Small Businesses Stronger Following Downturn But Still Need Help, International Survey Finds

SME sector ‘not out of the woods yet,’ says CGA-Canada’s Anthony Ariganello as between a third and one half of all small businesses worldwide don’t have adequate reserves to survive another financial crisis.

From a December 7, 2010 media release by ACCA, CGA-Canada and CNDCEC.

A worrying number of small businesses believe they do not have enough cash reserves to survive another economic downturn, according to a study by Forbes Insights in association with ACCA (the Association of Chartered Certified Accountants), Certified General Accountants Association of Canada (CGA-Canada) and CNDCEC, the professional body for certified accountants in Italy.

The study was based on a survey of more than 1,750 small- and medium-sized enterprises (SMEs) in Canada, China, Italy, Singapore, South Africa, and the UK, with 30 per cent of the sample composed of micro-businesses employing fewer than 10 people.

It shows that while most SMEs believed the worst of the recession had past, there was an unexpectedly high number of businesses—between 31 per cent and 54 per cent—in each country, including those which have seen high growth and were less affected by the global downturn, who felt they did not have adequate cash reserves to survive another financial crisis.

See the report “Small and Medium-Sized Enterprises: Rebuilding a Foundation for Post-Recovery Growth” [PDF — 1,941 KB] as well as national reports on Canada, China, Italy, Singapore, South Africa and the UK.

“Although there are signs of economic recovery, the SME sector is not out of the woods yet," says Anthony Ariganello, President and CEO of CGA-Canada. "We believe it's vitally important to understand the issues faced by this sector. And, having taken an in-depth look at the current situation, it's clear there are things to be done by policy-makers, by business advisers, by financial institutions and by the businesses themselves." 

SMEs surveyed said the recession has forced them to become better businesses and if they take on risk it is only where they can have control. Growing businesses, especially in the more dynamic economies, appear to be facing stiffer competition and rising costs, putting profit margins under pressure.

According to respondents, lenders appear to be directing funds to larger SMEs and big corporations rather than micro and small enterprises. The study also found that credit is being directed away from working capital towards capacity building investments, and is increasingly likely to be secured against personal or business assets, while equity investments are drawn to acquisitions and to financing local or international expansion.

As commercial providers of finance have become reluctant to finance working capital, assume customer credit risks or refinance debt, the weight of expectation has shifted to shareholders and trade creditors.

The study found that those businesses that value professional or expert advisers above others have performed better - professional advice has given lean SMEs more confidence about their chances of survival, by ensuring that they have fewer urgent financing needs and better access to credit.

The study’s authors have made several recommendations:

• SMEs must consider factors such as interest rate increases, exchange rate volatility and inflation when developing business plans and risk management policies.
• Governments can help reduce uncertainty through early and reliable commitments on tax, spending, monetary policy and regulation.
• Governments must consider strengthening loan guarantee schemes for SMEs to provide solutions where sufficient collateral cannot be provided.
•  More businesses should explore supply chain finance: whereby large customers provide credit to small suppliers by factoring their own invoices, and governments, often the most creditworthy customers of SMEs, should consider similar means of financing their suppliers.
• Business advisers and government-funded enterprise support agencies must prioritize improving credit- and investment-readiness among SMEs by explaining the information needs of capital providers and championing other sources of finance, such as business angels, where appropriate.
• Providers of capital must be clear about their lending or investment criteria and consider the need for security or personal guarantees flexibly, case-by-case.
• Businesses should use financial and credit information on their customers and ensure their information is available to prospective trading partners.
• Governments must acknowledge the critical importance of trade credit as a financial market, ensuring that credit information is widely available and that creditors have access to reasonable means of enforcing their claims.
• Business advisers and government-funded enterprise development agencies should be looking for undercapitalized SMEs and actively encouraging action if necessary.
• Providers of capital should acknowledge the value of professional advice in their communications with SMEs and consider directing unsuccessful applicants to professional advisors.

Giancarlo Attolini, board member in charge of International Affairs at CNDCEC, says: "Professionals can play a crucial role in the current financial crisis, supporting SMEs in their decisions concerning financing decisions and business planning. Good budgeting of financial resources and ability to secure third-party capital proves to be key in surviving the crisis. The survey shows that financing needs to change, based on enterprises' needs and geographical location. Micro and small enterprises, which represent the main clients of most practitioners, went through great difficulties in securing finance during the credit crunch; professional skills and advice can adequately support them in accessing finance and managing their cash flows."

Helen Brand, Chief Executive of ACCA, says: "It has been a challenging two years for small businesses around the world but they have emerged, on the whole, somewhat wiser, more in control and cautiously optimistic. However, the recovery, such as it is, presents its own unique risks. As this research demonstrates, having the tools, the support and the confidence to navigate these risks can make all the difference between continued growth and stagnation for small businesses."