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YOURGROWINGBUSINESSA REPORT ON GROWING MICRO BUSINESSESLord Young, May 2013THE SECOND PART OF THE REPORT ON SMALL FIRMS

Copyright notice Crown copyright 2013You may re-use this information (not including logos) free of charge in any format ormedium, under the terms of the Open Government Licence. Visit cence, write to the Information Policy Team, The NationalArchives, Kew, London TW9 4DU, or email: [email protected] BIS/13/729 - Growing Your BusinessLord Young’s first report as the Prime Minister’s adviser on enterprise and SMEs was MakeBusiness Your Business, 2012.

ContentsForeword by Lord Young1Executive Summary3A new package of support for growing small businessesThe Vital 95%46The Growing Importance of Small and Micro BusinessesFactors Influencing GrowthA Focus on Micro EnterprisesUsing What WeHave in Better Ways6121217Business Schools as ‘Anchor Institutions’17Universities and Colleges18The Customer to Grow: Public Sector Procurement19Programmes and Schemes to Help Businesses Grow24Finance to Grow30Employment and Attracting Specialist Skills36Growing Your Business iii

Relationships with Big Businesses40Locations43Summary of Help for Growing Small Businesses47Acknowledgements50Meetings and Engagements51Notes53

Foreword byLord YoungMy first report on small firms,Make Business Your Business,was published last year anddealt with start-ups and the developmentof small business. The second instalmentpublished today, Growing Your Business,deals in the main with micro-businessesand small firms employing fewer than 25people. This is an area of some strengthin our economy for we have one of thebest environments in the world for thecreation of new firms. What this reportendeavours to do is to help and encourageall those new firms to grow and become animportant part of our economy.Today we have some 4.8 million firms inexistence, a sixfold increase on the numberof firms at the time of the Bolton Report inthe early seventies, but of all these firmsno fewer than 3.6 million are sole traderswithout employees. Programmes like StartUp Loans are creating many thousandsmore and the purpose of this report is tohelp the sole trader take on his or her firstemployee, and the micro firms to expandand grow their business.The UK is one of the few countries in theEU which has seen the number of peoplein employment grow since the 2009recession. Despite a considerable reductionin public sector employment over 2010–12,the private sector has expanded to morethan make up the difference. But we are byno means at the end of this road. Estimatesby the Department for Business Innovationand Skills (BIS) suggest that if we wereas entrepreneurial as the United States wewould have nearly a million more firms.“If we were as entrepreneurialas the United States we wouldhave nearly a million more firms.Even without that, if we could just helpthe million micro firms that employbetween one and nine people to employon average one more employee we wouldtransform the economy. If we helped evena small portion of sole traders to becomeemployers it would further improve theunemployment figures and our prospectsfor the future.Growing Your Business 1

Is this possible? Yes, I believe it is. In thelast recession in the early nineties, smallfirms were in debt for over four years. Thistime small firms have had money in thebank throughout. Figures from the Officefor National Statistics (ONS) indicatethat large corporates are sitting on over 720 billion. When firms large and smallare sitting on cash and not investing, themissing ingredient for growth is simplyconfidence. Indeed confidence, or ratherthe lack of it, is the origin of many arecession. If merely 10 billion of this cashwas injected into our economy – in additionto current levels of business investment– the UK would see business investmentreturn to pre-crisis levels.No report, no matter how well intentioned,can provide that missing confidence. Whatit can do, and what I hope this report does,is to highlight the help and assistance thatalready exists – or will soon exist – to givebusinessmen and women the ability togrow their businesses. Here are the tools;now it is up to you.Lord Young, 2013Lord Young of GraffhamThe Rt Hon the Lord Young of Graffham PC DL graduated from University CollegeLondon before becoming a solicitor. He spent a year in the profession before moving onto establish a number of successful businesses. He became Chairman of the ManpowerServices Commission in 1982, entered the Cabinet in 1984, became Secretary of Statefor Employment in 1985 and in 1987 became Secretary of State for Trade and Industryand President of the Board of Trade. He was Executive Chairman of Cable and Wirelessplc from 1990 to 1995 and thereafter Chairman of Young Associates Ltd, which investsin new technologies.Lord Young is an adviser to the Prime Minister on small business and enterprise. Hepublished a report on start-ups, Make Business Your Business, in May 2012.Growing Your Business 2

