SMEs and Private Sector Growth

Latest figures from the Department for Business, Innovation and Skills (BIS) show that there are approximately 4.8 million private sector enterprises in the UK.  There are small ones (>= 49 people), medium ones (50-249 people) and large ones (http://stats.bis.gov.uk/ed/sme/) .  Critical Software Technologies has something of a split personality in this regard.  Its parent compant in Portugal has now gone beyond the end of its grace period and has to accept that it is now no longer an SME: it has far too many staff to satisfy the definition.  Critical Software Technologies Ltd in the UK is still quite clearly an SME, but it is disqualified by virtue of its parentage from claiming some of the advantages that are made available to SMEs.

99.3% of all these enterprises are small, 0.6% medium and just 0.1% large.   22.8 million people work in the private sector, just under 60% of them in SMEs that also account for around 50% of private sector turnover.  Those last two statistics for just this country’s small private enterprises (i.e. not including the medium ones) would be an astonishing 48% and 36% of employment and turnover respectively.

Here are some suggested answers to questions that aren’t answered in the BIS statistics.

    • Which companies’ directors are most viscerally aware of what it really means to be in business?  SMEs.
    • Which companies’ directors have the greatest chance of lobbying politicians and other influencers? Large ones, the 0.1%.

Hmmm… Here are some more:

    • Which companies are more likely to enjoy a more monopolistic trading position, having acquired smaller and probably more innovative competitors?  Large ones.
    • Which companies are less bothered by over-regulation (employment and H&S etc legislation, aka red tape) because they can afford to staff up a bureaucracy within their organisation?  Large ones again.
    • Which companies can almost squeeze the life out of small entrepreneurial companies in their supply chain partly because they can afford to and partly because they’re barely aware they’re doing it?  Yes, large ones.

One of the government’s avowed main strategies is to stimulate the private sector to compensate for rapidly increasing public sector unemployment.  To do that, it is going to have to create the conditions for growth so that innovative, entrepreneurial SMEs can start to expand. Unfortunately, such companies are facing more difficulties rather than less right now.

    • Part of the deal the banks signed up to, in return for being bailed out with taxpayers money, was that they would start lending to business again.  However in May we learned that, while their lending to large companies was reasonably on track, their lending to SMEs was falling woefully short of the target.  Bank of England figures show that in the first three months of 2011, the top five UK banks were falling short of their commitment by £2.2Bn per quarter (http://www.bbc.co.uk/news/business-13489884).
    • While the banks are lending to large companies, but are much less willing to help small companies manage their cashflow, large companies continue to use their muscle to lean on their suppliers.  Companies with more than 500 employees paid their invoices an average of almost thirty-seven days late – that’s over and above their agreed terms – in the fourth quarter of 2010 (a whole day later than the same period in 2009).  That’s almost twice the average lateness of companies with a handful of employees. (Source: Experian – http://press.experian.com/united-kingdom/Press-Release/2011/Payment%20performance%20slides%20in%20Q4%202010.aspx?&p=1)

In some respects, Critical Software Technologies is blessed  in having a blue-chip customer base.  No matter how long it takes, it’s a virtual certainty that invoices will eventually be paid. Sadly, even those of the company’s customers that would normally be reasonable payers think nothing of ‘losing’ invoices for a while, or expecting forbearance when implementing yet another change of accounting system.  It’s clear that the procurement and accounting staff in customer organisations have no concept of the scale of the problems they are causing their suppliers, but the suppliers have no option but to accept such situations as part of the rich pattern of business life.

On the brighter side, the Red Tape Challenge that’s just been launched (http://www.redtapechallenge.cabinetoffice.gov.uk/home/index/) at least offers a prospect of some of the twenty-odd thousand new business regulations introduced under the last regime being scrapped.  (Labour was very fond of using statutory instruments rather than legislation.)  Critical will use the Challenge as a channel to lobby against the issues that affect it the most:

  • The issues surrounding the income tax treatment of employees working on secondment from a European parent company have cost Critical Software Technologies dearly, not only in terms of penalties incurred by reason of failure fully to comply with complex regulations, but also in terms of management time that would have been far better spent focussing on how to defeat foreign competition both at home and abroad.
  • The VAT issues arising from the provision of services across borders both within Europe and beyond cause untold confusion and require the company to incur costs in terms of expensive professional advice.
  • Employment legislation designed to protect vulnerable people on the factory floor is often wholly inappropriate when it comes to ending professional relationships.  One size does not fit all – disaffected professionals have the potential to cause enormous long-term damage to a company far beyond any effects that could be caused by someone fulfilling a relatively simple function on a production line.
  • Some Health & Safety requirements are wholly inappropriate for companies that virtually exclusively employ professionals, but nevertheless the hoops have to be jumped through, and the costs borne.

The government would stand a better chance of achieving its aims if it could somehow ensure that those responsible for successful, high-growth SMEs were more involved in creating the conditions for SMEs to thrive.  All too often the agencies that are set up, ostensibly to do this, are populated by too many people who have had, and lost, jobs in the public sector, in banking, or in big companies.  People whose background has given them an authentic looking veneer: they appear organised, analytical and persuasive, but to believe they necessarily understand what makes small, growing companies tick is often misguided.

In our region, we have high hopes for the Solent LEP, one of the first Local Enterprise Partnerships to be approved and set up.  Critical Software Technologies is playing its part, by being one of its founding corporate members.  Time will tell whether the LEP approach will get the support it needs to be successful.  Watch this space.

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