A study into small and medium enterprises conducted by accounting firm RSM Bird Cameron reveals seven critical success factors for these businesses, writes John Heggie.
RSM Bird Cameron’s research into the SME sector formed the basis of their report Think Big—A Blueprint for SME Success, which reveals the following seven critical steps to business success:
1. Plan to spend at least 20 percent of your time working on the business.
Planning and management time is time well spent. Owners of small and medium enterprises often don’t achieve their full potential because they spend all their time selling their product or service and leave little time for thinking about how the business will grow in the future, whether the business has good systems, is compliant with all relevant regulations, is visible to its target market, and is serving its customers well.
The Think Big report found that SME owners typically find it challenging and difficult to develop the disciplines needed to step back from making sales and developing relationships, and to carve out some development time for their businesses and for themselves.
The downside of failing to develop these disciplines are significant—business owners that do not take this time typically report lower rates of growth than those that do.
The key lesson is to recognise that you wear many hats, and all these roles require attention.
2. Understand the growth/resource requirements for your business, and think broadly about potential avenues for funding your growth.
SMEs are typically constrained by lack of resources and lack of capital, confining owners to working in the business and limiting their ability to devote time to work on the business and achieve growth.
The businesses surveyed for the report identified the following barriers to growth: resources (33 percent), lack of capital (23 percent), market saturation (18 percent), time stretched (10 percent), and not relevant now (three percent). Only 13 percent reported they had no barriers to growth.
The report found that breaking out of this resource constraint cycle is a difficult task and a lack of capital, both internal and external, is a major constraint in moving SMEs to the next level.
Growth of SMEs is further constrained by a very narrow view held by owners of funding options. Most SMEs use their own equity and bank debt. The limited awareness of capital raising alternatives prevents SME owners from realising their wealth creation goals.
Businesses surveyed used the following sources of funding: owner’s equity (40 percent), bank debt (24 percent), reinvested profits (24 percent), foregone salary (seven percent), venture capital (two percent), and other (three percent).
There is a great need to make SME owners aware of the broad range of funding options and innovative growth options available to them. Investigating all funding opportunities can provide new avenues for SME owners to pursue growth opportunities and achieve personal wealth creation goals.
3. Planning is not just for big businesses. Document your ambitions, how you will realise them and when you expect to reach your goals.
SMEs that do not undertake planning because they either don’t have time, or think they know the market so well that this process is unnecessary, achieve much lower rates of growth than those that adopt and adhere to a business plan.
The Think Big report found that business planning disciplines were extremely weak in recently established enterprises, with owners citing time constraints as the most significant barrier.
In fact, the report found only 11 percent of businesses having completed a business plan did so within their first two years, compared with 72 percent of businesses having business plans completing them in their fifth to tenth years.
At the very time when SME owners should be examining the market they are trying to penetrate, the competitors they are trying to defeat, and the customers they are trying to capture, they are pushing those activities aside in favour of working in the business.
The report found that even though 66 percent of businesses surveyed undertook some form of business planning, 50 percent of this group did not have a formal business plan outlining how they planned to grow. Thirty four percent undertook no planning at all.
Not having a business plan may lead to capital being more difficult to obtain, because of not having a well documented plan and a story for lenders, as well as missing breakthrough strategies because time has not been invested in examining markets thoroughly and identifying real differentiation.
The Think Big report found that businesses that plan effectively have a greater likelihood of being in business ten years after commencement.
Failing to plan in the formative years of business is a false economy. Business planning is an essential prerequisite for long-term business success.
4. Bring the outside in—external Board members, or other external advisors, bring fresh perspectives, good ideas and discipline.
SMEs that have external Board members, or use external advisers, are far more likely to have completed business plans, and therefore more likely to experience higher growth than their competitors.
The Think Big report found that of the businesses surveyed, 18 percent reported they had external Board members, and 85 percent of these had completed business plans, compared with an overall 66 percent of SMEs surveyed.
SME owners seem reluctant to bring in outside expertise to help develop strategy and direction for their business, even though external advice and business planning are utilised by most successful businesses.