ExecutiveSummaryPrime Minister,Record numbers of people are starting a business each year, as partof a burgeoning population of over 4.8 million firms in the UKtoday.1 Although three quarters of these firms are sole traders thereare nearly a million micro firms (with one to nine employees), many withopportunities for growth.The purpose of this report is to highlight the abundance of opportunity and supportavailable for small and medium-sized enterprises (SMEs) and is aimed at policy makersand all those who advise and champion small businesses.I want to highlight three areas that I believe create the right conditions for businesses tofulfil their growth potential:1.2.C onfidence – not only in the economy and overall prospects for growth, but also intheir conviction to make it happen.3. oherence – businesses need support that is designed and marketed in a way thatCthey understand, trust and can find. Capability – by improving a firm’s skills and performance. The evidence isunequivocal: businesses that seek and engage external help are more likely to grow.But much more needs to be done to encourage firms to invest in their capability.Growing Your Business 3

A NEW PACKAGE OF SUPPORT FORGROWING SMALL BUSINESSESIn my review of start-up businesses in 2012, I asked the Government to put in place a firstimportant building block for young entrepreneurs through the creation of Start-Up Loans.This programme has begun well and should make a considerable difference in years tocome.This review on growing small firms accompanies a number of new developments.Capability and skills A greater role for business schoolsin the local economy with theestablishment of a new national“Supporting Small Business Charter”and accompanying award scheme toincentivise business schools to helpSMEs grow. This will include advisingsmall firms and increasing the flow ofhighly qualified students and graduatesinto SMEs. Business schools will alsobecome a key part of the referralprocess and provision of Start-Up Loansand Growth Vouchers.A 30 million Growth Vouchersprogramme to find innovativeapproaches to help SMEs overcomebehavioural barriers to increasinggrowth. Funded by Government, this willaim to unlock growth potential amongsmall businesses who are holding backon investing in growth and encouragethem to seek external advice.Finance In response to high demand, Start-UpLoans will be boosted by a further 30million to provide important fundingand mentoring to help young people gettheir business ideas off the ground. Theage limit for entrepreneurial candidateshas been increased from 18-24 up to 30,and I recommend removing the age capaltogether. SME Growth Loans, to be piloted fromthe summer of 2013 and as part of theEnterprise Finance Guarantee (EFG)scheme. These will facilitate loans of upto 25,000 targeting SMEs in their thirdyear seeking access to growth capital.This accompanies a new EFG TradeCredit pilot which uses a Governmentguarantee to facilitate additional TradeCredit provided by suppliers to boostliquidity for SMEs. 100 million of new funding to SMEsfrom the Business Finance Partnershipwhich promotes new sources of financeto businesses, including peer-to-peerand crowdfunding.Public sector procurement A new “single market”commitment to ensure a simpleand consistent approach is takenacross public sector procurement.Government will consult publicsector bodies and will make this alegal requirement. The pilot of a proactive function forGovernment’s Mystery Shopper tohold contractors to account in theirrelationships with SMEs.Growing Your Business 4

A first national competition to find thebest Councils to engage small suppliersin local government procurement.Marketing of Governmentschemes Better marketing of Governmentinitiatives to support new anddeveloping businesses. I am proposinga commitment for up to 5% of futureinitiatives to be spent on marketingand advertising, and with a view tosustaining a commitment over timewhere marketing is showing benefits.This report will also highlight the rangeof existing and new help targetedat growing SMEs. This includes thedevelopment of a new digital capabilityprogramme for SMEs to make moreeffective use of the internet andtechnology as well as help to export,take on a first employee and innovate. Asummary of these starts on page 47.Much of the analysis and support forbusiness described in this report isapplicable to all parts of the UK. However,my review and its conclusions focus onthe position in England, accepting thatother arrangements apply in the devolvedadministrations.Growing Your Business 5

