Destined for success in small business *

Revenue growth is not the be-all and end-all for many entrepreneurs. Still, those who outpace their peers share certain characteristics – such as higher education, use of advisers and web connectivity

*This is an expanded version of a summary that originally appeared in the March 2005 issue of CAmagazine.

Not every entrepreneur measures success in terms of revenue growth. In the small business sector, a distinction is made between “value builders,” who seek growth, and “lifestylers,” who want long-term stability and use the business as a means of generating enough income to support a certain lifestyle. An estimated 55% of micro businesses in Canada belong to the lifestylers group.

Despite the differences in motivation for opening a business outlined in the chart below, small business owners experienced a 27% cumulative percentage increase in revenue from 2001 to 2004, according to a new report released by CIBC Small Business.

Motivation for opening a business --financial

Motivation for opening a business --financial

The report, Secrets to Small Business Success, notes that half of all small business owners do not plan to expand their business in the next two years. One-quarter (25%) of entrepreneurs who are not planning to expand cite their contentment with the current state of their business as the primary reason for not expanding. For the 45% of entrepreneurs who are planning to expand their business in the next two years, small business owners say these plans include investing in new equipment and technology (22%) and hiring more staff (20%).

What does this mean for CAs?
At the most general level, the report clearly shows that a blanket approach to small business accounting is ineffective. CAs should also be cognizant of the current reality that growth is not the ultimate aim for many small firms. As well, it is becoming increasingly important for CAs to understand the nature of the individual business, the motivation of the small business owner and the factors that influence the company’s success. This understanding should be reflected in the CA’s advice.

What sets higher-growth businesses apart?
Again, despite the differences in motivation outlined above, 63% of small business owners expect revenue to increase in 2005. To help them meet that expectation, CIBC examined the factors most likely to set firms with higher than average revenue growth apart from their peers in the past three years.

A high level of education: Over the past three years, small firms run by individuals with at least some post-secondary education enjoyed a revenue increase which was more than double that of firms run by individuals with less than high school education. Two in three Canadian small business owners have at least some post-secondary education.

Use of advisers: Entrepreneurs who regularly use the advice of professional advisers saw their revenue rise 76% more than small firms without such advice. Just over one in 10 (11%) of Canadian small firms use an advisory panel or board as a matter of course. Among small business owners with an advisory panel or board, the most common panel members include financial experts (68%), business professionals (48%) and legal advisers (32%). CAs have an opportunity to educate small business owners about the importance of creating and using an advisory panel or board. CAs can also position themselves as key members of this circle of advisers with specialized information regarding tax and accounting to bring to the table. With the world of small business becoming more and more complex, the number of small business owners who seek the help of advisers is likely to grow, providing CAs with further opportunities to service this market.

Corporations: Small businesses that are incorporated saw their revenue rise by 40% more than unincorporated sole proprietors. Small businesses that are incorporated tend to have a larger support system, often with more resources and skills available. Forty percent of Canadian small businesses are incorporated. CAs should be able to monitor the growth and level of sophistication of a given business and should be willing to recommend incorporation when the business could benefit. Entrepreneurs are not always aware of all the benefits of incorporating and CAs can provide relevant information about this important factor in small business success.

Outsourcing: Small firms that receive outsourced work from other companies grew their revenue, on average, 61% more than firms that do not rely on outsourced work. The pace of business outsourcing is expected to accelerate in the coming years, as large firms cut costs and focus on core business. This should continue to provide Canadian small businesses with growth opportunities. Currently, 39% of small firms in Canada receive outsourced work. With increased outsourcing activity expected in the coming years, accounting and bookkeeping will probably become more complex, particularly with respect to the tax implications of the practice. CAs need to make sure they are on top of this trend and are aware of all the implications for the bottom line, including taxation.

Technology adoption and connectivity: Small firms that reported a high level of web connectivity saw their revenue rise about twice as much as that of firms with no web connectivity. The logical connection here is straightforward. Increased connectivity and the adoption of e-commerce work to improve and strengthen customer relationships, enhance information availability and exchange, improve the company’s image, and, in some cases, level the playing field with large corporations. Roughly 38% of small firms in Canada have a website and 7% use the Internet as a serious business tool.

High web connectivity is defined as a firm with a business website that allows e-commerce (which may or may not include information about the company) and an Internet connection.

Medium web connectivity includes firms with a business website for information only (with or without an Internet connection), as well as businesses with a website that allows e-commerce, but without an Internet connection.

Low connectivity includes firms that do not have a business website, but do have an Internet connection.

A majority of Internet sales outside of Canada: In the past three years, small businesses that exported more than half of their Internet-based sales experienced more than double the revenue growth of firms exporting less than half of their Internet-based sales. On average, 22% of Internet-based sales are to customers outside of Canada. This adds another level of complexity to the accounting needs of small businesses, especially when it comes to foreign market regulations and foreign exchange exposure. CAs will likely require the most up-to-date information available on these issues in order to explain the complexity (and risks) involved in foreign exchange transactions and to provide sound advice regarding doing business abroad.

Finance and real estate sectors doing well
While the common image of a small business is a storefront, it appears that small business revenue growth is strongest in the professional, science and technology industry, followed closely by small finance and real estate-related firms. Not only are more and more small firms starting operations in finance and accounting-related fields, but those who do so are, on average, doing well. Small businesses in the finance and real estate category (including accounting professionals) show the second-largest percentage growth in revenue in the past three years. This is consistent with our expectations of continued strong growth in this segment of small business. Small businesses in the health care field are also performing well.

In the past three years, single entrepreneurs have experienced almost double (86% more than) the revenue growth of entrepreneurs who are married (48.3% compared to 26%).

However, entrepreneurs who are divorced, separated or widowed experienced 17.9% growth in the past three years.

While the finding that single people have experienced comparatively larger revenue growth may indicate that they have more time to devote to their businesses, this finding may also be correlated with the age of the entrepreneur and the stage of the business, among other factors.

Equal opportunity for success
Within this context it is equally important to focus on the factors that appear to have little or no impact on the probability of success, as measured by the cumulative increase in revenue from 2001 to 2004. The gender of small business owners appears not to have had an impact on the revenue growth of small firms, as the growth rate among firms owned by men are rising at approximately the same rate seen among women. Immigrants were also found to enjoy the same rate of revenue growth as native-born small business owners. Business location is not a differentiating factor either, with three-year revenue growth rates reported by home-based businesses matching those of non home-based businesses. Interestingly, there was no performance difference between small businesses that were created due to negative economic circumstances (entrepreneurs who established their businesses at least in part because they were laid-off, downsized, restructured, fired or took an early retirement package) and companies that were established by choice.

Beyond the numbers, perhaps the most telling indication of small business success is the overwhelming number of entrepreneurs (86%) who say that if they had it to do over again, they would.

Entrepreneurs also take ownership of their responsibility for their success. Nine in ten (91%) entrepreneurs agreed with the statement, “The most important factor in the success of my business is me.” Given this self-reliance, CAs will need to demonstrate the potential benefit of using their specialized expertise to small business owners.