Small but mighty: the rise of the ‘compact business’

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There’s an idea that business success is fundamentally linked to growth: that increasing headcount, revenue, and regional, national, and global presence is the path all smaller companies must follow, writes Gary Turner, managing director (EMEA) of cloud accounting firm Xero.

This idea has always been basically flawed, because there’s more than one kind of entrepreneur.

There will always be those who aim for market-cornering, global expansion and world domination, but other entrepreneurs have more specific goals. A recent survey by InfusionSoft and Emergent Research found that 94 per cent of small businesses have strictly defined financial objectives, and that 65 per cent believe they’ll achieve them. Their definition of success is more focused and sustainable, and places more emphasis on quality of life. While they acknowledge that owning a small business is often difficult and seldom stress-free, they don’t see why it has to swallow their lives.

Naturally, the aim is still to run a profitable business: according to research from Xero and World Wide Worx, 75 per cent of entrepreneurs believe they make more money running their own company than they would in a job. But perhaps their business has already reached its optimal size, they don’t want to take the risk of expanding, or they simply enjoy running a compact lifestyle business.

Stability over growth

This isn’t to say that these entrepreneurs are resting on their laurels. South Africa’s small and medium enterprises (SMEs) are estimated to contribute up to 52 per cent of GDP, and employ around 60 per cent of the labour force. Many small business owners choose to stay small because they’ve weighed the potential risks of growth against the potential rewards, and have chosen stability over rapid expansion. If you’re an entrepreneur, making the same choice is entirely understandable.

For one thing, it’s much simpler to manage your finances when you’re not dealing with a large, overstretched organisation. When you’ve got a smaller area of responsibility, it’s easier to anticipate your budgetary needs. You don’t have to spend so much time kitting out and upgrading your office, hiring new members of staff, or scheduling multiple projects at once. It’s also much easier to ensure a steady cash flow if you don’t have to worry about securing regular growth capital. When you have to find some way to bridge a funding gap that you weren’t expecting, stress is inevitable.

More importantly, however, a smaller company finds it much easier to do right by its customers. When you’re opening new offices, pitching new investors, and attempting to stake out new territory in your market, it’s hard to provide personalised service – customers can easily become numbers, and churn becomes routine. When you stay small and stable, you can spend more time providing excellent service: increasing quality, boosting retention, and – not incidentally – making it easier to take pride in your work. You can only delight customers when you can give them the time of day.

Finally, deciding not to pursue high growth actually makes you more flexible. A bigger business can often find itself locked into certain paths, able to foresee coming problems but unable to do much about them. Smaller companies are necessarily more agile, and better able to respond to market conditions.

Keep the ship sailing

There are certainly advantages to running this kind of company, but it’s far from stress-free.

Keeping a business afloat is always hard work. It doesn’t have to dominate your life, but it needs the proper care and attention.

For example, you’ll certainly need to exercise that ability to retain customers. For one thing, it’s just good business sense: a company that increases loyalty by only five per cent can increase profits by 25 per cent to 95 per cent. Acquisition strategies are comparatively more hit or miss – and take time to show ROI either way.

That said, there’s such a thing as too much loyalty. When you concentrate too much of your business with one or two clients, you leave yourself at the mercy of those clients. If your relationships disintegrate for any reason, you can find yourself with a sudden cashflow problem. Spreading your risk across multiple accounts is the safest way to insure your small business against this kind of problem.

It’s also necessary to streamline your financial processes wherever possible: where larger companies might have an entire accounting department, a smaller business often won’t.

Technology has made it possible to automate most time-consuming tasks – from admin to HR and beyond – and finance is no exception. A cloud accounting platform will make it easier to manage your company’s targets and resources without sacrificing accessibility or transparency.

Every company has to grow a little – if only due to inflation and currency depreciation. But high growth doesn’t have to be a company’s reason for being, and it certainly isn’t the only definition of business success. That said, lifestyle business owners still need to manage their companies carefully, and profitably. Remember: the point of staying small is still to pursue success – but on your terms.

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Key players from Africa’s startup and investment ecosystem post on issues close to their heart for Disrupt Africa.

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