The Vital 95%THE GROWING IMPORTANCE OFSMALL AND MICRO BUSINESSESOver recent decades there has beena remarkable transformation in thefortunes of the UK economy. In theearly 1980s fewer than 24 million peoplewere in employment. Today that figureis close to 30 million.2 It has never beenhigher.A number of factors contributed to thisgrowth. One key factor is the impact ofthe internet. It has never been easier to setup a business, with the internet enablinggreater access to markets, advice andguidance, marketing opportunities and costsavings than previously feasible.Likewise there has been an inexorablerise in the number of businesses in theeconomy. The Bolton Report identifiedaround 820,000 small firms in the UK in1971.3 By the turn of the century, accordingto official Government estimates of thebusiness population, this figure hadincreased to 3.5 million.The UK also has one of the most efficientlabour markets in the EU – such flexibilityand light regulation provides tangiblebenefits to us all. Economic growth andemployment raises income and improvesliving standards. Our employment rate iswell above the EU average and exceedsthat of the United States too.Evidently, this rise in the number ofenterprises is part of a long-term trend.Even more encouraging is the rise in thenumber of businesses in recent years. In2008 there were 4.26 million businesses.By 2012 this had increased to 4.8 million– a rise of around half a million from theonset of the recession.Growing Your Business 6

Number of people in employment aged 16 and over, 1983 to 2012 and Number of private sectorbusinesses in the UK, start of 2000 to start of 2012The contribution of micro firms to the economy is hugeAt the start of 2012, 95.5% (4.6 million) of private sector businesses in the UK were microfirms (0–9 employees). Micro businesses together accounted for 32% of private sectoremployment (7.8 million) and 20% of private sector turnover.Share of private sector businesses, employment and turnover by employment size-band, 2012Growing Your Business 7

This contribution has been increasing over recent yearsThe contribution of micro businesses to the economy has been increasing in recentyears. The growth in the business population has been driven by micro firms which haveincreased by 40% since 2000.Change in the number of UK private sector micro businesses by size band, 2000–2012 (indexed)But growth has come from firms with few employeesWithin the micro business population itself growth has been driven predominantly bybusinesses without employees. Another interesting trend has been the fall in the number ofbusinesses with just one employee, particularly since the onset of the recession in 2008.Change in the number of UK private sector businesses by size band, 2000–2012 (indexed)Growing Your Business 8

Coupled with their contribution in other areas, this justifies a strong focus on helpingmicro firms to move forward. New and growing small businesses drive economic growth bystimulating innovation, by creating a competitive spur to existing businesses to increasetheir productivity,4 and by making a disproportionate contribution to job creation.5An excellent time to start a businessThe rise in the number of businesses in recent years shows that a recession can be anexcellent time to start a business.The following chart shows that despite tough economic conditions the number of newbusinesses has remained remarkably resilient and at historically high levels. Businessclosures have remained stable and lower than pre-recession levels.Estimated business population, start-ups and closures (truncated scale)One factor that has contributed to the relatively small number of business closures across2008–12 when compared to previous recessions is the improved financial position of SMEs.The next chart shows that, in the early nineties, lending to SMEs outstripped their depositsand so SMEs were net borrowers. In 2007 this position had reversed and SMEs were netdepositors. This meant that SMEs were better able to weather the economic storms that hitfrom 2008.Growing Your Business 9

Net financial position of SME sector, total lending minus total deposits (SMEs with less than 1million turnover)It has always been the case that a recession can be a good time to grow a business. This istrue for a number of reasons. Competitors who fall by the wayside enable well-run firms toexpand and increase market share. Factors of production such as premises and labour canbe cheaper and higher quality, meaning that return on investment can be greater.Research shows that well over half of the companies on the 2009 Fortune 500 list (a yearlyranking of America’s largest businesses) began during a recession.6 World renowned firmssuch as GE, Microsoft and Disney all started during a recession.Opportunity rather than necessityMost people in the UK who start up a business do so because they view it as anopportunity rather than a necessity (motives for growing that business are different, aswe shall see later). The Global Entrepreneurship Monitor (GEM) measures Total earlystage Entrepreneurial Activity (TEA).7 The following chart shows that, in the UK, mostentrepreneurial activity is opportunity-driven with less than a fifth driven by necessity.Growing Your Business 10

