How well do SMEs stack up compared to the wider industry
What is happening in each industry and how can this help your business?
The vast majority of businesses are SMEs, with approx. 2,000 businesses listed on the ASX. However the SME sector is critical to the Australian economy:
Australian SMEs make up 97% of all Australian businesses
Produced one third of total GDP,
Employ 4.7 million people.
Represent 90 per cent of all goods exporters and over 60% of services exporters.
How Many Businesses Exist in Australia?
There are currently 2.24m businesses with the:
Numbers of businesses grew by 3% in FY17.
80% of all businesses operate from the Eastern states of NSW(34%), Vic(26%) and Qld(20%).
The Top 5 industry sectors account for 57% of all businesses, with the Top 10 industries (out of 20) accounting for 83% of all businesses.
How Big Are Australian Businesses?
93% of businesses have revenue less than $2m pa.
This means that only 1 in 15 businesses will exceed revenue of $2m.
61% of businesses employ no people (in other words they are a single-owner business), with 27% of businesses employing 1 – 4 people.
Industry revenue has increased by 3.5% in FY17, after a flat 1% result in FY16
The Top 5 industries by revenue, shown in the chart below, highlight the traditional industries that Australia relies upon, such as Retail Trade, Construction and Manufacturing.
The leading industries in the Eastern states are:
Wholesale Trade.
Retail Trade.
Construction.
Manufacturing.
Only 27% of businesses employ between 1 – 4 people, with 61% of businesses not employing anyone.
What Is the Likelihood of Survival of Australian Businesses?
The average survival rate for most businesses ($2k - $2m revenue range) is approx. 61%, or 1 in 3 businesses in this size range will fail. Only 1 in every 2 small businesses with revenue less than $200k will survive.
Failure rates diminish as the size of the business increases, with larger businesses ($10m+ revenue) 15% more likely to survive than smaller businesses ($2k - $2m revenue).
Survival rates are also in decline, with survival rates as much as 15% - 20% lower in FY17 than FY15.
How Well Does Australian Businesses Perform?
The average EBITDA margin in FY17 across all businesses was 14.5%, up from 13.8% in the previous year. This increase in profitability came from an 8% growth in EBITDA from FY16 compared to only a 3.5% growth in revenue.
A comparison of revenue growth and EBITDA margin is shown in the chart below, which highlights the new industries that are growing faster than the traditional sectors and that are generally more profitable.
Industries showing the highest revenue growth are:
Mining
Electricity, Gas, Water and Waste Services
Professional, Scientific and Technical Services
Other Services (a catchall for business sectors that don’t fit the rest)
Health Care and Social Services
It is good to see that business performance has improved in FY17, but the overall profitability is still low by most commercial benchmarks with EBITDA per business shown in the chart below.
Apart from Mining and Electricity, Gas, Water and Waste Services, all other industries have an average EBITDA per business of less than $1m.
We have a large number of businesses that generate a very low EBITDA per business.
There are only five industries with EBITDA margins greater than or equal to 20% (excluding the top two industries):
Electricity, Gas, Water and Waste Services.
Transport, Postal and Warehousing.
Health Care and Social Services.
Agriculture, Forestry And Fishing.
Information Media and Telecommunications.
Education and Training is close behind the above five industries with an EBITDA Margin of 19%. The balance of the industries has EBITDA margins less than 15%.
Which Industries Are Profitable and Growing
Excluding the Mining and Utilities sectors, the clear winners for growth and profitability are:
Health and Social Services
Transport and Postal Services (assuming EBITDA margin is round up from 19.6% to 20%).
Other high margin businesses that have reduced growth rates are:
Rental, Hire and Real Estate services
IT & Telecommunications
Agriculture and Agri-Business
Education and Training
Professional, Scientific and Technical Services.
What Can We Conclude About Australian Business?
Key conclusions about the Australian SME space:
Revenue grew by 3.5% in FY17, whilst EBITDA increased by 8%.
Australian business is predominantly small with only 1 in 15 businesses exceeding revenue of $2m.
Most businesses have a low profitability of less than 15%, and in some cases as low as 4%.
Apart from top seven industries by EBITDA margin we are a nation of low margin businesses.
1 in 3 businesses with revenue of $2k - $2m will fail.
The failure rate has increased by 15% - 20% over the past three years.
So we can say that Australian business:
Is dominated by small but growing businesses.
Predominantly have a low profitability but it has improved.
Has a 2 out of 3 chance of success in most cases, however this is getting in decline.
The growth industries are primarily service-based industries such as:
Rental, Hire and Real Estate services
IT & Telecommunications
Education and Training
Professional, Scientific and Technical Services.
How Can We Improve The Performance?
The Revenue Growth vs EBITDA Margin chart highlights the “patchy” nature of the Australian economy. We have a lot of industries that will consistently deliver below-par growth and profitability, with some stand-out performers depending on the economic cycle.
In some sectors (mainly traditional secondary and some tertiary sectors) profitability will be depressed as a result of industry competition, lower prices and distributed technology and industry knowledge. Some sectors such as Retail Trade are being disrupted by shifts in the market place as a result of technology (such as online competition) and changing consumer demand (tendency to more differentiation and niche markets).
Some traditional industries, such as Agriculture Forestry and Fishing and Transport are getting a boost from an increasing world trends in living standards in emerging economies and changes in technology driving new demand.
However the key growth sectors are in the service and quaternary industries such as education and health. Whilst these sectors will naturally “drag up” the SME performance, we also need to consider strategies that will drive growth and improvement in other more traditional industries.
The broad strategies that we see our clients adopting to drive improved performance can be summarised into four areas:
Increase the skills of small business owners - Improved performance and survival rates will come from better decision making, improved management reporting and improved systems and processes.
Focus on increased use of innovation and technology to secure increased growth rates in more of the current and growing industries and to increase productivity and capacity.
Take more advantage of international markets to secure increased growth - For most high value businesses, they need to chase bigger markets and for many industries this includes creating export opportunities.
It is our view that the Australian SME community is at a significant cross-roads in adopting new technology, developing new skills and getting better at execution. To do this we must understand the issues that are present in a business and have clear metrics that guide the growth and improvement journey.
The key to better performance for SMEs is to:
Understand the broad trends and what drives them.
Identify the opportunities that will improve performance.
Develop a detailed plan to ensure effective execution of the strategy.
I am reminded often that effective execution of a plan will out-trump the perfect strategy every time. You can always improve the strategy as you go, but you must be implementing something in order to change.