Thirty nine percent of SMEs surveyed made no use whatsoever of external advisors to support their business management capacity.
Given the time constraints of these business owners it would make more sense to call on external parties to provide expertise and assistance. Businesses that could benefit from using external advice include those that:
• Have family business members as sole decision makers;
• Lack a business plan;
• Have board members that are seeking direction;
• Are a new business where the owner has limited business skills; and
• Have a business that is stagnating and needs new ideas and concepts.
Seeking advice from external experts helps drive business growth. External Board members can complement the skills of existing Board members and can attract potential investors through increased transparency in the business.
5. Don’t go it alone—find the right support to help you grow.
Small business owners, usually pressed for time, can benefit greatly from the use of external advisers to assist them with growth and wealth building.
The Think Big report found that 40 per cent of SME owners surveyed did not use external advisors to augment their business management capacity. The 60 percent that did use external advisors, used them predominantly in the areas of succession planning (25 percent), business planning (35 percent) and superannuation planning (55 percent).
One of the major reasons identified in the report for not using external advisors was that SME owners found it difficult to find the right advisers for their needs.
The report reveals SME owners are not looking for a ‘one size fits all’ approach from their external advisors, but an understanding of their industry and their business needs.
The report found that, when choosing an external advisor, SME owners rated the following as their top five criteria: an understanding of their business needs; reputation; industry knowledge; reliability and trustworthiness; and being principled.
SME owners should choose an external advisor that they believe has insight and understanding of their business. Bringing in external advisers can help deliver strategy and direction for SMEs and can be a key factor in
driving business growth.
Seeking external advice is vitally important for SMEs as it assists in streamlining accounting methods, establishing good legal structures and management practices, and sets the basis for future growth and wealth building.
6. Creating a succession plan will be one of the hardest things you do, but also the most valuable.
Although most SME owners state their biggest risk is their inability to continue working in their business, many do not have a succession plan in place.
The Think Big report found that 46 percent of businesses surveyed had not developed a succession plan. The report also found that other key risk factors for these businesses included: loss of competitive edge; loss of key people; lack of capital; and financial collapse.
Succession planning, like business planning, is one of the most important and challenging aspects of running a business, but for many businesses it does not receive the attention or priority it deserves.
The report also found that established businesses were no more likely to have a succession plan than new businesses. The survey revealed 65 percent of businesses that didn’t have a succession plan were older than ten years.
Owners fail to appreciate the complexity of succession planning and are unprepared for how to ensure the continuity of their business when they want to retire.
The reason given by most respondents to the Think Big survey was that succession planning was not relevant to their business at that time (56 percent), with only 20 percent citing the identification of a successor as the major barrier.
In family businesses many owners will avoid discussion of succession because it can be fraught with tension, but the consequences of not having a succession plan are more serious than the challenges in dealing with these issues.
7. Exiting your business takes time and effort. Write your information memorandum early so you can address weaknesses and maximise your return from a sale.
SMEs need to be thinking and planning their exit strategies long before they make the decision to realise their wealth.
The Think Big report found that planning to realise wealth improves only marginally where owners plan to exit the business, with 56 percent of those surveyed having a plan in place. But this discipline again was absent in many more established enterprises, with 74 percent of surveyed businesses without a plan being established for 10 years or more.
Preparing a business for sale is a complex and lengthy process, requiring documentation of financial, operating and marketing processes to create the necessary transparency demanded by a potential buyer.
Few SMEs have their business properly documented in this way and therefore do not have a clear picture of their current, or potential, financial worth.
The process of creating an information memorandum for a sale can highlight weaknesses of current operations that will need to be addressed prior to sale if the owners are to maximise their return. Businesses that have no exit plan have failed to appreciate they will need time and effort to realise wealth from their business.
*John Heggie is the national director of business solutions at national accounting firm, RSM Bird Cameron—a GHA business partner. A copy of Think Big—A Blueprint for SME Success can be obtained by contacting the marketing division of RSM Bird Cameron’s Sydney office on (02) 9233 8933. More information on the firm can be found at www.rsmi.com.au