If you've struggled to make a small business work, or you're thinking of starting one, this article provides some food for thought.
Depending on the statistics you believe, more than half of one-person businesses survive more than a few years. Constantly we are told that small business people aren't doing things the right way - only this week accounting software company CCH labelled small to medium business operators "cavalier" for not seeking professional outside advice. But is this unfair criticism? We asked for an opinion from Tim Mazzarol, who is the President of the Small Enterprise Association of Australia and New Zealand (SEAANZ). Tim has written about various aspects of running small business, from managing cash flow to accounting software, web sites and what it takes to be an entrepreneur. His comments below provide plenty of food for thought if you've struggled to make a small business work, or you're thinking of starting one.
I agree that many small business owners are informal in their management and decision making. They also tend to use “gut feel” or what some call “biases and heuristics” when seeking to make decisions.
Entrepreneurial people tend to make decisions based on a process of effectuation rather than systematic or formal planning.
They do this not just because they don’t often know how to plan formally, but because they don’t often know what they are planning for.
The small business owner, particularly the owner who is engaged in or wants to engage in entrepreneurial growth, is usually unable to determine the shape of their growth trajectory.
Their business is typically forming as they evolve and as such they are involved in a constant process of trial and error, plus the reconfiguration of their limited resources as they seek to achieve their goal.
Ask many of them what their goals are and they will struggle. They don’t know what is in front of them because each growth phase or evolution is placing them into uncharted territory.
When I look at the CCH article the following things come to mind:
1. SMEs are prone to failure due to unforeseen rising costs, poor management and lack of working capital. Yes, a common problem well known since we started to look at small firms. Yet this is due to the fact that small business owners are working things out as they go and often underestimate their working capital needs as growth or expansion plans will demand.
2. I’m personally sceptical about the claim there is a high failure rate amongst start-ups and a "cavalier attitude" towards professional advisors. Many firms that start up and then close down are not strictly failures. Only a small proportion fails in terms of going into bankruptcy. Most start up owners simply close down the venture because it was not what they planned to do and perhaps it was heading in a direction that they felt uncomfortable with. This is not a ‘failure’ and most owners who have had this type of experience look at it as a learning process not a failure.
3. As for the “cavalier” attitudes, well many professional advisors are actually not that good at helping start-up ventures. This is because they don’t operate in linear or systematic/formal patterns of behaviour. This is hard for professionals to grasp.
Also who is the ‘professional’? Accountants are the most common outside advisor but they are also mostly focused on tax compliance and not business development. If most small business owners don’t seek help from professionals it is because they don’t really know who is worth talking to. Business support centres funded by governments are not that highly rated. I gave a talk last week to a group of chartered accountants about this. My own research selected from a sample of 110 out of a larger database of small business owners found:
78% sought advice from outsiders
79% felt they could be more active
98% used accountants, who they ranked 7/10 in terms of the value of their advice
86% used other business owners, who they ranked 6/10 in terms of value
70% used friends, who they ranked 4/10
68% used business associations, who they ranked 4/10
66% used family, who they ranked 4/10 and
34% used government services, which they ranked 2/10
So you can see that many small business owners use accountants and highly value their advice. Yet there is a difference between getting operational advice in relation to financial accounting matters and strategic advice about the long term future of the business.
4. Micromanagement by small business owners is a problem, but they are typically fighting on two fronts. First they are trying to deal with external environmental issues that require strategic thinking and action. Second they are trying to manage operational things that get more complex if they start to grow their firm. They cannot easily delegate away work as they lack the money to hire the type of people needed to help them with the management tasks.
5. I would not be surprised to find that strategy and financial issues were the main causes of failure. However, it is what lies behind these statistics that matters. It is not always a lack of outside advice.