in June 2005
Small Firm Business
By David McNutt
There are as many as there are firms. Which one
nothing wrong with being, or for that matter staying, a
small firm. After all, small firms make up the huge majority
of companies in our country. Small firms with less than
500 employees represent more than 99% of the employer businesses
in this country. These small firms drive our economy.
As consumers and companies and
government spend, they spend it with small firms. Small-firm
employment represents half of all private sector employees
and almost half of the total US private payroll. Small firms
create more than half—and sometimes all—of the
net new jobs every year and some of these small firms will
become large firms as more new jobs are created. Small firms
create more than 50% of the non-farm private gross domestic
product (GDP). Small firms supply more than 23% of the total
value of federal prime contracts (approximately $100 billion).
Very small firms—those with
less than 20 employees, carry a disproportionate cost burden
when it comes to overall government regulations when operating
a company. The average cost incurred by a very small company
for all government regulation is $6975 per employee compared
to $4463 per staff member for companies with 500+ employees.
Even so, the small firm in this
country produces 14 times more patents per employee than
large firms and employs 39% of high-tech workers. Small
firms represent 97% of all identified exporters and produce
almost a third of the known export value of the US.
But to represent such a large portion of our economy, small
businesses are a volatile group; especially newly created
ones. Of the more than half-million new firms started each
year, two-thirds survive about two years; about half survive
only four years. Almost a half-million small firms close
each year and about 35,000 file for bankruptcy.
In the past few weeks, I have discussed
general stay-alive business strategies with many companies,
not because they were about to go under, but because they
constantly have their eyes on the horizon to figure out
how to maintain their size or grow. The strategies that
small businesses are employing are as varied as the types
of firms, but they can be categorized in a number of general
themes. They include strengthening accounting controls to
get a better handle on costs; increasing their emphasis
on finding and keeping good employees; and getting certified
with government bodies as a small business to win contracts.
Some firms have talked about marketing
dilemmas and how to find new business leads and tap new
markets. Some are focusing on narrow niche markets, some
are attracted to broader markets with lots of competitors
but feel they have an advantage.
Some are spending capital to gain
certain capabilities, some are outsourcing, some are in
hiring freezes. Some small companies are trying to sell
themselves, some are talking about buying other comp-anies.
All of them are looking for better financing or to partner.
When you consider that most of
this industry is made up of companies that are very small
firms with less than 20 employees and average $3.5 million
in revenues, it’s not hard to see why the industry
doesn’t grow very fast. It’s difficult for a
$1.5 million contractor to take on a $750,000 project and
experience a 50% growth rate in a single year. It’s
also difficult for a manufacturer to commercialize a half-million
dollar R&D investment when it takes a million-dollar
investment for machinery and the market for the product
is only 500 units a year.
We’re a small industry made
up of very small firms. There’s nothing wrong with
being, or for that matter staying, a small firm, in a slow
growth industry as long as one pays attention.
Creating capital; gaining access
to financing; finding capable employees; improving management
skills; searching for healthy markets: They are all important
strategies for continued existence of the small firm. Management
must select and execute them. Pick one, stay alive. All
of us need you.
David McNutt, a member of Sound & Communications’
Technical Council, is based in Chicago and has been involved
in many business sectors of the systems integration industry.
Send comments to him at email@example.com.