New research from the University of Technology Sydney has revealed the state of small business in Australia today and some lessons for SME owners to learn from.
Small businesses form a significant part of the Australian economy. Yet, while plenty of data exists on big Australian businesses, obtaining reliable data on small Australian businesses is a lot harder. To understand more about Australian small businesses, the University of Technology, Sydney (UTS) formed a project team to interview Australian small business owners.
A questionnaire was developed, and 721 Australian small businesses were interviewed. The questions focused on the characteristics of small business enterprises, and the decisions made by their owners. Some of the results and considerations are discussed in this article
Motivations for starting a small business
There are a number of different reasons why one decides to start their own small business. While technology is now able to provide small business owners with increased flexibility through their ability to operate via the internet, our interviews found that money was still the main motivator. 43 percent of respondents were motivated to start a small business to ‘make more money’, with lifestyle a motivating factor for 22 percent, followed by flexibility (19 percent), autonomy (10 percent), redundancy (3 percent) and other reasons (3 percent).
Things to consider: As any small business owner will tell you, when starting up your own small business, you will often be warned of its dangers (and the risks of leaving a regular, stable salary). Believe in why you started your own small business so that you have the drive and confidence to keep on going when the going is tough.
Hours worked by SME owners
It is fair to say that small business owners go to sleep thinking about their small business, and wake up with it on their mind. Our interviews indicated that 70 percent of respondents worked in their small business for more than 40 hours per week. Generally the small businesses we interviewed found it very difficult to separate their business from their personal life.
Things to consider: Small business owners often mentioned it was hard to step away from their small business, but when they did, they often came up with their greatest business ideas. Look at how you work. Are you working efficiently or are you spending hours in front of the computer, getting distracted by your incoming email? Plan your time effectively.
The comparative majority of small businesses we interviewed sourced financing from their own personal savings (39 percent), followed by banks (25 percent), friends and family (18 percent), business partners and investors (14 percent), and leasing arrangements (4 percent). Particularly interesting is the large number of small business owners using funds from friends, family and business partners. This may be a result of the difficulties small business owners face in obtaining funds from banks.
Things to consider: There are obvious benefits if your personal savings are enough to finance most (or all) of your start-up expenses. However, don’t forget you still have to live. So factor in funds for personal expenses. Are you about to ask family and friends to invest in your business? Think long and hard first.
Accounting and bookkeeping
It is well known that bookkeeping errors can cost small businesses a lot of money, through ATO interest charges and penalties. In our survey, 45 percent of small business owners attended to their own bookkeeping without the assistance of a professional bookkeeper or accountant. When looking at the preparation of financial statements, 56 percent engaged an accountant. Our survey also highlighted that as the size of the small business grew, the more the small business owner relied on professionals to attend to these requirements.
Things to consider: While you can save money by attending to your own bookkeeping and accounting requirements; are you confident with accounting procedures and taxation requirements? Are you on top of all the tax concessions available to you? Take a moment to think about how you keep records within your business. If you’re still storing your receipts in a shoebox, consider moving to a computerised system (there are a number of new, affordable bookkeeping programs available).
Budgeting and performance evaluation
While small businesses without budgets may survive, there will be many challenges along the way. We found through our interviews that just over half of respondents prepared budgets, often citing lack of time and uncertainty around the future as a reason for not preparing a budget. Of note, the survey found that larger small businesses make greater use of budgeting.
Our interviews also showed that most small businesses (93 percent) rely on their end-of-year financial statements (such as profit and loss summary) to evaluate how their business had performed for the year. If your financial statements are prepared by external accountants, they may not be available to the small business owners until well after the financial year! This presents an issue for small business owners as problems may be identified when it is too late.
Things to consider: Budgeting doesn’t have to be complicated. Start by focusing on your main income and expense items and group the smaller items as ‘other items’. This will help provide a snapshot of your business and assist in planning. If using accounting software or a spreadsheet to prepare your quarterly Business Activity Statements (BAS), you will have details of your income and expenses. Take the time to review these items every quarter, to save on any surprises down the track. If using an accountant or bookkeeper to prepare your BAS, ask them to give you a copy of your Profit & Loss summary.
Business and strategic planning
It is often said that ‘one who fails to plan, plans to fail’. Surprisingly, only 48 percent of small business owners surveyed had prepared a formal business plan. We also found that only 63 percent of small businesses engaged in some form of strategic planning (such as market research and competitor analysis).
Things to consider: A business plan often helps you frame your thoughts and ideas, and may highlight aspects of your business which need focus. You don’t need to start a business plan from scratch. There a number of websites with free ready-made templates to assist you (one of our favourites is available at www.business.gov.au/businessplan). Even if it’s doing a quick online search to see what your competitors are up to. You may also want to set up Google alerts (www.google.com/alerts) for your key competitors (this will alert you when new information on your competitors is published online).
These results provide just a snapshot of Australian small businesses. It is through continued research like this that we will better understand our small business environment, and current and future small business owners will be in a great position to make well-informed small business decisions.
-This article was co-authored by Emma Petroulas and Dr Francesco Giacobbe. Emma Petroulas and Dr Francesco Giacobbe are lecturers in Small Business Accounting at the University of Technology, Sydney (UTS).