The official Australian Bureau of Statistics (ABS) definition of a small business is one with less than 20 employees which, according to their latest data, make up 96% of all businesses. Together they contribute 35% to industry GDP, so they are important.
Another way of looking at business size is by turnover. The ABS found that 94% of businesses turned over less than $2 million and 63% earned less than $200,000. While both turnover and the number of employees are an important way of defining business size, they really don’t give much insight into how they are run.
As a business grows in size, its sophistication must also increase if it is to survive. That means better management, better systems and better reporting because the owners are unable to be everywhere and watch everything. There will be organisational changes as well. At some point an operations supervisor will be appointed so the owners can focus on growing the business, but I would still regard such a business as being small.
The next stage is the appointment of managers for key business areas. This is the real point where a business moves from small to medium size. However, it is not just the organisation structure that makes the difference between a small and medium sized business, it is the way they operate. Not only is there more delegated responsibility, but the owners share the decision making with their management team, although the owners may still reserve the right to set the vision.
This step change can only occur when a business reaches a certain level of profitability, which the ABS figures don’t reveal, being based on the simple measure of turnover rather than the more complex indicator, profit. I have regularly seen businesses with seven figure turnovers that don’t make any money.
Unfortunately, a management team significantly increases costs, as managers tend not to be directly delivering services or making sales. They are overhead. Therefore, they must pay for themselves with increases in productivity and improved sales performance through developing and implementing better business strategies. In a small business, the owners take on this responsibility themselves.
This gap between small and medium business is one that few owners overcome, which the ABS figures demonstrate with fewer than 4% of businesses reaching the other side of the nominal 20 employee mark. This gap becomes a big barrier to growth. In part it is insufficient profitability but primarily a mindset of the owners with most fearing the lack of control that comes with such changes.
The first step in making these changes is the development of a business management and reporting system. This not only gives owners the confidence to start to bring in managers, the reporting also enables the owners to improve results by utilising the analytical reports such a system provides. As results improve, their first manager may be appointed, which is usually an accountant. An accountant can transform the reporting and add much needed discipline to the business, paving the way to the appointment of other managers.
The bridge over the gap between a small and medium business is the Business Management System. Find out more about how a Business Management System works here.
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Dr Greg Chapman is the Director of Empower Business Solutions and is Australia's Lea ding Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems. He is also the author of The Five Pillars of Guaranteed Business Success and Price: How You Can Charge More Without Losing Sales.
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