June 27, 2018
By: Christopher Arnold and Manoj Fadnis
Most organizations worldwide are small by size and the importance of small-and medium-sized enterprises (SMEs) to both developed and developing economies and societies is indisputable. According to the World Trade Organization, (World Trade Report 2016 Leveling the Trading Field for SMEs) SMEs represent over 90 per cent of the business population, 60-70% of employment and 55% of GDP in developed economies.
SMEs are usually defined by reference to quantitative thresholds set by jurisdictions (e.g., number of employees, amount of assets, and level of revenues), but the reality is that small businesses are extremely heterogeneous in their size, age, sector, ownership, business models and aspirations and not easily addressed by any one-size-fits-all approach.
It is this diversity that United Nations, the International Council for Small Business and IFAC are celebrating as part of the UN Micro-, Small and Medium-sized Enterprises Day – June 27.
Small businesses are a critical source of employment, innovation and are embedded in local communities. The majority of SMEs are ‘micro-entities’ (1-9 employees) and a significant proportion are family enterprises. Many small businesses have no significant growth ambitions and decide to remain small – their plans can depend on specific developments, and vary at different points in their lifecycles and at certain critical events. Small businesses are also strongly influenced by the different motivations of their owners, the sector and location of the enterprise. Owner-managers may measure performance as a combination of both financial and non-financial expectations.
It is recognized that small enterprises can be an important vehicle of social inclusion (e.g. providing opportunities for women and other underrepresented groups to participate in economic activities) and are a key channel for poverty reduction. The World Bank’s ‘Doing Business’ Report indicates that a healthy SME sector corresponds with a reduced level of informal or “black market” activities. SMEs are therefore important an important part of achieving the UN Sustainable Development Goals, for example ‘promote inclusive and sustainable economic growth, employment and decent work for all’ (goal 8) and ‘build resilient infrastructure, promote sustainable industrialization and foster innovation’ (goal 9) – see Unlocking the potential of SMEs for the SDGs.
SMEs are under increasing pressure to have more sustainable practices (e.g. from regulations, customers and supply chain pressure) and being socially responsible is associated with having a better image within the community. SMEs have environmental and social responsibilities. For example, SMEs’ contribution to global pollution (e.g. waste) is estimated at about 60-70% of total pollution. Globally, SMEs respond differently to these pressures depending on available resources, level of pressure, and the owner-manager’s attitude toward sustainability. The public policy and regulatory framework is also critical.
SME Public Policy
In 2018 IFAC has been privileged to be a member of the B20 Argentina SME Development Task Force and has valued the opportunity to provide input on developing the policy position paper, which will include specific practical recommendations to the G20. The G20 Germany Cross-Thematic Group for SMEs produced ‘Think Big for Small and Medium Enterprises as Pillar for Future-Oriented, Sustainable Growth’, which focused on recommendations and actions the G20 should take on facilitating SMEs participating in cross-border trade, building digital capacities and capabilities and advancing financial inclusion.
The importance of “think small first” is essential in developing public policy and regulation. The European Commission emphasized this principle in its 2008 Small Business Act, which called on policy-makers to take into account the needs and interests of SMEs from the earliest moment in policy formulation. This includes an SME Test, which involves consultation with SMEs and SME representative organizations, measurement of the impact on SMEs (cost-benefit analysis) and an assessment of alternative mechanisms and mitigating measures, if appropriate.
SME policy is complex and covers a wide range of areas. It is widely accepted that a public policy framework that fosters a culture of entrepreneurship and innovation is beneficial. A number of actions may be taken to support entrepreneurship, including establishing education programs (e.g. business schools helping students get started on campus with incubator facilities) and promoting entrepreneurs as role models. However, questions arise on where interventions should be targeted and how countries can help create the right support environment and develop an ecosystem where SMEs can thrive.
While the overall problems faced by the SMEs are similar in different jurisdictions, there are significant differences in their priorities and of their needs in different countries and within national regions. There may be no one set of correct policy priorities in support of the SME sector given the diversity of small businesses and their needs, which will also vary depending on the stage of their lifecycle. The segmentation of the SME market is therefore vital for informed policy interventions, as well as establishing a robust evidence base.
It is important for all stakeholders to work together to improve the knowledge-base for policy making and for sharing best practice and information. This was high on the agenda during a recent successful OCED Ministerial Conference on SMEs in February 2018, which resulted in 55 countries adopting a declaration on strengthening SMEs and entrepreneurship for productivity and inclusive growth that included agreement to continue the development, implementation and evaluation of effective policies for SMEs, which enable SMEs to increase their contributions to sustainable and inclusive growth.
There has been an overall increase in the level of data, research and knowledge available in recent years. This includes:
– The World Bank annual ‘Doing Business’ Report provides a ranking of 190 different economies on the ease of doing business, which takes into account ten different topics: starting a business, dealing with construction permits; getting electricity; registering property; getting credit; protecting minority investors; paying taxes; trading across borders; enforcing contracts, resolving insolvency and labor market regulation. For example, the Doing Business 2018Report has tracked various reforms which have made it easier to start a business. Fifteen years ago it took entrepreneurs worldwide 52 days on average to launch and formally operate, today it takes 20 days.
– The OECD Scorecard Financing SMEs and Entrepreneurs 2018 is an annual publication providing information on debt, equity, asset-based finance, conditions for SME and entrepreneurship finance and recent policy measures. The latest report indicated that new lending declined in a majority of countries in 2016, while alternative sources of finance become more widely used.
– The Global Entrepreneurship Monitor (GEM) which for 17 years has provided evidence in over 100 countries on the entrepreneurial behavior and attitudes of individuals, considering the national context and how that impacts entrepreneurship. For example, in the latest report twenty-one percent of people surveyed in the 60 economies, on average, intend to start a business in the next three years.
– The Future of Business Survey, jointly developed by the OECD, the World Bank and Facebook is producing timely and granular information on the use of digital tools by SMEs. For example, the percentage of SMEs that accept mobile payments at their business in each country via mobile device, messenger or other apps.
Research reveals that over 50% of new businesses fail during their first five years. Although SMEs can close shop for various reasons, and not all non-surviving SMEs represent “failures”, the importance of accessing professional advice and expertise to help guide the business through the myriad of business issues is vitally important. Poor financial management is one of the leading reasons why businesses fail. Research indicates that professional business advice provided to SMEs is associated with better performance as measured by improved rates of survival, growth, improved decision making procedures and superior financial performance. The services of a professional accountant can be invaluable in order to operate a successful business and the importance of accurate and timely financial information is essential.
In addition, research findings continue to show that, irrespective of jurisdiction, accountants, and especially small and medium-sized practitioners (SMPs), continue to be the preferred advisors to SMEs. SMPs have an in-depth knowledge and understanding of their SME clients and are therefore well-positioned to provide a range of services. These services include support on business development (strategy, marketing etc.), human resources and employment regulations as well as on management accounting and corporate advisory. Because of the level of trust between accountants and their clients, they are also in the ideal position to direct businesses to other reliable sources of advice.
An example of the way in which professional accountants have a key role in supporting the small business sector is succession planning and business transfers. The European Union (EU) Entrepreneurship 2020 Action Plan notes that around 450,000 SMEs change ownership annually, affecting more than 2 million employees, but up to one-third of these transfers may not be successful, thus endangering around 150,000 enterprises and 600,000 jobs. Professional accountants have established relationships with their clients and can provide objective and expert advice on a range of different succession and transfer situations, specifically relating to each business’ individual circumstances.