Business Planning: SME's

Topic 3: Business Planning

Small to Medium Enterprises (SMEs)

Definition

• Australian Bureau of Statistics (ABS) Definition:

  • Small Business: Actively trading business with $0-19$ employees or an annual turnover of <$2$ million.

  • Micro Business: Small businesses with $0-4$ employees.

  • Actively Trading Businesses: Possess an Australian Business Number (ABN) and actively pay Goods & Services Tax (GST).

  • Medium Business: Actively trading business with $20-199$ employees.

  • Large Business: Actively trading business with $200$ or more employees.

• General SME Definition: An SME typically has an annual turnover of less than $10$ million.

ABS Classification of Business Size (Figure 10.2)

• Micro: Fewer than $5$ employees (including the owner).

• Small: Between $5$ and $19$ employees.

• Medium: Between $20$ and $199$ employees.

• Large: $200$ or more employees.

Characteristics of SMEs (Figure 10.3)

• Local Markets: Operate within specific geographical areas.

• Personalised Service: Often provide tailored customer service.

• Independently Operated: Managed without external control.

• Independently Owned: Ownership typically resides with individuals or small groups.

• Size: Non-manufacturing companies usually have fewer than $20$ employees; manufacturing companies fewer than $100$ employees.

• Closely Controlled: Owner/operator maintains close control over operations.

• Not Dominant: Have a small share of total industry output.

• Locally Based: Operations are primarily local.

• Owner Responsible for Decision Making: Key decisions are made by the owner.

• Reliant on Internal Support Services: Utilise resources within the business.

• Bulk of Capital Provided by Owner: Significant financial contribution from the owner.

Economic Contribution and Role

• GDP Contribution: SMEs account for approximately $33$ percent of Australia's GDP.

• Employment:

  • Employ over $40$ percent of Australia's workforce (as of 2020-23, consistently around $42$% for small and $24-25$% for medium businesses, totaling about $70$% of private sector employment).

  • Created $80$ percent of Australia's employment gains over the past ten years.

  • Employment Numbers ('000s) by Business Size (Table 1):

    • Small Business (0-19 employees): $5,036$ in 2020-21 ($42$%), $5,161$ in 2021-22 ($42$%), $5,368$ in 2022-23 ($42$%).

    • Medium Business (20-199 employees): $2,848$ in 2020-21 ($24$%), $2,994$ in 2021-22 ($24$%), $3,184$ in 2022-23 ($25$%).

    • Large Business (200+ employees): $4,025$ in 2020-21 ($34$%), $4,212$ in 2021-22 ($34$%), $4,376$ in 2022-23 ($34$%).

    • Total: $11,909$ in 2020-21 ($100$%), $12,367$ in 2021-22 ($100$%), $12,928$ in 2022-23 ($100$%).

• Production: Produce approximately $50$ percent of all products manufactured each year.

• Exports: Generate an increasing amount of total exports, with SME Australian exporters growing faster than large exporters. Export growth is rapid in agribusiness, manufacturing, and professional services, though from a low base, as only $4$ percent of Australian SMEs export.

• Research & Development (R&D): Account for $20$ percent of all money spent on R&D, with SME spending almost trebling over the past $10$ years. SMEs are the main source of most invention and innovation in Australia, enhancing efficiency and productivity.

• Profits and Taxes: Earn more profits and pay more taxes than large businesses.

• Balance of Payments (BOP): Contribute positively as the number of SME Australian exporters increases. The BOP is the difference between all money flowing into and out of a country over a specific period.

Success Factors

• Entrepreneurial Abilities: Possessing the right attitude and personality, drive, enthusiasm, high motivation, optimism, ability to set targets, and calculated risk-taking.

• Access to Up-to-Date Information: Regarding profitability, quality of goods and services, and employee performance.

• Flexibility: Small size allows for adaptability to external environment changes, flatter management structures enable faster decision-making, and close owner-customer contact facilitates quick responses to changing tastes.

• Focus on Market Niche: Specialisation allows for delivering a high level of service.

• Reputation: Servicing a narrow market niche helps develop enviable reputations for quality and service (e.g., Canva as a success story).

Failure Factors

• Definition of Failure: An SME is considered to have failed when it is unincorporated and declared bankrupt, or incorporated and either forced into liquidation or voluntarily closes down.

• Statistics: Approximately $1$ in $4$ businesses fail within the first year of establishment (around $80,000$ Australian small businesses fail annually, or $219$ per day).

• Gender Impact: Female-owned businesses generally have a higher survival rate than male-operated ones. Businesses jointly operated by both men and women have the highest survival rate.

• Reasons for SME Failure (can be classified as internal or external):

  • Failure to plan

  • Lack of information

  • Leadership crisis

  • Inaccurate record keeping

  • Failure to delegate

  • Complacency

  • Incorrect marketing strategy

  • Poor location

  • Lack of financial planning

  • Negative cash flow

  • New competitors

  • Illness (owner/key personnel)

  • Supplier problems

  • Poor use of external support services

  • Economic downturn

  • New taxes

  • Change in government policy

  • Insufficient capital

  • Partnership problems

  • Lack of management experience

  • Incorrect pricing policy

  • Failure to seek advice

  • Not enough sales

  • Staff difficulties

  • Being under-insured