Total and Necessity entrepreneurship in participating G7 countries, 2012The next chart shows just how the enterprise activity has strengthened in recent years.Between 2002 and 2009 the TEA rate stood at around 6%. Since then it has increased yearon-year reaching 9.8% in 2013. This has seen us pull away from Germany and France andbegin to chase down the US.Total Early Stage Entrepreneurship in select G7 countries, 2002–2012Small firms and economic growthEconomic growth raises income levels and improves living standards. One of the main waysthis occurs is through job creation; and new and growing small businesses fuel job growth.A recent study found that of the jobs created each year between 1998 and 2010, small firmsand start-ups created around two-thirds.8Growing Your Business 11

Factors InfluencingGrowthFor the past 12 to 18 months, I have seen many small businesses grow, often keeping alow number of employees despite rapid growth in profit and turnover.This is being achieved through: increasing adoption of technology to innovate, raise finance and find new customers increasing use of shared services and outsourcing specialist functions, enabling businessowners to keep costs down, stay nimble and respond rapidly to new opportunities.Growth needs to be measured not just by job creation but also by the economic activitythese firms are generating through the flexible use of people, technology and services.A FOCUS ON MICRO ENTERPRISESWe know that SMEs dominate the stock ofbusinesses and the majority of these willstart and remain small – nearly 95% ofall firms are micro enterprises employingfewer than ten people; 75% have noemployees.9Government is right to focus muchof its attention on SMEs with highgrowth potential and I welcome thedevelopment of GrowthAccelerator(www.growthaccelerator.com) and otherprogrammes to support these businesses.But I know from experience that it is noteasy to spot the high-flyers at an earlystage or to make predictions about theirlong-term success. That is why I am keenthat Government keeps up its efforts tobuild the capacity of the wider populationof SMEs, including those that start verysmall and have a strong desire to grow.Growing Your Business 12

This report concentrates on theearly stages of growth for new microbusinesses – from a sole trader and itsfirst employee, up to ten and beyond.These will be businesses across a range ofsectors, trading for a couple of years andestablishing themselves, and now thinkingabout growth opportunities. But theselessons could also apply to establishedfirms looking to make a step-change intheir performance.My report emphasises a number ofimportant factors influencing smallbusiness growth:1. Confidence remains keyThis report will demonstrate how smallbusinesses, unlike in previous recessions,have for the most part remained strongwith good growth prospects since 2008.I meet many small firms who fit thisprofile – strong viable businesses with verygood growth prospects. But for many ofthese firms there is no current inclinationor preparation to expand. Over a thirdof SMEs in recent research cited theeconomic climate as the main obstacle tothe success of the business. 56% of SMEsthat express a need for finance say theydo not apply because they do not wantto take on additional risk; and fewer SMEemployers aim to grow in 2012 comparedwith 2010, particularly among microfirms.10Challenging economic periods can be aprime time to strike for growth – marketsthat appear to be at their lowest point canoffer gaps and openings as customersseek new solutions and alternatives tothe way things were before, and suppliersbecome more competitive to win yourbusiness. This is how successful brandslike Screwfix, The Body Shop and Hackettsaw it when they were starting out. Thesebusinesses started very small and facedmany of the challenges small firms facetoday. When others were pulling back orjust holding on, these businesses werespotting new market openings and makingthe most of opportunities to grow andexpand.A little later in this report we shall meetCrux Product Design. This business startedin 2003 as a two-man product design teamand made the decision to expand in 2008.Crux have now become synonymous withGreat Britain’s London Olympic success asthe designers and makers of the Team GBcycling helmets. For Crux and many others,a decision to expand was as much abouta survival strategy as it was about growthsuccess. Not investing now can make itmuch harder to make the most of theopportunities for growth when economicprospects start to improve.2. Strength of ambition mattersAmbitious SMEs are more likely to growin terms of turnover and employment.11However, while the majority of SMEsassert that they want to grow, relativelyfew achieve this in practice. Fewer than aquarter of SMEs have what is describedas ‘a substantive ambition to grow’ – inother words, a desire to grow met withdetermination, opportunity and a stronglevel of leadership and management tomake it happen.There will always be “lifestyle” firms withlittle or no growth ambition, but there willalso be many other firms that do not growbut are well placed to do so. These couldbe SMEs that have downsized due to therecession with a strong desire to grow backto previous levels. There are others likethe ‘ambitious but unprepared’ that havea strong aspiration but little awarenessof the opportunity and help available tothem. And then there are social enterprisesGrowing Your Business 13

