Small business by the numbers – why the sector defies generalisation

by Rob O'Neill / 27 June, 2017
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Businesses with fewer than 20 employees make up 97 per cent of New Zealand's enterprises. But how much do we really know about them? Photo / Getty Images

Small business is vital to New Zealand’s economy, but efforts to understand them continue to fall short.

Getting a handle on small business is hard. While they are constantly name-checked as a huge driver of activity and employment – the “engine room of growth” – small businesses suffer from obscurity through diversity.

After years of research and myriad reports, the objectives, challenges and drivers of small business activity remain hard to grasp.

Even their desire to grow now has to be questioned after insurer Suncorp this month released research indicating many small businesses are happy to stay that way.

That survey of 415 businesses found 78% of businesses valued work-life balance as highly as growth. 58% said they would rather focus more on productivity and efficiency than growth and over a third did not have any growth ambitions at all.

At the heart of the problem is the fact that the sheer breadth of activity in the small business sector and problems with definition make it difficult to come up with meaningful generalisations. The differences between small Kiwi businesses are as significant as their commonalities.

The SME sector encompasses self-employed people as well as those employing others. It operates across all sectors, so the dynamics and drivers of small business activity varies dramatically.

Because many small businesses do not operate as registered companies and many also fail quickly – they can often die without leaving statistical a trace.

Despite these constraints, the Ministry of Business Innovation and Employment continues to bring together the best statistical information and analysis about the SME sector.

MBIE updated these data in its latest Small Business Factsheet this month, putting some hard numbers around SME activity and slaying a few holy cows along the way.

For instance, we often talk about small business being a centre for innovation and driver of employment. Both are true to some extent, but there are also strong indications in these numbers that innovation, employment and the quality of jobs created explodes with scale.

While 17% of firms with between six and 19 employees reported introducing innovative products or services to the market in 2015, 23% of firms with 20 or more employees did the same. Similarly, only 6% to 7% of businesses with between six and 19 employees invested in research and development compared with 11% to 14% of businesses with over 20 employees.

Job creation among businesses appears to be stronger among those with more than 50 employees while if you work for a company with 19 employees or less you are, on average, being paid 15% less than employees in companies with more than 20 employees.

Scale also boosts business survival rates. While 20% of businesses founded in 2010 and with 100 or more employees ceased business by 2016, the failure rate for smaller businesses over the same period reaches as high as 48%.

We also tend to glibly complain that New Zealand businesses have problems gaining access to capital, yet over 94% of small businesses with six or more employees reported they could access debt finance such as bank loans on acceptable terms.

Some of the findings in MBIE’s factsheet are, sadly only on the surface, a bit of a revelation. This is especially the case when it comes to so-called “microbusinesses” – otherwise known as the self-employed.

Get this: the average revenue of a business employing no staff in 2015 was $204,066. Compare that with the average revenue of businesses employing between 1 and 19 people of $846,574, and you might start to understand why so many small business don’t want to grow.

The self-employed, 45% of whom are over 50 years of age and 61% male, are doing all right.

Or are they? Noted asked Statistics NZ to cut the numbers again and provide a median revenue figure for the same businesses.

The result: total revenue of just $70,000.

That is a huge difference from $204,000 and can mean only one thing – some of the businesses in the data are earning much, much higher revenues than even the average. The vast bulk of businesses fall well short of that glorious number.

Statistics NZ also confirmed that the revenue figure it used was before expenses. It is not taxable income. The agency added that some of the small businesses with no employees in the data might actually have employees after all “due to their structure where employees are reported in other units, contributing to a higher average and mean.”

All of this went unexplained in the factsheet, potentially painting a misleading picture of our smallest businesses.

If you are a self-employed person working from home with few expenses, $70,000 could provide a reasonable living. But if you are, say, a courier driver who has to borrow money to buy, paint, repair, fuel and eventually replace their own van, you are probably leading a life of quiet desperation, as so many do.

Releasing the latest data this month small business minister Jacqui Dean said businesses with fewer than 20 employees make up 97% of all enterprises in New Zealand and contribute $65 billion to our GDP.

“The factsheet brings together statistics that relate to small businesses, and provides us with an overview of how valuable they are to the New Zealand economy,” she said.

An overview, yes. Understanding? That might be asking too much.

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