At the turn of the last decade the UK recorded 5.9 million SMEs in the UK and this accounts for over 99% of all businesses in the economy.
During the same time period, there were 5.6 million micro- businesses (micro-businesses have 0-9 employees.) in the UK in 2019, accounting for 96% of all businesses.
Interestingly enough only 1.4 million of these businesses had employees, meaning 4.5 million businesses didn’t have any form of employment within the business; the UK private sector business population is made up of:
• 3.5 million sole proprietorships (this is 59% of the total)
• 2 million actively trading companies (34%)
• 405,000 ordinary partnerships (7%)
• 2.6 million private sector businesses were registered for VAT or PAYE (45%)
The total business population grew by 200,000 (3.5%) just between 2018 and 2019 and since the turn of the century (2000) there has been a 69% growth in the business population.
With such a rapid growth and trend for micro and small businesses, we look at the challenges that these businesses face in the journey from start-up, sustainability to moderate scalability.
Challenge 1: Attracting new customers
Research suggests that the number one challenge micro and small businesses face is attracting new customers; most business owners have a very narrow view of their business, micro businesses generally don’t have many employees and are what we call ‘lifestyle businesses’ set up to serve the simple purpose of providing an income to the owner that allows them to live their life.
Micro and small business owners don’t usually employ a growth mindset, this has a direct impact and influence on how they behave in the business; often they look at the minimum they must achieve to survive.
The trouble with this is that as the total population of businesses continues to grow, the market becomes more competitive; micro, and small businesses need to start looking at developing strategies to attract new business; and this needs a growth mindset.
Key areas of the business strategy need to be optimised:
1. Visibility and branding
Small and Micro businesses are very poor at visibility and branding, usually these businesses consist of 1 or 2 people working in the business and have low inclination towards marketing – this is usually not because they don’t know what or how, but it is more related to their motivation and desire to do the marketing
The rise of social and digital offers these businesses and huge market opportunity to increase their customer base; visibility and branding is now in the form of video and vibrant static imaging. But you need to be consistent and invest in paid advertising, organic marketing just simply doesn’t give you the reach any more.
In order to create great visibility and branding it is important to start with your why and build the story and journey that the business has gone through and going to. Is this aligned with your target audience.
Evolving your message by defining what you stand for (vision and mission) allows you to engage the right audience and bring the right type of customer to the business.
2. Product/Service Innovation and market/sector diversification
As a business if you are not continuously innovating then you risk becoming obsolete, small and incremental changes will allow you to remain not just competitive but push beyond the current market position; product innovation and diversification holds the key to gaining new customers.
Small and Micro businesses are not exempt from innovating and diversifying, the advantage that this size of business against larger structures is agility. These businesses are much more agile to encompass change.
As your product/service evolves it may also open the business to serve in more diverse markets/sectors. This will allow you to build additional revenue streams from various markets and allow you to introduce new customers from untapped markets.
3. Partnership and/or collaboration
To achieve greatness, you need the help of others…
You net worth is equal is to your network…
10% of something is better than 100% of nothing…
One of the smartest ways of attracting new customers is being part of a solution and offering and to do this you need to consider partnerships and collaborations. Finding partners that compliment and add value to your proposition will allow you entry in to new ventures, access to new opportunities and allow your business to have new experiences.
Challenge 2: Staying Profitable
Most small and micro-businesses play with very small margins and profit; to enable business sustainability and growth the business needs to invest their profits in different aspects of the business.
When you use revenue to grow, you will ultimately fail; the reason being is the business cannot afford the investment and this will in turn create a cashflow shortage in other areas. For example if there is a strong business case to invest into advertising for new sales, you must consider how much return on the investment you will be able to make; once this is established should you use the revenue in the business you then create a gap in the revenue resources that you need to cover the current business activity and this will then impact negatively on your business and the actual campaign for new business.
Some advice that we give to small business owners is that you should always consider 33% margin and determine a £1 investment should generate £3 revenue (triple the investment, minimum).
For the investment of £1:
• £1 to cover the cost of the exercise
• £1 to do the activity again
• £1 to scale the activity for greater returns
Making profit isn’t difficult, but staying profitable is – you have to consider many different variables:
1. Your Operation Costs (Opex)
As a business owner, do you really understand the cost of doing business?
