A misguided $2 billion: What good is small-business capital if founders don’t know how to use it?

By Jana Matthews, University of South Australia

The Australian government has a plan to help the nation’s small- and medium-sized businesses — but it’s not a very well-developed one.

Its cornerstone is $2 billion for a ‘securitisation fund’ to provide loans to small business through smaller banks and non-bank lenders, plus a ‘business growth fund’ that will enable big banks and super funds to take passive equity stakes in small business. The assumption is more money will help small- and medium-sized enterprises fund their expansion plans.

The problem is most small and medium companies do not have expansion plans.

The Australian Bureau of Statistics’ first management capability survey, published in August 2017, indicates only a third of medium-sized companies (defined as those with 20 to 199 employees) have a written plan of any kind. The percentage is much lower for small companies (those with five to 19 employees) and lower still for micro-businesses (employing four or fewer people).

The Australian Centre for Business Growth at the University of South Australia collects data and delivers programs for those running small- and medium-sized companies. Since it began in 2014, the centre has worked with more than 1,500 business proprietors. They all wanted to do better. Hardly any of them had a plan.

The federal government’s assistance package seems to assume access to more capital will accelerate company growth. Our experience suggests executives of small and medium companies need knowledge capital as well as financial capital to grow.

If they don’t know what to do when, who to hire, how to manage people, or how to plan and execute, simply providing more money will not accelerate growth.

This year we collected data from 145 of the companies that have been through one of our growth programs. In the past financial year, they increased their revenues, on average, by 27%, their profits by 19%, and employment by 32%. Their growth was the result of learning how to develop and execute an expansion plan, that is, knowing how to generate and where to deploy financial capital in order to grow.

Passing a public-interest test

It’s true small and medium enterprises need money for growth. But before they get funding, they need to learn what to do with that money to grow.

Driver’s education and a proficiency test are compulsory before we give people a licence to drive a car. We need something equivalent before we provide public funds — even as loans — to businesses.

We justify allowing people to borrow against their homes to start a company because it’s ‘their decision’ and ‘their money’. But if taxpayers’ money is being provided, the federal government has a duty of care to ensure every company has a comprehensive plan for growth before receiving funding.

That plan should cover all the bases from products, markets and customers, to culture, people and organisation, to finance, risks and externalities, to governance and strategy.

If financial capital is not coupled with knowledge capital, investments in small- and medium-sized companies will not deliver returns. Only after those running a company understand how to grow, and have a plan to grow, will they achieve what we all want: more jobs, higher wages, and greater economic prosperity for all.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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