Barriers to SME Success

Obstacles to SME Success in Scotland

 

Synopsis of part one of research commissioned by Basics and Beyond Ltd and undertaken by Business Studies students at Strathclyde University. Part two, a qualitative analysis, will be available in Spring 2018.

 

The European Union definition of a small and medium sized enterprise (SME) is one that “employs fewer than 250 persons, has an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro”.

 

The contribution of SMEs to the Scottish economy is significant. In 2016, it was estimated that there were over 348,000 private sector enterprises operating in Scotland, 99% of which are SMEs. They provide an estimated 1.2 million jobs, almost 55% of private sector employees. Moreover, SMEs account for 40.5% of private sector turnover.

 

Top 10 Scottish SMEs by Sector and Headcount

 

 

Number of companies

 

 

Sector

 

sole trader

1 to 9

employees

10 to 49

employees

50 to 249

employees

Total

Professional, scientific and technical

39230

12165

1490

370

53255

Construction

36195

10020

1500

295

48010

Wholesale and retail

14965

11475

10465

555

37460

Health and social work

20755

3615

1940

415

26725

Administrative and support services

18990

5795

950

300

26035

Agriculture, forestry and fishing

14145

6865

430

25

21465

Hospitality

6755

8950

2900

305

18910

Education

17190

895

260

85

18430

Manufacturing

11380

3865

1380

605

17230

IT & Comms

11615

2955

400

135

15105

 

According to many reliable sources, less than one half of start up businesses survive for more than three years and firms employing less than twenty staff are 78% more likely to fail within the next 10 years.

 

In Scotland, causes of business failure can be attributed to a number of issues including mandatory financial burdens, legal and regulatory restrictions, limited access to working capital and long-term credit, inadequate infrastructure, limited managerial expertise and loss of motivation.

 

Furthermore, most small businesses identify the barriers to business success to be market competition and finding skilled staff. Concerns about macroeconomic conditions and economic stability add to the uncertainty.

 

 

                                Obstacles to Successful Business Growth

Reason

% respondents

Regulation/Red tape

52.20

Competition

46.50

Taxation, VAT, PAYE, National Insurance, business rates

37.50

Staff recruitment and skills

35.50

Late payment

30.70

Obtaining finance

24.20

Workplace pensions

20.00

Availability/cost of suitable premises

19.50

 

Top 3 Reasons for Seeking Finance

 

Sole trader

Acquiring capital equip or vehicles

Working capital or cash flow

Premises

1 to 9 staff

Working capital or cash flow

Acquiring capital equipment or vehicles

Fund expansion

10 to 49 staff

Working capital or cash flow

Acquiring capital equipment or vehicles

Other

50 to 249 staff

Working capital or cash flow

Acquiring capital equipment or vehicles

Premises

 

Top 3 Sources of Finance

 

Sole trader

bank overdraft

loans

credit

1 to 9 staff

credit

bank overdraft

leasing or hire purchase

10 to 49 staff

credit

leasing or hire purchase

bank overdraft

50 to 249 staff

credit

leasing or hire purchase

loans

 

There are other important factors to consider.

 

“Internal” factors

There is considerable evidence that firms managed by people without management experience have a greater chance of failure. They will most probably have a weak business concept, unclear business definition and general lack of focus. Inadequate product or service options will also increase the risk of failure. A firm that can adjust and offer viable products or services is more likely to have a greater probability for survival and consequential growth.

 

“External” factors

These include high interest rates, recession, inflation, taxes, competition and government regulation.

An inadequate capital structure makes smaller businesses more vulnerable to unpredictable changes to local economic conditions.

The research identifies regulation (eg health and safety), red tape and financial burdens (taxation; VAT, PAYE, National insurance, late payment, workplace pension and business rates) as key inhibitors to growth.

The inability to identify and recruit staff with the required skills is an additional hindrance.

 

There is no guarantee for success, however being aware of the obstacles to be overcome and having in place robust plans to address these will significantly improve an SME’s chances of survival.

 

Data sources

National Statistics Publication for Scotland, 2015 and 2016

Scottish Government Small Business Survey Scotland 2016

Organisation for Economic and Development (OECD)

Office for National Statistics

UK Government Department for Business, Innovation and Skills (DBIS)

Various academic papers and publications

 

To discuss this further or for more detailed information contact Michael Clerck at michael@basicsandbeyond.co.uk or call 07762 937137.

 

Basics and Beyond Ltd are business growth specialists committed to supporting SMEs achieve their aspirations.

 

www.basicsandbeyond.co.uk

 

 

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