Keep an eye on growth, the racing car can wait

“Good policies for SMEs come in clusters”

That headline comes from an OECD report entitled Promoting Entrepreneurship and Innovative SMEs in a Global Economy on how governments, and other stakeholders in any economy including banks and chambers of commerce, can best support the growth of small to medium businesses.

There are around 2 million small businesses in Australia, comprising more than 95% of all businesses in Australia. A ‘micro’ business (most tradies and small retail stores are classed as micro) have one to nine employees. A small business has 10 to 49 employees and a medium business has 50 to 249 employees.

In the UK it’s even more extreme with SMEs accounting for 99.9% of all private sector businesses there, plus almost 60% of private sector employment and almost half of all private sector turnover. SMEs are very important.

So the trigger for my researching this came from a conversation I had with a very longstanding friend, who is in a business partnership.

They have a very good business they’ve built over many years. Both of them funded the start and now own the business jointly, but only one works in it – only one is management but both are equity holders and directors.

Their neighbour of many years also has a business. But a little like ‘rich dad, poor dad’, their neighbour’s business is struggling … again. Not for the first time. Well, actually for the second time in two years. One neighbour has lent the other money to help them through their business’s hard times.  A very noble thing to do, and something that I would not.

I am frequently approached to invest in small to medium business, and infrequently I do. There are a number of caveats I build into any decision, which we don’t need to go into. However, even before that I look at the business and the need for the investment. Nine times out of 10 it’s because the business is ‘short of cash’. And that is often followed by: ‘If I just plug this cash gap, I’ll be ok.’

Well, sometimes that’s true, but more often it’s an ongoing issue within the business, or an ongoing issue with what the owners are asking of the business.

First one. Unless the business is being run with an eye to constant growth, with constant investment to allow it to grow, a business stalls then goes backwards. When it goes backwards, the owners still try to take the same amount of money out of it to pay their mortgage, car loans, schools fees. But the business is stalling, and can’t generate as much cash, and things start to go backwards faster until there’s no money left in the business.

Second one. The business is strong and well run. It’s growing and providing a good income for the owners. But then a new hobby appears. Boats, racing cars, race horses and holiday homes are the ones that ring alarm bells for the accountants who work with many small to medium businesses. Here the business is like a healthy little donkey. It’s being well fed, but being asked to carry a greater and greater load. A load it can’t bear for too long until its little legs splay and it sinks to the ground. The old adage that if you want to own a small business, build a big one then go motor/horse/yacht racing is still true.

These are good businesses to buy. They’re making good money, just spending too much. A behaviour a new owner can change.

The report also said: “SME development requires a crosscutting strategy, its success depends on the ability of governments to implement sound macroeconomic policies, for other stakeholders (banks, educational institutions and chambers) to develop good microeconomic business environments, and the ability of the SME’s owners to implement competitive operating practices and business strategies. Good policies come in clusters.”

I’m not sure how good policy can stop business owners from spending too much money on things outside the business, but I do believe that all levels of government plus key professional business bodies can help our SME owners start and then grow strong businesses.