At its January meeting the Joint Committee decided on its work programme for 1984 specifically the preparation of reports on:-
Retail and Distribution
This first Report of the Committee, on Manufacturing Industry, is laid before both Houses of the Oireachtas in accordance with paragraph (6) of the Orders of Reference of the Joint Oireachtas Committee on Small Businesses.
Small Manufacturing Firms
Small manufacturing firms, defined by the Committee as any manufacturing firm employing up to 100 people, represent a vital component of the National Economy.
The 5,000 or so small manufacturing firms account for:
90% of the total number of manufacturing firms
40% of total manufacturing employment
30% of total manufacturing output
25% of total industrial exports.
During the decades prior to 1970 the number of small firms was static but their number has grown by one fifth over the past decade.
An important characteristic of the sector is that 90% of small manufacturing firms are Irish owned.
Ownership and management of the typical small firm is usually vested in the same person. All the functions of management are often the responsibility of the owner who has to cope with production, marketing, administration, and industrial relations without the benefit of the specialist management resources that are a feature of large commercial organisations.
This report in detailing problems and solutions has aimed at being concise and succinct. In this attempt to be practical and relevant it should not be interpreted that very detailed consultation and consideration has not taken place.
The layout of chapters represents a deliberate selection of the major problem areas facing small manufacturing business.
The Committee wishes to thank all those who in any way assisted in the production of this Report.
ENVIRONMENT FOR SMALL BUSINESSES
Only a small group of enthusiasts recognised the importance of small business over the last two decades. Most people now agree that if employment growth is to be achieved the formation and nurturing of small firms is essential. Industrial expansion is a two legged affair based on the concept of a dual structure. Through the sixties and seventies the I.D.A. placed the emphasis on the attraction of foreign new plants. Although this was a one legged strategy it was very successful; new foreign industry employment rose to 34,000 (1973) and went on to nearly double by 1980. The other leg of the dual structure is small industry. It did not receive sufficient attention in the first half of the seventies. It does now. An analysis of job growth and losses (nesc No. 67, 1983) demonstrates that small industry is durable. For instance,
•Small indigenous industry jobs grew from 11,900 (1973) to 21,300 (1980) and 3,500 were lost.
•This contrasts with a loss of 16,400 jobs from 66,400 (1980) in the new industry sector.
Again it is very striking that foreign small industry development compared badly with indigenous firms; a mere doubling from a low figure of 780 (1973). This points to the possibility of putting together a special strategy to encourage foreign small industrialists to partner Irish new business ventures.
It is all very well to highlight the value of small businesses to our economy and to suggest broad strategies to accelerate this process, but to deliver on this requires a concentrated and sophisticated package of incentives and support from the State.
It should be recognised that there are two different kinds of small manufacturing firm. Firstly, we must distinguish between small firms which remain small but healthy, and small firms with the potential to be large. Secondly, we must be aware of the various manufacturing sectors, each requiring a particular approach.
It should be remembered that a small business has to deal with the same kinds of issues and tasks as do large established operations. The difference is that one person often tries to deal with them all.
Ireland needs to develop a new attitude to failure, risk taking should be encouraged and valued. The honest failures should be helped to try again. Those who fail usually have learned from the experience.
Inappropriate references to “squandering tax-payers money” on high risk ventures should be avoided. A supportive climate must be cultivated. Success must be applauded. The widespread antagonism among Irish people to business success and enterprise must be overcome.
Although State policy towards small industry is one of support there are contradictions including, on the one hand, a variety of support services through various Agencies and, on the other, excessively high charges for such State provided commercial services as electricity, post, and telecommunications.
It is generally recommended that there should be a third tier of electricity tariffs introduced for the benefit of small industry.
There is a great deal of empty State provided factory space nationally but a great shortage of small premises available on short term leases for small start-up operations employing one, two or three people.
We recommend that Local Authorities and relevant State Agencies give priority to the provision of small industry incubation type premises on short term leases, similar to those provided by IDA at Pearse Street, Dublin.
There is a need for a clear and unambiguous national policy on small business development, disposing of the constraints and contradictions that currently exist.
We hope this document sets out this policy.
Finance is without doubt one of the major problem areas for small companies. Most owners of small manufacturing companies do not have a financial background and when one considers that many owners have a mental block or fear of financial matters coupled with the lack of any permanent financial expertise in the company, this means that minor financial difficulties can quickly become major problems for the small company.
