Why are so many SMEs not growing from small to medium size?

I was recently asked by a defence industry executive why so many SMEs in the defence sector grow to a certain point and then stagnate or sell?

This question resonated strongly because I’ve observed SME growth stalling not just in defence, but across industries. It’s worth noting that this is also a global phenomenon. For a high proportion of these businesses, this seems to happen at around 15-20 staff and $5 million in revenue.

Why are so many of our SMEs not growing from small to medium size? We know that many business owners start out with a passion to grow and succeed but fail to plan for three to five years (or longer) down the line. This lack of adequate planning alone is a big factor keeping SMEs, which account for 97.3 per cent of the Australian economy, small.

Other times, entrepreneurs decide instead to manage their business to support their lifestyle or maintain a legacy to pass to their children. Few of them understand how to capitalise on growth opportunities by creating a valuable venture that continuously expands its services, creating much more substantial and sustainable growth in jobs and profits.

Looking at the bigger picture, failing to graduate beyond being ‘small’ has unfortunate economic effects. One critical issue is how this reduces our economic complexity. Without more SMEs growing and expanding into larger companies, it is nearly impossible for a country to build strength across diverse industries. This is particularly troubling for Australia given our economy lacks complexity and sophistication when compared to other developed, and even some developing, countries. Add a challenging environment with economic headwinds and it becomes clear SMEs need more help to grow. What can we do? Here are three ways smaller companies can break through growth stagnation:

1. Business owners must make the choice to look up

The choice to grow ultimately lies in the hands of individual business owners. Governments can help by educating talent to keep a pool of employees available, encouraging a growth mindset and providing tax incentives to support growing companies.

Regardless of the economic times, there’s always "no better time than now" when it comes to deciding to pursue a more assertive business growth plan. Even in a volatile economic environment, good businesses can always succeed. Some of the world’s most well-known enterprises were created during times of turmoil. Google and Salesforce were founded just before the dotcom bubble burst at the turn of the millennium. Airbnb, Slack and Uber emerged from the Global Financial Crisis in 2008-2009.

2. Clearly define what it means to grow

Once the decision to go for growth is made, businesses must clearly define what it means to grow and the future state of a larger business. What will future revenue look like? How many clients or customers will you need? What headcount will that require? Which markets will you be servicing?

To grow, a company must ruthlessly pursue its vision. A growth plan sets specific goals and maps the growth journey of your business. Can you grow organically from internal resources or will you need outside investment or your bank to help facilitate growth? Will you need new initiatives, such as new products and services, or to enter new markets? Would a merger or acquisition be the best way forward? You may even decide to commission market research and consider hiring external consultants.

3. Ask yourself – are you in control enough to let go?

Just like it takes a whole village to raise a child, it also takes a team to build a company. Many entrepreneurs struggle to delegate because they’ve become accustomed to working on every aspect of their company. However, business owners must understand that they aren’t able to achieve growth on their own and they must delegate responsibilities to other people in the organisation, according to the stage of growth their company is experiencing. If not, owners risk becoming the obstacle stopping growth in the business.

When SMEs break through their growth stagnation point to become larger companies, the increased economic diversity means the whole nation prospers in the long-term. So the balls are now in our collective courts to inspire SME owners to choose growth, create jobs and increase their contribution to a robust economy, and in so doing, secure prosperity for future generations of Australians.