January 7, 2020
The importance of Small Businesses to the Maltese Economy is clearly outlined in the Policy note “SMEs’ contribution to the Maltese economy and future prospects”, issued by the Central Bank of Malta in October 2018
“Official data suggests that the contribution of Maltese business economy SMEs was close to half of total value added, which is significantly higher than the proportion of total value added that is generated by SMEs in the EU (which is around two-fifths). Official statistics suggest that SMEs accounted for the lion’s share of growth observed recently in Malta. If one excludes Malta’s non-business economy sector, growth in value added was still more than double the increase observed in the EU economy as a whole. This difference in growth was due to Maltese SMEs, as larger business economy firms grew at a slower pace than their counterparts in the EU. In fact, Maltese SMEs in the business economy sector generated nearly two thirds of all growth in value added and half of the rise in employment. This is a healthy development as growing dependence on many SMEs is making the Maltese economy less susceptible to idiosyncratic shocks.”
External difficulties faced by Small Businesses in Malta
The policy note mentions that for Maltese SMEs “the three largest major obstacles were skilled staff availability, uncertainty about the future and the availability of an adequate transport infrastructure.”
While Malta has been going through a period of high economic growth a lot of Maltese SMEs are experiencing that they have reached their capacity limit with their present complement of employees. Hence, they needed to rely on foreign workers to keep growing the business. This is however leading to a new set of problems both at a macro and micro level. Many times, SMEs find themselves facing a high turnover in foreign workers and spiralling costs with regards recruitment and training. Many Maltese SMEs realise, now more than ever, the importance of staff retention, even at the cost of offering more flexibility at the place of work which is still less costly than recruiting new staff.
Maltese SMEs are also facing the challenges and extra costs that the limitations of Malta’s infrastructure bring with it. Traffic has a cost for such SMEs as it ends up creating costly inefficiencies. While efforts on a national basis to improve such infrastructure are being made, there are efforts that Maltese SMEs could do to help the situation. These include flexibility on working times and the introduction of teleworking, coupled with privately organised carpooling or transport to and from the office.
Achieving the needed financing in the most cost-effective way is always a challenge for SMEs. The recent economically buoyant years in Malta may have reduced the need for external funding, but this does not mean that access to SME financing has lost its importance. Bank financing remains the most important type of financing for SMEs, with banks fulfilling the role of risk management as part of the financing process. In this context, when certain securities are requested from bank financing, institutions like the Malta Development bank could play a role in aiding the achievement of such financing.
However, there are several cases of SMEs that have reached a particular size which could make them access financing from capital markets. Malta has the SME specific Prospects MTF market which is serving the role for such SMEs to access capital markets whilst reaching a higher level of corporate governance in their business.
Common Internal difficulties faced by Small Businesses in Malta
Usually, Maltese SMEs are family businesses with involving different family members. Some of the challenges that these businesses face include:
Complete lack of Corporate Governance:
Many SMEs lack proper and formal structures whereby decisions are taken in a structured environment of checks and balances. Many critical and strategic decisions are taken on the fly by whoever feels entitled to take such a decision within the company, without proper debate or analysis on such decisions.
No external consultant:
Small Businesses would benefit from the services of an experienced, external business consultant. Such consultant would make sure that adequate structures are implemented and that a level of corporate discipline is maintained.
Lack of Strategic Thinking & Comfort Zones:
Many times, people leading small businesses get involved in the daily operations and rarely, if ever, have time to focus on future planning and the strategic direction they would like to implement in their business. Many SMEs find themselves happily operating in a comfort zone, only to be negatively surprised when external factors re-shape the market they operate in without them even realising.
Lack of Training:
Family members may be promoted to leading positions without proper training of how business is to be managed and how to deal with the different stakeholders involved in the business.
No clear control and reporting mechanism:
Many SMEs lose control of the most basic things that any business needs. These include basic reporting mechanisms, updated management and audited accounts, credit management and performance management of their employees. This usually leads to companies hitting a brick wall, with many times, cashflow issues being the first signal of all the underlying problems.
Problem with employee turnover:
With a lack of corporate culture, many employees find themselves having to work within the confines of the work culture imposed by the owner of leader of the SME. Moreover, due to their nature SMEs cannot always offer improving prospects for career advancement for their employees. With regards family owned SMEs, employees usually find themselves out-manoeuvred by family members who progress in the business due to the simple fact that they are family members and not on the merits of their abilities.
Lack of Succession planning:
In the case of family owned SMEs, it is usually the case that no proper succession plan has been established. This creates a lot of tension between the old guard which feels it should continue leading and the new guard which feels that the time is ripe to start changing things in the business. Conflicts usually arise that can be very damaging to the business.
Marketing, Market Positioning & Competitive Analysis seem superfluous:
Many SMEs think that spending money on market research, marketing their business and positioning it strategically in the market, whilst analysing what competition is doing, is all wasted money. The realisation that this was false economy normally is made when it is too late to make amends. With technology effecting any business venture, some fail to realise that there are very cost-effective channels today to reach your present and future customers in an effective way.
Written by Silvan Mifsud, EMCS Director