It is not unusual for companies with large order books to fail because of financial difficulties nor is it unusual for companies who are actually making profits to fail because of cash shortages.
It is vitally important therefore that:-
(a)A business possesses sufficient capital to meet its requirements. Many new and existing companies underestimate their capital requirement and are seriously affected by production problems, sales problems etc. Company planning is generally based on an ideal situation rather than anticipating difficulties.
(b)The mix of the different constituents of capital also cause problems for companies and the normal response to such problems is a short term solution - more borrowings which in turn may cause further problems.
(c)The lack of financial expertise or indeed financial appreciation in companies causes difficulties not only in the management of companies but also in dealings with banks, development agencies etc.
(d)As many small companies are looking to export markets for expansion or indeed in many cases for survial, the above difficulties are amplified and require even more urgent attention.
The purpose of this chapter is to describe some of the difficulties encountered and to recommend a number of policy proposals.
1. AVAILABILITY OF FINANCE
Small businesses experience difficulties in raising loan finance both in the setting up or the expansion of their businesses. This means that a degree of entrepreneurial potential is being stunted by the lack of available finance due mainly to the lack of security and the lack of a track record with financial institutions. The request by banks for personal guarantees places an additional pressure on the owners of small businesses. Financiers to justify their high risk projects continually complain of a shortage of good projects rather than a shortage of money to invest. There is an urgent national need which the market has failed to deliver on.
The establishment of a Government Loan Guarantee Scheme similar to the U.S.A. and U.K. The objective of this scheme would be to make commercial finance more readily available to new and existing small businesses which appear soundly based but because of lack of security could not raise funds in the conventional manner. Funds lent with regard to this scheme would be additional to what would otherwise have been provided. To avail of this scheme companies would have to provide three rejection letters from existing banks and have I.D.A. approval as a pre-requisite. Guaranteed loans would be repayable over periods up to seven years with an initial repayment holiday of up to two years available.
It is recommended that a pilot scheme be introduced for a three year period. The limit of guarantee could be £15 million and the Government Guarantee would cover 80% of each loan, to be administered by the relevant lender. The State Guarantee would apply only where new employment was to be created and, in general, should apply mainly to new enterprises.
Provision should be made to ensure that this scheme would be self financing through an insurance fund with the cost covered in full by the premia.
A scheme should be introduced to channel personal savings into small business loans, with the payment of tax free interest to investors. Such loans would be made available to small businesses at low rates of interest and the scheme would be administered by the Associated Banks in agreement with the Department of Finance.
The Industrial Credit Company Ltd., as the State Industrial Bank, should place its small business services on a regional basis and should put greater emphasis on being more accessible to small firms.
In a general sense it is believed that personal guarantees are contrary to the concept of limited liability and should be fundamentally re-examined with a view to discontinuation, provided there are stringent moves (including legislation as proposed in Chapter 7) to alter the current regulations governing limited liability.
2. EQUITY FINANCE
Many small firms are undercapitalised when setting up and because of low profitability and lack of any further equity investment this situation continues during the life of the company.
The necessity of making relatively large repayments is a considerable strain on the resources of the company, particularly when profitability is low as exists when companies are setting up or when trading difficulties exist.
The Stock Exchange has tried to develop a market in unlisted stocks in recent years - with little success and has concentrated on devising sophisticated schemes for its existing (large) companies rather than trying to make the Exchange attractive to new (small) entrants. It is a measure of its failure that the 1984 Finance Bill proposed its Scheme for Relief for Investment in Corporate Trade.
The availability of additional venture capital through the banks, other financial institutions and through private investors is required.
The introduction of the recently announced Scheme for Relief for Investment in Corporate Trade is welcomed and its early extension is recommended to include investments from financial institutions and companies.
As a means of operating the above scheme the establishment of Small Business Investment Companies is recommended where both individuals, financial institutions or companies could invest and the investment companies would then invest in individual companies. Such investment companies could be licenced by the Government.
The availability of additional equity will not necessarily increase the capitalisation of many companies as many owners are reluctant to part with any part of “their” companies and it would appear that some people would prefer to own 100% of a non successful company rather than own 40% of a very successful company. Therefore, a change in attitude on behalf of many owners will be required before this scheme can achieve its full potential.
The Stock Exchange should reassess its criteria to allow for “Small Business Stocks” in the case of companies seeking to raise funds at a lower level than that which now prevails.
3. INTEREST RATES
The high level of bank interest rates is causing major problems for small firms. This is of particular concern to small Irish companies that face foreign competitors having lower interest rates.
That the minimum limit for European Investment Bank loans be reduced from £15,000 to £5,000.
To provide the same interest rates for small firms as exist for large firms consideration should be given to interest subsidies.
Also, interest subsidies should be provided for small companies in industries that do not have access to reduced interest rates.
Small firms should be able to avail of Section 84 loans as do large firms.
4. BANK/INDUSTRY LIAISON
There are major weaknesses in small companies in the areas of financial planning, cash flow projections and even in the most basic record keeping. This means that problems are often not identified until too late a stage.
Moreover, the perceived restriction by banks of finance for working capital purposes causes major problems for many companies. Many bank personnel seem to not understand the need for particular levels of working capital. Bank personnel seldom visit companies and hence may have a lack of confidence in the operation of the company and the possible risk to the bank money.
Better liaison between bank personnel and small businessmen is an urgent necessity.
The development of better liaison between bank personnel and industry through more frequent visits, equity participation, arrangement of seminars etc. We also recommend new and larger small business regional teams, intensive training of bank staff in small business problems, and secondment of staff to small business.
5. EXPORT CREDIT FINANCE AND INSURANCE
The lack of flexibility in the operation of existing State sponsored Export Credit Finance and Insurance Schemes militates against small exporting businesses. The schemes seem to be operated in an over-restrictive manner and the small exported often has difficulty in finding out the limit of facilities available for specific transactions. The insistence on bill of exchange rather than allowing open accounts seems unnecessarily restrictive.
The more flexible adaptation of existing Export Credit Finance and Insurance Schemes to the needs of small business.
6. HOLD ACCOUNTS
The fact that the Central Bank will not sanction Hold Accounts if the transaction level is not high enough is discrimination against small businesses trying to break into export markets.
That there should be a greater relaxation and flexibility on the setting up of Hold Accounts, particularly with regard to companies starting to export.
7. GRANT STRUCTURE
The present emphasis of IDA/SFADCO/Údarás na Gaeltachta on capital grants means that many companies have acquired both premises and equipment in excess of their immediate requirements, yet they may not have sufficient finance to cover their working capital requirements or to develop export markets.
There is also not sufficient motivation for managers of small firms to undergo training.
Far greater flexibility is required in the grant aid package to include:
(i)Export marketing expenditure.
(ii)State Guarantees on working capital and loans.
(iii)Approval for secondhand machinery.
(iv)Grants per new employee or for fixed assets should be optional.
(v)Payment of grants without delay after expenditure is incurred.
(vi)The availability of long term (15 to 20 years) fixed repayment loans, the term to be extended when interest rates increase rather than raise repayments during the current term. These loans would be an optional alternative to capital grants.
(vii)The provision of aid in relation to full time employment to firms not eligible for capital grants.
All research in business success and business failure reaches a universal conclusion that effective management is the key ingredient of success and weak or inadequate management is the primary cause of failure. In the same business environment there are successful and unsuccessful firms. The difference is explained by the quality of management.
The basis of good management is early awareness of threats and opportunities and the skill and determination to overcome threats and exploit opportunities. By contrast, poor management is typified by lack of awareness and paralysis in action.
Good managers make more mistakes than poor managers but they know how to recognise them and correct them.
1. MANAGEMENT OF SMALL BUSINESSES
Managers of small businesses, because of the nature of small businesses, have to learn how to manage against backgrounds of:
i)limited relevant education and
ii)limited relevant experience.
Small businesses are the natural habitat for the entrepreneur and the main entrepreneurial characteristics are explained in the attached appendix.
Success in business calls for a blend of entrepreneurship and managerial competence.
Therefore, training and development for managers of small businesses must focus on these two areas. Most problems of small business management arise from structural characteristics of small firms. These characteristics include the scope and scale of operation which are normally confined to serving a narrow local market and a limited share of that market. Ownership is confined to one or a few people with the result that all decision making and control are usually vested in the owner/manager.
By contrast larger firms have the separate management functions vested in different departments or individuals.
2. MANAGEMENT FUNCTIONS
The basic management functions are the same for small and large businesses, only the scope and complexity is different. As against this the smaller business must rely on one person to carry out the wide range of managerial tasks and is, therefore, totally dependent on that person’s skill, energy and commitment.
The essential management functions for small businesses are:
These must be carried out by a manager who is technically competent.
Because the business enterprise must be managed as an interrelated system management, of even quite modest sized businesses, is a task requiring a wide range of capability and skill.
Deficiencies in the management of small Irish businesses are well documented. They arise for a variety of reasons which have their roots in history, culture and education.
The principal areas in which deficiencies are found are set out below and recommendations for correcting the problems are listed.
Generally, one of the most serious problems for small businesses is the lack of effective formal planning. This stems from:
i)lack of understanding of what planning is
ii)lack of appreciation of the need for and usefulness of planning
iii)lack of knowledge of simple and appropriate planning methods.
Because very small businesses can function very well with informal organisation systems, decisions about the introduction of formal systems as the business grows are delayed or postponed.
Key issues in this area arise from the personality of the owner/manager.
At the various stages of growth failure to develop proper personnel policies on recruitment, training, development, performance measurement and reward systems gives rise to problems of low morale and poor performance on the part of staff and frustration and a reluctance to develop the business further on the part of the owner.
Without planning it is difficult to exercise effective control and effective control is the key to success.
Many small business managers believe systematic controls are not necessary because of the size of the enterprise.
Even those who recognise the need for control rarely realise the full extent of the controls required.
Areas of absolute necessity for controls are:
Managers of small businesses need to be instructed in the appropriate control techniques and advised and counselled on the particular application of these techniques in their particular businesses.
In addition to these general management areas, one specific functional area presents universal problems in small Irish industry - marketing.
In view of the importance of marketing and its interrelationship with product development and quality it is the subject of a separate chapter.
Sound management practice, in all areas of business, is the single most important element of developing a dynamic small business sector. The following recommendations are aimed at assisting small business managers in reaching the highest standards of performance in the management of their enterprise.
1.Good management must be viewed by Government as a good investment and a significant increase should be made in both expenditure and effort on management training. Government should restate the fundamental need for more management skills in small industry, make a clear policy statement on the responsibility of State Agencies (AnCO, Irish Management institute, Irish Productivity Centre) to concentrate on management development, insist on effective co-ordination of existing and future management development policies. Increased emphasis on the performance of industry should considerably reduce the need for State backed rescue activity.
2.State Agencies which grant assist small industry should place more emphasis on assessment of management capability prior to approval of grant aid.
Appropriate management training should be provided where necessary.
3.To improve management performance consideration should be given to management secondment schemes whereby suitable personnel would be seconded from the public and private sectors.
4.Access to management training be more widely available, particularly at regional level and the opportunities for in-company management training provided by the newer technologies should be encouraged and expanded. Development of training material better tailored to managers is needed.
5.A specialist in-company management training programme should be undertaken on a pilot basis over the next three years. The programme should be organised and undertaken jointly by the three training agencies - AnCO, I.M.I. and I.P.C. The administration of the programme should be on a regional basis and should have a significant input from third level institutions. The essence of the programme should be a company by company approach incorporating:
(i)evaluation of present performance and current management deficiencies
(ii)preparation and implementation of in-company action plan to achieve stated objectives
(iii)installation of proper company management system and training of personnel to operate them
(iv)monthly monitoring of management development progress
(v)utilisation of technical and other specialist assistance available at either regional or National level.
6.Agencies responsible for training should have effective follow-up mechanisms and liaison with other Agencies to ensure the practical implementation of what has been learned at management training courses. More counselling and coaching services are needed.
7.Consideration should be given to assisting small businesses through an annual broadly based evaluation of the business either by Accountancy Body or State Agency, specifically for the Company’s internal use. All State Agencies with a financial/ Managerial involvement with small firms (I.D.A., AnCO, I.M.I. etc.) should combine to do an annual short company audit of the firm. As a result of this audit, the State Agencies would increase or diminish their assistance in the year ahead.
8.Panels of retired exectuvies and suitable graduates should be formed at regional level to provide advice and assistance to small firms on an organised basis. The organisation of this service should be undertaken by a competent Agency and a “personalised” service provided, on a confidential and cheap basis. The banks should encourage retired bank managers, for moderate fees, to help out small firms in the banks’ charge.
9.The curriculum for Business subjects in second level education should be examined to make it more relevant to the requirements Business.