SMEs – Are You Aiming to Thrive or Aiming to Survive! Key Challenges
As an Insolvency Practitioner, I get an invaluable insight regarding the key challenges and differences that enables some SMEs to thrive, as opposed to those that are simply aiming to survive. It is my experience, those that are aiming to survive will in many occasions not make it. As harsh as such view may seem, a major reason that this occurs is due to not having the right “attitude”. SMEs face challenges that all businesses commonly face, however these challenges at times are not properly considered (by way of a plan – be it formal or informal) and/or responded to in the best manner.
True it is that SMEs may not either initially or at other times in their life cycle have access to the same level of resources (human, technological or financial capital) that larger businesses have, but those with the right attitude about:
• Correctly identifying the market they are seeking to sell into and re-positioning as necessary;
• Correctly resourcing (through efficient use of technology) and evaluating the manner in which they produce or deliver their product, even if heavily reliant on personal services;
• Strong administration and financial management; and
• Conscious re-investment back into the SME,
will be the ones that successfully work through the challenges and come out the other side.
SMEs (or small to medium enterprises) are vitally important to the economic health of Australia. What is an SME and why are they important?
• An SME can be generally considered to be businesses that employ between 1 and 19 people with a turnover of up to $100 million;
• In Australia, there are approximately 1.2 million SMEs which represents over 96% of all business and approximately 33% of
Gross Domestic Product (“GDP”);
• Approximately 93.5% individuals employed by SME’s in Australia are employees of a business with less than 20 individuals; and
• Of the approximate 10,000 corporate insolvencies that occur nationally each year, about 80% are SMEs.
Many challenges faced by SME’s are relatively common and are not (to the surprise of many SME owners) simply unique to their business. The following challenges are by no means exhaustive, but represent 3 of the most important challenges that determine whether or not the SME will thrive or survive:
• Leadership/management skills – cover a very wide spectrum. No one knows everything, however SMEs need to be reflective of genuinely what skills they bring to the table and what they don’t – and don’t sugar coat it. This coupled with undertaking the same analysis with present employees may aid in determining whether the relative strengths and weaknesses are across the areas of sales, marketing, production, administration/finance and research. It may be that an SME cannot have employees across all categories initially, however work what you do have (and indeed need initially) and develop a plan to move toward the full compliment.
Also understand what the SME may lack initially or at other times can be covered by the selective use of external service providers – for example suitably experienced professional advisors like accountants who can assist with determining issues such as working capital requirements and pricing of goods/services to be profitable.
Successful leaders or management also know when to carefully listen to other business stakeholders and when to take action. Those that fail to listen do so at their own peril.
• Undercapitalisation – is typically when a business does not have sufficient capital to conduct normal business operations and pay creditors. Frequently the business is not generating enough cash flow or is unable to access forms of financing such as debt or equity. This can occur at the start of the business or at other intervals during the life cycle. Having enough start-up capital is frequently problematic, but what should be known quite clearly from inception is what’s required in funding to cover the initial commencement and on-going costs in the first year.
Don’t unnecessarily skimp just to make the equation work – know realistic costs and what you need to sell your product or service at to be profitable. Forecast profit and loss and cash-flows should be prepared before a decision is even made to start the venture – it is better to make the informed decision that perhaps it may not work from the start and avoid putting the family home on the line (from a security perspective) rather than just going off somewhat blindly. Also make sure that such forecasts include paying Taxes (ie GST / PAYG and SGC) on time!!!
If some level of bank finance is required, know clearly what the terms are and what other security has been given and that where possible related parties not involved in the business refrain from providing security / guarantees – unfortunately this is something that I see occurs too often. Equally if the bank is providing funding solely on the basis of residential security (ie the family home) consider the structure of the loan and whether it may be more beneficial for a shareholders loan to be made to the SME with a security interest taken over the company’s assets at the time of the advance. A lawyer with appropriate commercial and insolvency expertise will be able to assist with such consideration. Such position elevates the related party in an insolvency event ahead of other unsecured creditors.
It is during the initial and early part of the life cycle when an SME is most likely to struggle and potentially become insolvent – so take care to regularly review forecast positions with actuals and importantly be pragmatic about work flows, managing debtor and creditors days so where possible the mismatch does not unnecessarily cause cash-flow challenges. If you need help reach out to a professional for such guidance as these costs should have been factored into your start-up costs anyway.
Importantly – don’t treat the business monies as yours. This may sound simplistic but happens too regularly. The use of shareholder or director loan accounts can be misused as a substitute for not paying the company taxes. Sure SMEs directors/ business owners are entitled to remuneration, but not simply at the expense of failing to provide for the above taxes.
• The impact of shareholder disputes or family relationship breakdown
Shareholder disputes can be made easier if a plan of action is in place before you enter into business with a friend, a family member, a business angel etc. Shareholder agreements are quite powerful as they set out what each shareholder has contributed, how the assets are to be broken up in the case of an intractable dispute etc. However, please ensure that they are properly drafted by a lawyer that is familiar with the particulars of the SME and that you simply haven’t acquired one from the internet! Quite often when two friends go into business one might supply the capital, the other the expertise. If you can’t get along how is this to be dealt with if there is a breakdown?
Where a family relationship breakdown occurs between the shareholders of an SME, ie husband and wife, this can bring down what might otherwise be a viable business or might lead to the downturn of a business as the shareholders are not there with a common purpose.
In either scenario, unless the parties seek to reach an amicable commercial resolution, in my experience significant value is destroyed in the SME. SMEs are much more vulnerable to material changes in valuation than other corporates, for example a Big Four Bank or Telecommunication Carrier. The unfortunate reality is that shareholder disputes and family relationship breakdowns occur. It is important that all parties obtain relevant professional advice to understand their position, but additionally be pragmatic and commercially focused on a resolution. In my experience the Net Position (ie after payment of professional advisor costs) is sometimes ignored at the expense of the Gross Position.
Running an SME presents both enormous opportunities, but also challenges along the way and can be emotionally taxing for the owners. Having the right attitude is critical – and an important part of this is a PLAN. Have you heard “those who fail to plan, plan to fail”. Part of that plan should be to have the access to suitable professional advisors that understand your business and can genuinely add value. There are many great Australian SME stories and we need this pipeline to continue. If you would like to discuss your position at all, please give me a call as we continually work with a range of professionals in financial services, accounting and legal.
by Bruce Gleeson