What are the basic cost centres you need to associate to the total sum of doing business?
Simple questions that often is overlooked and a fundamental point that makes the difference between surviving and thriving. It is good practice to review this area of your business regularly and ensure that all the cost centres are accurate and relevant to your business.
Consistent review of your costs will ensure your product/service solution is both afforded in the market and afforded by the business; just a simple increase of 8-10% on your baseline costs can be the difference of operating in profit or sinking in loss. When the business is operating at a loss it is only time that will bring the demise of the business.
The most common thought is to simply increase price to overcome the cost argument; however, imposter syndrome and standard business psychology is that you shouldn’t or couldn’t increase the price without increasing the value. When you look at increasing value you then change the opex for the business.
2. Incremental Pricing and Product Placement
There are ways that you can decrease costs and increase price which extend the level of margin that the business can make on its product/services – however it is not always good to try doing both. The most common action to take is to look at cost reduction or optimisation.
What areas of the opex can you create efficiency or reduce; as you primarily reduce cost of doing business and maintain the sales revenue you protect the margin.
When you are in the situation where you have exhausted all opex optimisation, then we need to look at the price of your product; often there is sufficient value in your offering that can warrant a price increase. Price is something small/micro businesses usually are uncomfortable to change especially when putting prices up.
It is important to understand that as a business owner should you not have the belief in your value then this will be reflected in your commercialisation; as mentioned previously small or incremental product/service innovation will automatically give you the passage to increase your price.
3. Multi-layered revenue sources
Another way of increasing and sustaining profit is to generate multiple revenue generating levels in your business. The whole “do you want fries with your burger?” is the concept that additional bolt-on products/services that help you in building more margin onto each transaction.
Create a base product/service solution and then attach high margin accessories or options, this will allow you to maintain the existing pricing on your base product and make up the margin on the additional products/solutions.
For example: in the gym industry, you can have a market standard price for your gym membership but then add a special price pack for water (selling bottles of water in the gym) this can give you premium margin which increases the average margin per sale/customer.
In services industry (like consulting or coaching) you should always look to create a number of different product levels that allow you to upsell/cross-sell this again gives you leverage to increase the approximate margin per transaction.
Challenge 3 – Staff, Employees & Resourcing
Small and Micro businesses are often paralysed from growth due to the inability to develop their teams – there is a myth that resourcing is expensive and often time consuming.
Onboarding and retaining staff when a small to micro business can be a challenge, often is the case with micro businesses that they have no real desire to employ into the business as it is seen as a large cost centre to the business.
Most small to micro-business owners suffer from being too involved in the business; their ultimate dream/destination was to create freedom, yet they often end up tangled within different roles in the business.
The Robert Kiyosaki’s concept of ESBI (Cashflow Quadrant) illustrates the true perspective and position when it comes to cashflow and the mindset of business owners.
The left side of the quadrant is all about Active cashflow whilst the right-hand side represents Passive cashflow
The reason why most micro/small businesses suffer when it comes to employment, resourcing and outsourcing is because they are set up to operate within an active cashflow process.
E = Employed
This is the most common form of resource; business owners are fundamentally the only resource in the business and exchange time for money. The largest constraint for this resource level is that its limited by income – if you are not working in the business you wont generate revenue and ultimately be able to pay yourself.
S = Self-Employed
The net of all micro-businesses tends to have self-employed professionals working in the business; these are not employees per-say; however, they still operate within the business as an employee. Being self-employed saves the business a lot in tax and other expenses and allows the business owner to pay themselves. This source of active cashflow will allow for short periods of time away from the business by the business owner but essentially business owners will still be stuck in their business as they are reliant on developing the revenue and incomes.
B = Business Owner
By definition this is the part of the quadrant that more people should be within, the Business Owner typically builds systems and operations that they then recruit or resource to deliver; this is where active cashflow turns into passive cashflow.
Building systems and resourcing these systems allow the business owner to step away from the running and serving in the business and initiates others to generate the revenue and income; this process also introduces more freedom to the business owner to then start to design and strategise the next tier of growth in business.
I = Investor
The ultimate position within the business, this is where most micro and small business owners really want to be. At this level you are making money work for you; you are invested into networks and systems that are then generating the revenue and incomes. Business owners at this stage are usually working on their business rather than in their business.
