issues were that were preventing them from going forward.

One did not realise the other didn’t want him working so hard and was worried about his health. He didn’t realise his wife wasn’t so worried about money as quality of life and having a bit of time to travel.

They wanted to carry the business on but didn’t want to be so tied to it.

Using our Business Review Program we took an in-depth look at the company, examining the strategic and operational issues facing it and the principals – and creating a heat map and diagnostics.   

In this case, the answer to the problem was succession. We realised that it was time to bring in the next generation – so the founding principals could address the issues raised.

They were also worried about new markets, disruption by technology and succession – so we recommended bringing in a second-in-command with a view to that person buying them out in time; it worked really well.

SMEs are vital engines of the New Zealand economy; 97 per cent of all businesses have 20 employees or less, they provide jobs for roughly a third of all Kiwis and produce about 29 per cent of our GDP.

Yet successive surveys of SMEs have produced findings suggesting business owners are often less concerned about growth than lifestyle – tending to raise the prospect that SMEs want a cruisy lifestyle more than they want to work hard.

In 2015, the Productivity Commission said the inability, or lack of desire, of small businesses to grow and be more international was at least partly to blame for the country’s poor productivity over the past 30 years, contributing to the 30 per cent wage gap with Australia and New Zealand’s poor rating in OECD productivity statistics – where New Zealanders work long hours but do not score highly on the productivity index.

The growth versus quality-of-life debate is often overstated. I always say the lifestyle element comes out of a lack of balance. These are small businesses, started by people who work very hard and are donkey deep in their own business. They need help.

They probably packed their own product to begin with and jumped in their car to distribute it. They are so busy they can’t develop their next tier or decide how to take the business to the next level – a lot of SMEs fail in their first five years and that’s part of the reason why.

That’s where the BDO Business Review Program comes in. Designed mostly for businesses where the owners are heavily involved in decision-making, it drills down into the company, brings issues discovered there to the table along with external business and market information – and identifies how closely owners and managers are aligned on those issues.

The diagnostics help them to create strategy and action plans to achieve growth, including the key risks facing the business and how to deal with them.

A lot of small businesses need to become more businesslike. So many are proud of their baby but hold onto it too long, not realising they need to let other clever people come in and help the baby to grow up.

That being said, there are other issues facing SMEs – the lack of skilled staff the most oft-quoted. Although the country’s political forces are seeking to curtail it, I’m a fan of immigration. Look what it did for Melbourne in the ‘50s and ‘60s when the Italians and the Greeks came in – and look at the colour and culture they have brought to that city. New Zealand is too small; we need critical mass and good people are a scarce resource for SMEs.

Another key issue is cash flow and invoicing, with many big companies keeping small businesses on often punishing payment terms. It’s very hard if your major client is a major corporation and they do not pay for 60 days and you have to pay your staff and your landlord.

That’s why, when we are working with clients, we factor in cash flow and a model that ensures they have enough cash for up to three months out – as that is another reason why a lot of new businesses go under in the first five years.