SMES punch below their weight

The apparently rude health of the small business sector in the Republic makes it easy to ignore some of its weaknesses. The sector has prospered over the past decade and now accounts for 777,000 jobs (39 per cent of the labour force). It pays 50 per cent of all VAT paid on services (more than €4 billion annually), 11 per cent of corporation taxes (€530 million), and 37 per cent of income taxes (€4 billion).

However, the recently published report of the Small Business Forum has pointed to pronounced weaknesses in the quality of management within the sector. The report rightly points out that the performance and even the survival of a small business depends largely on the competence of its management, which affects productivity, profitability and sales growth.

The Small Business Forum found that the level of management skills in Irish small businesses is poor, particularly in functional skills such as human resources, marketing and finance, and in forward planning and strategic management. According to the report, small firms engage in management training only to a limited extent due to time and cost, and training programmes are perceived as irrelevant.

These findings are echoed in a recent study of Irish small and medium sized enterprises (SMEs) carried out by Mazars. This study revealed that companies in the sector are, on average, operating at less than 65 per cent of their potential. Among the issues identified was a lack of strategic planning.

The findings are the result of face-to-face assessments conducted during 2005 and 2006 with more than 100 companies in the manufacturing, distribution and services sectors. These assessments were conducted using the Mazars Hour, a tool that analyses a company in the context of sector and industry-wide key performance indicators.

In relation to management, it was found that owner-managers were often too close to the business to take a wider perspective on the problem and solutions, eg a strategic perspective. Many of the owner-managers knew the appropriate solution, but needed to hear it from external parties.

This may indicate a problem in resolution implementation or a willingness to change on behalf of Irish owner-managers.

It was also found that owner-managers need to be continually reminded of what is required in the business. As an owner-manager, there is a danger of getting sucked in to the detail. This danger is exacerbated by the isolation that many owner-managers experience. They often have no one to bounce ideas off with a view to improving matters.

In general, a change in performance will require a change in how the business is managed. In many cases, it was found that improvements in performance could be made by the owner-manager getting out of the trenches to work "on" their businesses as well as working "in" their businesses.

A clear conclusion is that small businesses should seek to professionalise their management structure, broaden their management capability and consider the appointment of non-executive directors or mentors.

While a less formal corporate structure may allow for an agile operation that can adapt quickly to changing client needs, the Mazars Hour showed that companies that had already taken these steps outperformed those that maintained the common shareholder/director structure.

In addition, small businesses need to devote more focus to strategic planning. The review process revealed that many management teams appear to "hope" for business growth rather than actually plan for it.

Given that the small business sector accounts for more than 97 per cent of all businesses in the Republic today, it is clear that future economic progress will depend heavily on the performance of this sector. It is therefore vital that the management deficiencies in these businesses be addressed as a matter of urgency.

Enda Gunnell is business advisory partner with Mazars