Last reviewed 17 June 2013

Is there such a thing as a typical small and medium enterprises (SME) profile? What are the significant characteristics that many SMEs bear? Nigel Baker focuses on some common characteristics of SMEs and the views they hold on important issues affecting the small business sector.

Statistics

SMEs make up the overwhelming majority of UK business units and also contribute significant tax revenue to the state. Famously described in 1776 as a “nation of shopkeepers”, the UK has maintained a tradition of small business enterprises in the national economy and this trend continues today. In 1971, there were 820,000 small firms in the UK and by 2012 this had risen to 4.8 million, with a combined turnover of £3100 billion. The Federation for Small Businesses (FSB) stated that, in 2012, some 13.8 million people were employed in SMEs. According to the Department for Business Innovation and Skills in 2012, 74.1% of private sector businesses had no employees and the combined turnover of such business was £202 billion; 62.7% of private sector enterprises were operated as sole proprietorships; 3.83 million people worked from home; with 80,000 home-based businesses being started during 2012. According to the Office for National Statistics in February 2013, the number of self-employed workers has risen by 367,000 to 4.2 million over the last four years and now makes up 14% of the working population.

In the UK, small businesses are classified as micro (consisting of 0–9 employees), small (with 10-49 employees) and medium (with 50-249 employees). The percentage of SMEs registered for VAT and/or PAYE in 2012 was 45%, and a third of SMEs are based in London and the south east of England. The number of micro firms has risen by 40% since 2000. At the start of 2012, 95.5% (4.6 million) of private sector businesses in the UK were micro firms. Micro businesses together accounted for 32% of private sector employment (7.8 million) and 20% of private sector turnover. Overall, SMEs account for 60% of private sector employment and 49% of turnover in the private sector.

Issue of red tape

The volume of Government regulation is a serious headache for all businesses, but in particular for SMEs who do not have the same resources or time to devote to this necessary evil. In 2011, an FSB survey of its members revealed that the average cost of compliance was £14,200 a year, adding up to a combined cost of £16.8 billion. For businesses of all sizes, the Institute of Directors research found the cost of Government regulation was £80 billion a year, with directors spending 13 working hours per month handling and administering Government red tape, amounting to more than one month a year. Company workforces spend an estimated 73 hours a month, or 5.5 months a year, on regulation and administration.

Research from Zurich Insurance in 2012 revealed that 70% of British SME decision-makers want the Government to focus on cutting red tape. In the list of top three SME priorities, this rated higher than improving access to finance (54%) and reviewing employment legislation (36%). The top regulatory challenges revealed in the survey were: employment regulations (37%); health and safety matters (28%); and pensions (21%).

The FSB survey of 2012 found that administering health and safety legislation cost members £3.8 billion a year, exceeded only by employment law (£4.2 billion) and tax (£5.1 billion). This has led to SMEs having to resort to outside consultants to help them with red tape, with firms of fewer than 10 employees paying an average of £4346 a year for the services of outside consultants, firms with 10–49 employees paying average annual bills of £7277, and firms with more than 50 employees paying an average of £10,815 a year.

In the 2013 E.ON survey of 750 small business decision-makers, 73% said that over-regulation is threatening their future business success and that excessive red tape was stifling them. Notwithstanding this, 45% of UK small business owners remained optimistic about the country’s economic prospects. The top reforms that businesses identified were the simplification of the tax system (37%), followed by a cut in bureaucratic red tape (36%), and a review of employment policies (30%).

Our membership of the EU continues to be politically divisive and, in particular, the cost of EU regulations was estimated at £19.4 billion in 2009, amounting to 1.3% of the UK’s gross domestic product. Particular bugbears are the Working Time Directive, which costs the economy more than £2 billion a year, and the Temporary Agency Workers Directive, costing £1.87 billion a year. Should the UK lose its current opt out from the EU’s 48-hour week, it has been estimated the cost would be as high as £11.9 billion.

In the recent Queen’s speech, the Government’s Deregulation Bill (2013) attempts to tackle the concerns of the SME sector, although what has so far been outlined has not been met with universal approval. The Bill pledges to get rid of unnecessary laws and to place a duty on the regulators to consider business growth before passing rules. The Bill tackles one health and safety issue by granting an exemption to the self-employed “whose work activities pose no potential risk of harm to others”.

Also announced was a £2000 tax break for all businesses in the form of an allowance towards their National Insurance contributions bill from April 2014, a measure which will particularly help small businesses create jobs. As a result of the initiative, more than 450,000 firms will no longer pay National Insurance contributions.

Late payment

Delayed settlement of invoices is the curse of all businesses, but it affects SMEs the most because they are unlikely to have the capital reserves to sustain themselves for long periods. According to a survey by Bacs Payment Schemes released in 2013, the average amount owed to small and medium enterprises in the UK is £31,000, with 35% of SMEs reporting that late payments of up to £20,000 would be enough to put them out of business, and 10% of SMEs claim that they are owed £50,000 or more in overdue payments. Overall, the late payment debt owed to SMEs amounts to £30.2 billion and the average UK SME suffering late payment has to wait 38 days beyond their payment terms for their invoices to be paid. In addition to this loss of the use of working capital, businesses are also spending on average 2.2 hours each week chasing late payments. 37% of SMEs say that the worst offenders are large companies, although 25% of companies surveyed reported that fellow SMEs were also guilty of late payment. 47% of SMEs state that the most common excuse they are given for late payment from debtors is due to cash flow problems. 58% of SME owners say that there was little real negotiation over payment terms with large customers because they were in a better position to dictate terms. The Late Payment of Commercial Debts Regulations 2013 is a further attempt to alleviate the problem, but whether SME creditors choose to exert their rights against large customers is another matter.

Fraud and cyber crime

SMEs are just as vulnerable to fraud as are larger enterprises. Across the UK, the total value of reported fraud in 2012 was £1.37 billion, with businesses of all sizes being potential victims. SMEs face particular problems in tackling fraud, especially when perpetrated internally because there is not always the opportunity to segregate the duties of fraud control. Where staff have dual roles there is increased temptation and risk.

Cyber crime has exploded in recent years and SMEs are becoming an increasing target. Computer crime rose by 50% last year and almost 90% of small companies were victims of computer attacks by hackers as well as their own staff. Small companies suffered a median number of 17 security breaches in 2011, the average cost of the worst breaches for all companies being in the range £35,000 to £65,000. In small firms, 57% of the breaches were traced back to their own staff. The Government is offering SMEs the opportunity to bid for financial help to recruit security consultants to increase their safeguards.