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Out with SME, in with MSB? Putting medium-sized businesses on the radar

Monday 16th September 2019

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Too many of New Zealand's job-rich, medium-sized businesses fail to move beyond the habits learnt when they were small businesses, limiting their productivity and earning potential, says a report published this morning from accounting firm Grant Thornton.

The report urges new attention on a vital part of the New Zealand economy that it says is "vibrant and dynamic, but ... underperforming on profitable income growth, productivity and capital investment, which means some big opportunities are being missed."

For a start, it recommends we stop lumping medium-sized businesses in with SMEs, the catch-all phrase most commonly used to describe the 'small and medium-sized enterprises' that make up 99.5 percent of all the businesses registered at the New Zealand Companies Office.

Yet MSBs, as Grant Thornton inelegantly dubs them, are just 2.2 percent of the total, so are a tiny fraction of all SMEs. Yet they contribute disproportionately to economic activity and employment growth. There were 10,698 such MSBs in 2018, compared to 2,460 'large' firms and some 471,021 firms defined as 'small' and which comprise 97.3 percent of all New Zealand businesses.

The report defines MSBs as businesses turning over between $5 million and $30 million annually and/or employing between 20 and 99 employees. But there is no official Stats NZ dataset or definition.

Australia's official measure for an MSB requires revenue between A$5 million and A$250 million and between 20 and 200 employees, but New Zealand "has a much smaller economy and population than most comparable highly-developed market economies," Grant Thornton says.

A consensus definition would promote understanding of the sector to inform public policy to support for businesses that cover a multitude of activities. Just over half are in the wholesale and retail trades, construction, and manufacturing sectors, with the remainder covering professional, technical and communications services, the real estate sector, financial and insurance services, healthcare and agricultural businesses, among others.

"Only by defining some parameters can we effectively measure and track the success of MSBs."

That matters because New Zealand's MSBs are an employment powerhouse but are underperforming relative both to global peers and to large and small New Zealand businesses on profitability, online sales, international engagement and exporting, and "low productivity (as measured by income per employee) is also a barrier to growth."

MSBs account for some 14 percent of total economic activity in New Zealand and tend to be stable and long-lived. Two-thirds have been trading for 11 years or more and businesses are becoming MSBs at a much far stronger rate than small and large businesses over that time. Strong income and high profit growth being observed in many small businesses "could indicate they are turning into mid-sized businesses, which would explain why the number of MSBs is rapidly increasing in New Zealand," the report says.

Their total salary and wage payments grew spectacularly faster  between 2014 and 2018 than among small and large businesses, at 38 percent growth versus 25 and 26 percent respectively, reflecting a combination of fast workforce growth and competitive employment conditions in many of the sectors covered by MSBs.

However, when it comes to growth, the report finds low capital investment and an overwhelming preference for debt over equity to fund growth.

"Mid-size businesses have a similar equity to total assets ratio as small businesses. This tells us that MSBs behave like small businesses when it comes to accessing and using finance."

Their tendency to fund growth with debt was "constraining their growth prospects" when "large amounts of capital ... new expertise and networks" were all available by pursuing equity investors, most likely by offering a shareholding in the company. Some 8.8 percent of New Zealand MSBs are controlled by foreign shareholders, compared with 16 percent in Australia.


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