Fire & Hire - 5 Reasons Why Small Businesses Do It Better

Our SBW team has been advising or managing small and medium businesses more than a combined century. None of us have "seen it all", but we have seen a lot! And like you, we have heard all the sound bites about small business being the tide that floats the boat of job creation which, in turn, is the engine of the US economy. None of us had a definitive reason for why this might be and, prompted by reader and partner requests, we set out looking for some sound bites of our own. Out of a series of recent discussions over the past few months, we came up with five reasons that might help explain the truisms about small business and job creation.

We ranked them arbitrarily based on the number of times they came up in conversation with entrepreneurs and their advisors. Feel free to add your own priority to the list and let us know your opinion.

#5 - Access to Financial Partners

Equity capital sources tend to concentrate on high risk, high return growth opportunities, so most small firms are left out of that form of capital market. But because equity-backed businesses often aim at short- or medium-term liquidation events like IPO's or mergers activity in order to satisfy outside investment criteria, that also means most small businesses don't have the same pressure to show net income, take more operating risks and develop new products at a faster pace.

Small businesses, however, do have excellent access to commercial credit capital sources like banks and asset-based lenders. These firms are generally more attuned to local business conditions, the reporting methodologies of small businesses and to a different level of risk. They understand that most of the capital for small business comes from internal generation of funds…before taxes. They are more comfortable with providing capital based on cash flow coverage and backed by collateral and not necessarily hung up on companies reporting minimal net income.

Closely aligned with reason #5 is the impact of the income tax environment on both capital access and levels of operating risk.

#4 - Income Tax: Minimize Profit By Maximizing Investment In The Future

Most small businesses serve two primary external masters - their commercial banking partner and the income tax authorities. Their business plans, therefore, are usually grounded in the pursuit of investments that can be expensed in a single year or aggressively depreciated in a short period of time, thus reducing the income tax bite. But they are also careful to fall within the guidelines and covenants of their credit arrangements.

One of the principal ways to invest in the future of a small business that meets these criteria is to invest in new people. Their salaries and other compensation are 100% tax deductible and the impact on a budget is perfectly quantifiable. Most of the benefits of their employment are also readily quantifiable, so if the personnel investment doesn't pan out, they can be fired.

In tough economic times, when larger corporations are downsizing experienced people with great industry contacts or product expertise, smaller companies are aggressively seeking them as new employees to help polish product development or production and to bolster existing sales teams or customer service departments. And when the economy starts to rise, these firms are well situated to take advantage of bringing in new customers or opening new markets.

#3 - Big Difference: "When Opportunity Knocks…"

Small businesses are nimble, so when an opportunity knocks, they can move quickly to take advantage of it. Decision makers are at all levels - and they know more about the affairs of the business and the importance of its relationships - customers, suppliers and banks - than their larger corporation counterparts, and can react accordingly. Hiring the right person is just another business opportunity to a small business and they can more quickly evaluate and reach a consensus than a larger company. From the job candidate side, there is a certain appeal to being involved with an entrepreneurial company - the passion and excitement combined with the opportunity to "make a difference" have swayed many a prospect from the more secure environment of a larger corporation.

#2 - Taking People Risks

You have probably heard the statement, large corporations fill positions and small businesses hire people. However true that may be, it is safe to say that people are more important to small businesses, if for no other reason than small businesses have so many fewer of them! So each one is important! Most of the time, however, entrepreneurs are risk takers and one of the areas where they take a lot of risks are in hiring new people. Even while larger corporations are "downsizing" dozens or hundreds of experienced people, small businesses are willing to hire them, even if it is on an interim, results-oriented basis. They know that a single good person can make a big difference -- to open doors and provide industry access and expertise that are not in-house. So they hire them and give them ample opportunity to expand their horizons and to make a difference in the organization, both powerful incentives to a goal-minded candidate.

But this cuts both ways. Besides hiring new people, small businesses are also willing to replace people because the entire enterprise can be affected by one poor performer. While generally much more loyal and willing to work with employees than larger companies, small business owners and managers are more sensitive to underperformers because the company's very survival may depend on a single employee.

And the Number One reason small businesses create job growth….

The Ownership Imperative - #1

We believe the key reason that small businesses generate jobs are the business owners. Small business owners generally are motivated by making money and having control over their destinies; then trading off the business motivations against the demands of their personal lives. One constant calculation among the business owners I have had as clients has been the "can I do that job for less than it takes to hire someone?" Roughly translated, this boils down to "what is my time worth?" As the business expands, the question is modified to "can we do that job…?" Clearly, there is value associated with each hire and a constant calculation of the trade-off. After all, it is the owner's money!

When we take on a consulting engagement for a small or middle market company, we set a goal early in the process. One of our principal goals is to allow the owner to make more money spending the same amount of time in the business or to make the same money spending less time. Besides streamlining systems and reporting, we generally encourage bringing in new, experienced hires to help achieve that goal. This approach has resonated with our clients.

But when all is said and done, small business owners know how good people can make their lives easier or help make them more money. And we believe that is the primary reason that small businesses generate more jobs than larger corporations.

Whether your list has 1 or 100 reasons why small businesses create more jobs, please share it with us at info@smallbizworthy.com. We will be pleased to share your thoughts with your fellow readers.