The big footprint of Canadian small businesses
SMEs have weathered the recession well and are cruising for new growth.
They aren't the corporate names — or numbers — that make headlines. They don't have their names on arenas or office towers. And their CEOs don't appear before television cameras or Parliamentary committees.
Still, Canada's economic health is largely determined by the performance of its small and medium-sized enterprise (SME) community. These are companies with fewer than 500 employees, and their success or failure is an important indicator of how the overall economy will fare in the future.
How important are they?
Well, in Canada, small and medium-sized businesses accounted for about $576.9 billion, or 54.2 per cent, of business-sector GDP in 2005, while large-sized businesses accounted for $486.7 billion, or 45.8 per cent, of business-sector GDP in 2005.
The first thing to understand is that SMEs have a very different profile than large, multinational operations. As a result, they weathered the recent recession differently (60 to 70 per cent of SMEs have a more domestic than international focus and were sheltered from global volatility) and they have emerged with a strong degree of confidence.
The latest small business confidence barometer released by the Canadian Federation of Independent Business (CFIB), showed improvement for the seventh consecutive month — even among manufacturers and even within Ontario.
As it stands, 20 per cent of business owners plan to increase full-time staffing in the next three months. With 46 per cent expecting their businesses to strengthen in that same period, they also expect to increase wages by 1.7 per cent and prices by 1.5 per cent over the next 12 months.
Even more significantly, 35 per cent of SMEs plan to invest in new office or communications technology — an expense the soaring Canadian dollar helps to offset.
Given how much small businesses contribute to Canada's annual gross domestic product, that level of confidence is encouraging.
To their advantage, smaller firms can serve specialized markets that large firms find unprofitable. They can adopt flexible production processes that allow them to produce premium customized goods and services.
That in turn leads to a close relationship with and knowledge of customers, positioning the companies to take the basic innovations of larger firms and turn them into new products and create new market niches.
Furthermore, when large corporations are contracting, there's more opportunity and scope for flexible, responsive players to fill the sudden gaps.
That's one reason why, even though SMEs initially bore the brunt of job cuts during the financial downturn, nearly 20 per cent of those surveyed found ways to increase their payroll and expand into new markets in other provinces or countries — the opposite experience of larger corporations.
According to Statscan, in fact, by the first quarter of 2011, SMEs had already re-staffed about half the positions they'd eliminated — well ahead of their large-cap counterparts.
Given their bellwether status, it's worth closely watching how small businesses grapple with some of the looming challenges, specifically high commodity prices, rising interest rates and the record household debt that will — at some point — start to affect levels of consumer spending. The prospect of a drop in consumer spending is particularly problematic for enterprises in both the retail and service sectors.
The durability of the manufacturing sector will also play out in the SME space: about 62 per cent of them are levered to manufacturing, according to Statscan. The strong Canadian dollar combined with uneven demand south of the border is a definite threat (especially given that 73 per cent of manufactured goods from Canada are still shipped to the U.S.).
As the worst of the recession ebbs, large companies will be gearing up and markets will become more competitive and tougher for small business players.
But for those who are keeping a close eye on breaking trends, government downsizing may well emerge as a solid, new opportunity for the fast and flexible.
The cuts in staffing and service levels means that outside consultants and contractors will play a greater role, plugging the considerable gaps left by a shrinking public sector.
It's a shift that may not make headlines. But it will make bottom lines.
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