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 [email protected] or call 07762 937137.

 

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

 

www.basicsandbeyond.co.uk