Building a team is not easy but it is necessary; you don’t need to invest in employees, you can start with contractors. What is crucial as a micro/small business owner is ensuring you are building a mindset and strategy to get yourself out of the business as soon as possible.
Most businesses look at cashflow or funding as the blocker to getting resources into the business, this is not always the case – there are many ways you can structure resource into your business to overcome the cashflow or funding challenge:
1. Performance related pay – allowing people to come into the business and setting performance targets (commercial and operational)
2. Zero hour contracting – not always the best, but an option; this is where people only get paid for the hours, they work
3. Outsource before resource – look for experts that have the right ability/skills/experience that can come in and do the work faster/quicker/better than you.
Investing in resources within the business is the first step to successful growth of your business, it is also a clear indication to you as the business owner that you can take one step away from working in the business to actually running the business.
Challenge 4 – Finance, raising capital and increasing revenues
There is still a large level of discontent and uncertainty when it comes to finance and raising finance for your business. In today’s climate there are more finance options then ever, making capital more accessible – however, this can be a curse as much as a blessing.
The conventional bank loan is something more business owners deflect from as they no longer have confidence in the ability to secure the finance; but more and more debt finance options are on the table today (peer to peer lending, contract invoicing, overdrafts) these are all viable solutions.
If you are a tech company and have a revenue gap, consider R&D Tax Credits to plug the gap.
You don’t need to always consider equity release in your business and be mindful that investment isn’t always the answer.
In my business we have steered away from investment and dilution of the business equity as our business doesn’t warrant additional shareholders; most of the time when we are strategising we understand what the financial gap will be and initiate a commercial programme to raise the funds.
This is the process of diversifying investment of your profits back into the business; naturally this is more of a slower or long play strategy but it is sustainable and reduces risk by 100%.
On the flip side of raising capital is increasing revenues; 6 in every 10 businesses of this size (small and micro) will struggle to increase revenue; the problem is whether to increase sales revenue through existing customers or to increase the volume of customers to increase sales revenue.
The truth to this is that you need to apply both strategies, creating smarter deals for your existing customers will enable you to get more loyalty and longer commitment to you. Also diversifying your value proposition into different markets/sectors will enable you to attract new customers.
Small and micro businesses must invest in increasing customers, being wholly dependent on existing customers is a dangerous strategy as the lifecycle or lifetime value of that customer could be a short cycle.
One last thought is in having a collaborative approach to your market rather than a competitive one… there is a saying that ‘10% of something is better than 100% of nothing’.
Working as part of a consortium of services to a client will enable you to expand your customer horizon/bandwith whilst also creating a new value proposition to the market space.
Enterprise Lab has built its business on networks and collaboration; we understand our value in the chain and incorporate other partners for their value – working together we have a stronger and more reliable proposition to our client and ultimately everyone wins down the chain
We realised that in order to grow the business, we needed to extend the lifetime value of the client; in order to do that we need to curate expertise into the client – that’s why we have a programme that positions our partners to our clients at the right time to achieve the right result.
In return our partners engage us into projects and client services where they don’t have the expertise allowing them to maintain their customer relations and giving us new clients.
Challenge 5 – Embracing Technology
One of the greatest challenges in small/micro businesses is digitalisation and embracing technology to advance your business.
While most businesses have welcomed technological advancements of the past few decades, there are others who have buried their heads in the sand. Technology plays a key role in business and there are now software and apps available to make things easier and simpler for business owners and to alleviate some of the challenges they may regularly face. Some of these include accounting software packages, marketing tools to help distribute monthly newsletters and project management tools.
A mistake many businesses make is thinking that they have an online presence just because they have a website. There is so much more to be done beyond this and while a website was an essential a decade ago for any business serious about being successful, social media has proven to be a powerful tool in helping to maximise brand exposure.
Having an online presence means that businesses can engage with a far larger audience, which could increase profits if they’re able to capture the attention of the demographic they want to buy their products and services. Brand awareness should be a priority for all businesses and the best way to achieve this is by being present, informative and consistent.
All self-starters and entrepreneurs will undoubtedly agree that starting a business is hard and while the SME landscape is clearly a competitive one, with all this in mind, businesses should rest assured that there is help at hand.