looking to develop their business modeland extend their help to the people theyemploy and the communities they serve.3. Perceptions affect ambitionI am also struck by how much perceivedobstacles can stunt not just a firm’s abilityto grow, but also the owner’s desire togrow. These can be difficulties navigatingregulations, hiring staff or exporting. Thesepsychological barriers stifle ambition anddiscourage people from taking growthplans forward. I am therefore keen thatone of the results of this review will be todemystify the misperceptions out thereabout growing a business.4. Small firms are usingtechnology like never beforeWe are seeing the increasing adoptionof technology amongst small firms toinnovate, raise finance and find newcustomers. These firms are realising thatthe internet and digital technology is nolonger an optional extra, but a key driverto growth. An example of this is risingcustomer demand for 4G (high-speedmobile internet) which will both increasecommercial opportunities for SMEs andtest their ability to remain competitive.5. Small businesses that useexternal help are more likelyto growOutside assistance has a strong andpositive impact on the growth of a smallbusiness. However, much more needs to bedone to encourage firms to invest in theirown performance. As well as an overallmood of confidence in the economy, firmsneed to build confidence in their own skills.Intrinsic to this is the strength of a firm’sleadership and management.This makes it imperative that weencourage firms to improve in the keyareas which can make a sustainabledifference to their business. This is whyI have asked Government to put in placea Growth Voucher programme availablefor small and micro firms seekingsupport to tackle their key growthchallenges.6. SMEs need to broaden theirawareness of sources offinanceSmall businesses continue to complainthat they are unable to access bankfinance. But this should not prevent smallfirms from accessing the finance theyneed – whether from micro finance12 oralternative sources of finance provided bycrowdfunding platforms.7. There is more Governmentitself can do to facilitate newand growing enterprisesI want new and existing business supportschemes to belong to a coherent packageof help for growing small businesses. Thisshould include: Better use of existing assets, forexample by helping business schools toplay a central role in the developmentof local businesses through betterengagement with their students andfacilities, or by unlocking the hugegrowth potential for SMEs throughgovernment procurement.Growing Your Business 14

Greater emphasis on marketingGovernment initiatives. There is anabundance of support available togrowing businesses, but it is not alwaysmarketed to the small firms that need itmost. When I think back to my time asthe Secretary of State for Employmentin the 1980s, I am reminded that thepopularity of the Enterprise AllowanceScheme (EAS) was due to strong andwell-resourced coverage and a simpleand clear message to unemployedpeople looking to set up their ownbusiness. Some of the companies set upwith the assistance of the EAS are evenlisted today in the FTSE 100.CASE STUDYCRUX PRODUCT DESIGN James West, DirectorYou may not have heard of CruxProduct Design, but you’ve probablyseen the cycling helmets theydeveloped for Team GB at the 2012Olympics and Paralympics Crux started in 2003 as a two-manteam and you’re now a global brand,famous for the Team GB cycle helmets.How did that happen?When the recession hit, growth was anecessity rather than a luxury – we wereoverly exposed to a small number ofclient accounts, so we quickly went aboutexpanding our client base. It was essentialthat we had the confidence and convictionto continue with our plans whilst managingrisk. The biggest risk was doing nothingat all – if we’d battened down the hatcheswe’d be out of business.We also found that being in a recessionI have put forward a proposal toGovernment which would enabledepartments to use all relevant marketingchannels at our disposal to ensure thatschemes like Start-Up Loans, GrowthVouchers and the Seed EnterpriseInvestment Scheme (SEIS) are effectivelytargeted at entrepreneurs and potentialinvestors in enterprises. If we can do this,I am confident that we can repeat thesuccess of businesses like Superdry andWarehouse, which were started with thehelp of programmes like EAS, and producea new generation of successful businesses.meant we could negotiate good deals onpremises and new staff, as many otherbusinesses were cutting back.What key steps were critical to yourgrowth?Two key changes have driven our growth:new premises and new people. Taking onnew staff was not about increasing ourheadcount – it was about investing in askillset that could give us that competitiveedge.Recruiting aperson withsales andmarketingexpertiseimmediatelyboostedCrux salesand hasGrowing Your Business 15

