Australia’s small medium size enterprise threat

| March 21, 2011

In current times, the truism for most economies is that job growth and future economic prosperity lies in thriving small to medium size enterprises (SMEs).

Generally large corporates are operating more efficiently, outsourcing globally and using greater amounts of technology – all of which shrink employment. 

<--break->” src=”http://staging.first5000.com.au/wp-content/uploads/2011/03/spacer.gif” title=”<--break-->“><br />Observing this trend, many governments and agencies have established programs and policies to encourage and assist entrepreneurs and SME growth. An interesting example of these measures is “<a href=Start Up America”, which is supported by the US Government, funded by Ewing Marion Kauffman Foundation, the Case Foundation and some smaller foundations. It is also supported and partnered by large companies like Facebook, HP and Intel.

Australia was fortunate to escape the full brunt of the economic downturn of the Global Financial Crisis (GFC) and its impact into ‘main street’ businesses. Much of the cushioning in Australia came from the strength of our mining and resource companies and their continued exports. However, many commentators have observed that we now have a ‘two speed’ economy, where some businesses are thriving and many others in more impacted sectors are struggling.
 

Size and Impact of SMEs in Australia
 

According to Australian Bureau of Statistics (ABS) 2007 survey, Australia has around 2 million actively trading businesses which employ around 42% of total employed persons. ABS estimate that these businesses contributed around 46% of the 2006 Australia’s Gross Domestic Product (GDP). ABS sampling shows that SME home based businesses are 35.6% (712,000) and of these home based businesses, only 40% (284,800) are non employing. The Australian Taxation Office (ATO) defines small (micro) businesses as businesses having a turnover of less than $2 million per annum.
 

Threats to Australian SMEs
 

Besides creating changes in underlying market dynamics and business models, the GFC had the impact of taking financial funds out of the economy.  This was due to off shore banks closing or scaling down Australian offices, repatriation by financial institutions of capital back to home markets,  tightening credit policies, increased competition for a reducing base of loan funds and reduction in financial institutions ability to raise capital as the value of their capital bases was eroded.
 

As liquidity quickly decreased, businesses were forced to instantly adapt. Unfortunately SMEs are a group that receives the most pressure when financial liquidity reduces. This is because:

  • SME credit risk is generally perceived as higher than larger businesses and therefore they experienced a greater tightening of credit;
  • Large businesses push out credit terms, which particularly negatively impacts SME suppliers ;
  • SMEs generally don’t have large reserves, so that they often don’t have the funds that allow them to move or change strategies efficiently and effectively;
  • SMEs are more relationship based and therefore taking actions that create pain to stakeholders are harder to instigate and complete.
     

So it comes as no surprise to see that SME tax debt has increased significantly. As liquidity tightened, the numbers show that the outstanding tax liabilities to the ATO increased significantly. The ATO became a default bank. In 2009, the ATO issued some public statements that said that they had 706,000 SMEs with a total of $6.5 billion outstanding tax debts.  Using ABS data cited above, this was 35.3% of all SMEs or if home office businesses are excluded it is a staggering number of circa 55% of SMEs.

According to a November 2010 article by James Thomson in ‘Smart Company’, the level of outstanding ATO tax debt has subsequently increased by 21%, for FYE 2010. Indications are that the amount of tax debt has continued to increase even more since then, despite the ATO taking a tougher stance.
 

This tax debt has the potential not just to negatively impact individual SMEs but to feed, via a domino effect, into the whole of the Australian economy. If the ATO get too tough on collections, then many businesses will be forced into administration and liquidation, unemployment will increase and there will be an adverse impact on other businesses (large and small). It highlights that many Australian businesses are in urgent need of restructuring and need to undergo strategic and business model repositioning, as well as find ways to deal intelligently with their tax arrears.
 

We cannot afford to do nothing and hope this problem will go away. In my next blog post I will put forward some ideas on how we could deal with this time bomb of an issue, and I would be interested to see what ideas readers have.
 

SHARE WITH: