Small business primed to grow

Michael Stirrup knew his brewery was running into tough economic headwinds when he tried to collect cash from his existing pub customers at the start of2009.

"We had to be a lot more careful with our receivables; people just weren't able to pay as quickly," said the president and co-owner of Wellington County Brewery Inc., a craft brewer based in Guelph, Ont., southwest of Toronto.

In a strange twist of financial fate, however, Wellington had endured a sharp rise in malt prices and a shortage of hops, two crucial ingredients in beer-making, prior to the recession in late 2008.

So, Stirrup's company had already cut costs before the September financial meltdown precipitated the ensuing credit crunch and global downturn.

Today, Wellington is in good commercial shape and ready to break out of the downtrodden economy. The company has a beer-bottling line that it added to its businesstwo years agothat provides extra revenue, and it is also eyeing a move into Quebec.

"That bodes well for our future," Stirrup said.

Growing again

Finally, after a year of scrambling to just stay in operation, many small businesses in Canada and the United States are following Stirrup's lead and gettingready to start making money.

Canada's overall recovery might appear a bit more solid than the one in the U.S. But neither economy is exactly primed to take off.

Still, probably against their better judgment, small businesses have begun to sprout shoots of entrepreneurial optimism.

"The gain in the Optimism Index clearly signals that the worst is likely over, but so far, there has been no 'surge'," said the U.S.-based National Federation of Independent Business (NFIB)in its September 2009 outlook.

The NFIB's Optimism Index, which measures business sentiment reached 88.6 (out of a possible 100) in August, mainly based upon an improved outlook among smaller firms.

That is 7.6 points higher than what it was in March. The March reading was the lowestthe index hadplungedin the period from August 2008 to August 2009.

In Canada, an increasingnumber of small businesses even expect to grow in terms of international sales.

HSBC Bank Canada found in a2009 survey that more than half of Canadian business believe they will generate revenue from foreign sales, a distinct improvement over 2008.

Still, if there ever was a time when throwing open your doors and waiting for the customers to come was a decent strategy for making cash, that era has come and gone after this recession.

"It's been difficult," said David Cook, a Toronto partner at KPMG Canada's enterprise practice.

"People who seem to think they will just go back to the old ways [are mistaken] there will be a new model now."

Nevertheless, entrepreneurs can still use their much-touted commercial flexibility to adapt to the post-downturn world, experts say.

"It's a great time to be a small business," said David Simpson, executive director of the Business Families Centreat the Richard Ivey School of Business at the University of Western Ontario in London, Ont.

Given the sector's importance to the overall health of many industrialized economies, small businesses need to get backto theirusual mode of risk-taking in order to turn a fragile recovery in Canada into a solid economic expansion.

By the numbers

The contributions of small businesses to the Canadian economy has been well documented.

Firms that have fewer than 100 workers Canada's definition of a small firm constituted 97.9 per cent of the 1.08 million businesses across the country at the end of 2008. And of the small firms, 56 per cent had only one to four employees.

(Industry Canada also lists another 1.233 million companiesin the "indeterminate" category, which includes individual contract workers, family members and various business owners.)

At the end of 2008, the latest figures available, small businesses with fewer than 50 employeescontributed 26 per cent to Canada's overall gross domestic product (GDP).

Those numbers were shaved slightly by the recession.

Between June 2007 and the end of 2008, the number of smaller Canadian businesses dipped ever-so-slightly, down 0.2 per cent, or a reduction of a bit less than 2,000 enterprises, according to Industry Canada.

Among small businesses, however, the recession saw some interesting shifts take place.

Between June 2007 and December 2008, the number of firms in the one-to-four employee category slipped by 6.6 per cent, a slightly largerdeclinecompared tofirmsemploying 20 to 49 people.

The number of companies that had between five and 19 workers actually grew in that time, up 16 per cent.

Finally, the number of companies that had less than 100 but more than 50 workers fell by 10.6 per cent by the end of 2008.

Today, the population of these modestly sized firms does not appear much different than it was in 1995, when Statistics Canada recorded just over one million small businesses.

Bankruptcies down

Entrepreneurs do not face many barriers if they want to set up a small business but do face widely fluctuating cash flows once they open their doors.

As a result, Industry Canada estimated that, between 2002 and 2006, 130,000 small firms started operations annually and anywhere from 82,000 (in 2004) to 120,000 (in 2002) closed each year.

Interestingly, fewer companies of all types actually slipped into creditor protection during the recession. According to the federal Office of the Superintendent of Bankruptcies, the number of firms big and small that declared bankruptcy or had an insolvency proposal in the worksdropped by 6.4 per cent by the end of Aug.2009 versus one year earlier.

While small companies account for the vast majority of firms in Canada's commercial landscape, employees at these enterprises make up a smaller portion of the country's total employment.

According to Industry Canada, smaller firms employed about five million individuals across the country in 2008, slightly less than half of the total national workforce.

In addition, the oft-repeated nostrum that small business adds about 80 per cent of the new jobs in a country actually varies depending upon the year. For example, modestly sized companies created 70,000 Canadian jobs in 2008, roughly 50 per cent of all the new employment added nationally in that year.

But, Industry Canada also estimated that, between 1997 and 2008, smaller firms accounted for 36 per cent of the annual employment growth nationwide.

Don't call it a comeback

KPMG's Cookfigures that the disparate nature of small business means that companies do not necessarily always need a growing economy to see a better bottom line.

That means some firms have done well during the recession even as others have failed, he said.

But there are some basics new firms need tomaster in order to take advantage of improving consumer fortunes, expertssaid.

Entrepreneurs should develop a business strategy that they actually use and do not just hide away in a desk drawer, Cook noted.

"The purpose of developing a business strategy is not to produce a term paper," Cook said.

As well, smaller companies need to figure out how best to use social media services such as Twitter and Facebook to attract customers, other experts said.

"Younger people shop differently than their parents did," said Doug Fleener, president of Dynamic Experiences Group LLC, a Lexington, Mass.-based firm that advises big and small retailers.

In addition, KPMG discovered that, for seven years in a row,small business types saidgetting and retaining the best workforce was the company's No. 1 worry.

For Wellington's Stirrup, however, gaining new sales is more about learning old lessons.

"We got a lot more efficient things like cutting out unnecessary cellphone calls.We even saved money on paper towels," Stirrup said.