given us a strong strategic direction toexpand into new markets and develop theCrux brand.of winning the Team GB cycling helmetcontract was the approach we made to UKSport via LinkedIn.Moving from a small office to a fullyfunctioning design studio and rapidprototyping workshop was also key – itgave us the room and facilities to expandand underlined our drive to develop from asurviving micro firm to an ambitious andsustainable business.What would be your top tip for othermicro businesses?What has been your biggest mistake?Not understanding the value of marketingand PR early enough.What does social media mean to yourbusiness?Social media is a great way of gatheringmarket intelligence. We monitor theinterests and trends of prospectiveclients, thinking about how we mightoffer solutions to their needs. A key partKeep a close eye on costs: only makebusiness expenditure on items that youreally need. Start a cash flow forecastfrom day one and keep it up-to-date.Maintaining a positive cash balance givesyou speed and flexibility to capitalise onbusiness opportunities that may comeyour way. And use universities. They’rean important resource for your business.Academia and the corporate worldare merging ever closer. Setting andsupporting university projects, for example,can yield excellent results for both partiesat low cost.www.cruxproductdesign.comGrowing Your Business 16

Using What WeHave in Better WaysThere is often a call for the Government to come up with new schemes andprogrammes to help businesses, yet right under our noses we have assets which canbe developed to offer further benefits to SMEs. I want to use this chapter to highlightsome of these, including business schools and the wider education sector, and governmentprocurement.BUSINESS SCHOOLS AS ‘ANCHORINSTITUTIONS’There are no fewer than 130 businessschools across the country, the majorityattached to universities. These businessschools are seen as one of the big successstories of UK higher education, producinglarge numbers of talented studentsof business, management and relateddisciplines. Many of their students will goon to find placements and careers in largecorporate and mid-cap firms here andabroad.However, in the main, these businessschools play a variable role in the localeconomy – graduates generally do nothave ambitions to take up employmentopportunities in small firms and smallbusinesses do not see business schools asa useful source of help in the local area.Without direct contact with the smallbusiness sector, I believe business schoolsare underselling themselves in terms oftheir expertise. Nor do they provide thebreadth of skills and experience studentsneed to enter the wider world of business,entrepreneurship and commerce.I want this to change. I have found thatI am pushing on an open door withthe Association of Business Schools(ABS). The ABS is equally committed toincreasing direct contact between localSMEs and business schools, and ensuringthat the latter become a force in theirGrowing Your Business 17

local community. The ABS has agreed tolead a national programme to recogniseand encourage good practice in therelationship between business schools,their faculty and students, and smallbusinesses. The imperative is to extendsuch activities more widely across thebusiness school community and developthe capacity of business schools to act asanchor institutions, supporting economicdevelopment on a sustainable basis.Vouchers and other elements of the SMEsupport identified elsewhere in this report.Incentives and rewards forbusiness schoolsThis charter and award scheme wouldunderpin a coherent package of helpon offer from business schools to smallbusinesses, making the schools easilyidentified as places where students andstaff are keen and able to work withsmall firms on the specialist areas thatdrive their growth. I believe in future suchschools should also encompass resourcessuch as incubators where small firmsand entrepreneurs can interact with thefacilities and students in business schools.And there should be initiatives to supporthigh quality academic research into keyissues facing the SME community, suchas crowdfunding and the value of SMEs inpublic sector procurement.I have asked the ABS to develop a“Supporting Small Business Charter” andan associated award scheme to incentivisebusiness schools to help small firms togrow. This will include the provision ofsmall firm growth programmes, adviceclinics, improving the flow of highlyqualified graduates into small businesses,and increasing export potential throughengageme

bank throughout. Figures from the Office for National Statistics (ONS) indicate that large corporates are sitting on over 720 billion. When firms large and small are sitting on cash and not investing, the missing ingredient for growth is simply . confidence. Indeed confidence, or rather the lack of it, is the origin of many a recession.