Small business shines in tough economy

Small businesses represent more than 98 per cent of all companies and have created about 80 per cent of new jobs, so they can be excused for getting so much attention, especially with global financial markets in disarray and large companies in disrepute.
As an icon, small business is as close as you get to the untouchability of the dove in Canadian commerce.

Unlike with large companies, all the political parties have good things to say about smaller firms. 

Governments give them favourable tax treatment and sometimes hire bureaucrats whose job is to cut the mountains of red tape through which corporate Canada must wade in order to set up and run operations.

Well, no wonder these companies are doted upon by politicians, revered by economists and applauded by the average Canadian.

When you represent more than 98 per cent of all the companies in a country and have created approximately 80 per cent of all new jobs in an economy, you can be excused for getting all this attention.

That is doubly true currently, with global financial markets in disarray and large companies in disrepute.

A recent Gallup polls pegs small business as the number two institution in which Americans have the most confidence, behind the military but ahead of police.

"Small businesses are an integral part of the economic and social health of any community," said Marilyn Braun-Pollon, Saskatchewan vice-president of the Canadian Federation of Independent Business (CFIB), in a January submission to the Saskatchewan government.

What might have sounded like rhetorical gruel at the beginning of 2008 now appears to be the one remaining economic truth as the industrialized world heads toward a potentially awful Christmas season.

How small is small?

In this world, definitions matter. And how you measure small in the company sense often depends upon where you are.

In a 2004 report on management practices, Industry Canada, the federal department responsible for entrepreneurs and smaller firms, defined small business as any company employing fewer than 20 people. 

 Small business defined Number of employees
 Canada fewer than 100
 United States fewer than 500
 European Union fewer than 250
 Japan fewer than 20

The department said a firm with between 20 and 99 workers was medium-sized and more than 99 employees was big in Canada.

The same agency, however, sometimes uses a mark of fewer than 100 employees as the cutoff for a goods-producing small business and fewer than 50 as the line for a company providing services.

The Canadian Bankers Association does it differently again, in this case based upon borrowing ability. A company that is eligible for a loan of up to $250,000 is considered a small business.

Go to another jurisdiction and the terms change again.

The U.S. Small Business Administration says a company with fewer than 500 employees is small.

The European Union uses a standard closer to Canada's, with small and medium-sized enterprises defined as firms with fewer than 250 workers.

Finally, in Japan, small and medium-sized companies are those with fewer than 300 workers. A small business there is one with fewer than 20 employees for manufacturing and fewer than five for wholesale, service and retail.

These definitions only matter in the different jurisdictions because each area has its own special small-business tax rates, deductions and assistance programs.

As a practical matter, however, these distinct terms can make it hard to compare small business trends in one region to those in another.

Canada stands tall

In Canada, the small business sector is often seen as more robust than the same group in other jurisdictions.

The CFIB, for instance, estimates that small enterprises constitute almost 50 per cent of Canada's economy versus 40 per cent in the United States, where they're seen as the paragon of entrepreneurship and risk-taking.

Costs related to government regulation % of revenue
 Small firm 8
 Medium firm 3.8
 Large firm 2.4
 Source: Industry Canada 

In addition, the number of self-employment businesses in the country grew by 18.6 per cent between 2001 and 2006, twice the rate of employment growth in the overall economy.

Using the definition of fewer than 100 employees for the small sector, Canada had slightly more than one million small business last December — 1,053,589, to be exact, according to Industry Canada.

Small companies, in other words, make up 97.8 per cent of all federally registered corporations that report their employee totals.

By way of comparison, there were 1.02 million Canadian small businesses in 2002, constituting 97.5 per cent of the number of federally registered companies.

The figures are similar to those in the United States, where small biz constitutes 99.7 per cent of all companies (remembering that the American definition of tiny companies is a firm with less than 500 workers).

Still, slicing this loaf of bread with a different knife yields the same conclusion: small business is an important component of the Canadian and U.S. economies.

Cranking out the jobs

The sector that makes up more than nine-10ths of Canada's corporate base also creates the greatest portion of new jobs. 

One government study estimated that small business accounted for 80 per cent of total job growth for the 10 years between 1993 and 2003, or 747,000 new jobs.

In the U.S., the small sector produced 60 to 80 per cent of the new positions generated for American workers in the mid-1990s. In 2004, these firms created 979,102 new jobs, versus bigger companies' adding slightly more than 262,000 new positions for the same year.

Tarnished yellow brick road

With such a prominent position in industrialized economies, a possible paradox persists.

A slightly dated 1994 survey suggested that 59 per cent of U.S. students had an interest in starting up their own company sometime.

Yet, big companies and governments still appear to be the places where many people get their initial baptism into the work world.

One reason might be pay. 

Statistics Canada says that, in 2007, the average worker in a small business took home $694 a week. At that level, he or she earned nine per cent less than the average national weekly wage, and 16 per cent less what that person could have made working for a large company.

 Average salary per week 2007
 Small firm $694
 Big firm $827
 Canadian average $762
Source: Statistics Canada  

The other big reason people are sometimes reluctant to either work for or start up their own small company is the worst four-letter word in the business lexicon: risk.

Essentially, small businesses go bankrupt quickly and often.

It could be lack of sustained financing, likely to be exacerbated by the current global borrowing environment; lack of revenue diversification, which can kill a firm's sales during a downturn; or a lack of managerial acumen, sometimes sparse in single-manager firms.

But whatever the reason, smaller companies open and close more often than bigger ones.

Again, according to the U.S. Small Business Administration, 637,100 small enterprises started up in 2007. But, 560,300 shut down in the same year, a failure rate of 88 per cent. 

In fact, small-business closures averaged 88 per cent of new company openings annually between 2004 and 2008.

In Canada, only about 50 per cent of small companies survive past the third year of operation. In the United States, only 44 per cent last longer than four years.

That means putting out your own shingle runs the fairly substantial risk that you might be consulting a bankruptcy expert within the next three years.

But still bright

Still, these tiny capitalists appear to be happier than most.

An October 2003 Gallup poll found that 86 per cent of small business respondents were satisfied or extremely satisfied as their own bosses and 81 per cent said they would do it over again if given the chance.

Only 13 per cent of those surveyed were unhappy with how their foray into business ownership turned out.