How Important are Small Businesses to the Economy

How Important are Small Businesses to the Economy

How Important are Small Businesses to the Economy

There are in excess of 2M small businesses in Australia and the number is billowing with every passing day. These small businesses employ more than 5M people and are in integral part of the economic landscape in the country. They provide a range of products and services and ensure that the equilibrium is maintained in local economies. So what exactly are these small businesses and how and why are they important to the economy? A small business is essentially an independently-owned & operated business that has fewer employees and its volume of sales is also relatively lower. Though countries across the world have a large number of small businesses, the definition varies.

Deciding Factors

For instance, in the U.S, a business that has less than 100-employees is said to be a small business. In the EU, a company that has less than 50-employees qualifies as a small business, while in Australia a company that has 1-19 employees fits into this mould. Small businesses are generally privately-owned corporations, sole proprietorships or partnerships. In addition to the number of people employed, the other criteria that are considered are:
  • Amount of capital that is employed
  • The annual sales turnover
  • Value of the company’s assets
  • Company profits

The Difference

Small businesses are very different from corporates. In the former, there may be only one person at the helm. A partnership may have one or more partners managing the show. In these types of businesses, the decision power lies with only one or very few people and not with an entire board like it does in larger corporations. The power centre is very small and all the responsibilities & obligations lie only with that one person (sole proprietorship), or just 2-3 people (partnership).

Impactful Factors

In a way, it’s a micro-version of a larger business and has all the elements of the latter but on a much smaller scale. The role they play in the economy and their value tends to be undermined because of their size. However, the fact is they have a very big impact on the economy. So, exactly why do these small businesses become so important? Let’s take a look at what makes them significant contributors in Australia’s economy:
  • Small businesses play an extremely important role in catalysing the Economy. Statistics have showed that these businesses are very effective in increasing the employment levels and over 5M people in Australia are employed in small businesses. This goes a long way in reducing the employment rate in the country
  • What’s even more important is that approximately 96% of the total-income in the Australian economy is accounted for by small businesses (sole proprietorships+ partnerships).
  • Interestingly, the fewer the employees in a small business, the more it contributes to our country’s economy. Sole traders account for almost 36% of the industry value in the Australian industry, which is much more than what medium-sized & large businesses contribute to our industry
  • One notable advantage of small businesses is that they tend to employ a large number of supporting services; these are also obtained locally. For instance if a small business wants to add to its existing facilities, it will go ahead and hire local tradespeople. They will use the services of a local tax professional etc- all of this adds to the local employment levels
  • Typically, small businesses also offer a larger number of locally-produced goods compared to larger, national or global chains
  • A larger amount of money that is spent at local businesses stays in the area. Of every $100 spent at a country-wide chain store, only 13% will stay in the local economy. In comparison, out-of every $100 spent at any locally-owned and operated business, almost 45% stays in the local economy. This is a distinct benefit for the other local businesses, families and workers in the area

The Winds of Change

Small businesses are also very flexible and they respond easily to any changes in demand. In times of recession or when the economy is not at its best, small businesses are the best avenue for employment. They provide customised services and goods, produce niche products and cater to local demands. At times, larger companies tend to overlook these. All-in-all, small businesses are the wind in the sails of the country’s economy. Kind regards, MaxMyProfit Corporate Australia (02) 9111 5000

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