Downturn lingers for small firms

Even sales of humble fish and chips have taken a battering. Photo / Doug Sherring

With a baby on the way, Bart Innes has a lot on the line as he works seven days a week at his Auckland fresh fish and takeaway shop.

The fact that New Zealand technically isn't in a recession would be cold comfort for the 32-year-old owner of the Pacific Fish Market, in the east Auckland suburb of Glen Innes, as well as for countless other small-business operators across the country.

Sales at his shop have dropped 40 per cent so far this year.

"Things are pretty touch and go to be honest," says Innes, who worked for the police before he bought the shop two years ago.

"Lately business has been really bad. There's just no money around, especially in Glen Innes, which is a low socio-economic area.

"Previously, customers were coming in and spending $10, now they're just coming in for just a scoop of chips and spending $2."

His wife, Lynn, who is six months pregnant with their first child, is also having to work every day to keep the business - which employs three staff other than the couple - afloat.

"[The baby's] not too far away now and I'm not quite sure how we're going to get through when my wife's not here, but it's just one of those things. You work it out," says Innes.

This was not how he imagined things would turn out when he became self-employed.

"We would have preferred to have some extra staff and things like that but it's just not affordable right now."

Research shows New Zealand's smallest companies - many of them family-run operations - are finding it the toughest to weather the lingering effects of the recession.

A report from Massey University's Centre for SME Research, released this week, says the gap between the performance of micro-firms (those with five staff or fewer) and small companies (between six and 49 staff) is widening.

The university conducts an annual survey of micro, small and medium-sized firms. In 2009 it found 73 per cent of small firms were experiencing flat or decreasing sales compared to 77 per cent of micro-enterprises.

By late last year, 76 per cent of micro-companies were still reporting flat or falling turnover, while the proportion of small firms facing the same situation had fallen to 64 per cent. Medium-sized firms (50 to 99 staff) were faring even better, with those reporting decreased revenue dropping 15 percentage points to 39 per cent between the surveys conducted in 2009 and 2010.

Centre for SME Research director David Deakins says micro-firms have the least resources to fall back on during times of economic stagnation.

"They have more limited financial resources they can draw on and more limited human capital resources," he says. "And they are more likely to be focused on the domestic market, while medium-sized firms are more likely to be [doing business] in export markets which are showing growth."

SMEs accounted for almost half of this country's economic output in 2008, according to Ministry of Economic Development figures.

And micro-firms make up almost 90 per cent of all New Zealand businesses. In short, they are a crucial component of this country's economic landscape.

New Zealand Institute of Economic Research (NZIER) principal economist Shamubeel Eaqub says small firms are an important source of employment.

"If those guys are doing it tough then the rate of business growth and job creation will be pretty moderate," Eaqub says.

"Right through the course of the recession business margins have been hit pretty hard and obviously profitability has also fallen, and it's been disproportionately so for small- and medium-sized businesses.

"Relatively speaking, small businesses have been hit much harder [by the downturn]."

The Massey University survey also found 78 per cent of SME respondents were financing their firms with personal credit cards last year, up from 67 per cent in 2009.

Deakins says credit cards are now the most common form of business finance for SMEs, alongside trade credit.

"There is a risk they may get a bad debt - particularly in times of recession - but if it helps cashflow over a temporary period it could be a good solution."

One person who knows too well the cashflow challenges that come with running a micro-firm is Ashley Vazey, owner of Phoenix Fabrications, an East Tamaki company.

Vazey, 33, set up the firm - which manufactures products used in conjunction with forklifts, such as loading ramps - in 2003.

In the boom years that led up to the global downturn the business flourished and he took on three staff.

"In the first four years things were pretty cruisy, pretty plain sailing," Vazey says.

But everything changed with the onset of the recession in 2008.

Vazey, who has two children aged under 5, had to let go of his employees as annual revenue tumbled by more than 30 per cent from above $300,000 to less than $200,000.

Now he runs the business on his own with his wife helping out with the book-keeping.

"It used to be pretty easy to get work and make money off the work but now the competition's very tight, and even getting jobs in the first place is proving a lot more difficult," says Vazey. "I never really had to search for work and now I find myself every month having to knock on my customers' doors and say, 'what else can you give me?"'

Vazey has even resorted to financing the business on his personal credit card, which isn't something he wants to make a habit of.

"It creates a bigger bill with the accountant when they have to sort it out later on."

BusinessNZ chief executive Phil O'Reilly finds it unsurprising that 79 per cent of SMEs would use personal credit cards as a means of finance in a single year.

"What concerns me more is the fact that [credit card use] is rising ... the number one issue that businesses are talking to me about right now is cash flow," he says.

O'Reilly says the smallest firms in this country - like those all over the world - are cash flow businesses.

"They don't have much of a balance sheet to speak of, or retained earnings," he says.

But O'Reilly says micro- and small-business operators could do more to help themselves, like engaging in training to get their business skills up to scratch.

Vazey said he enlisted the help of a business mentor a year ago.

"[The mentor] showed me how to watch what my gross margins were doing and gave me techniques for seeking out new work and for making sure the jobs in the shop were profitable," he says.

"He pretty much saved my business, I'd say. He wasn't cheap but the value was there in the fact that I wouldn't have a business at all if I hadn't taken [the advice]."

Vazey says he is working at paying down debt. "We know what we need to do to remain viable and once we can clear that old debt we can start snowballing and actually start putting funds in the bank."

Innes, the Pacific Fish Market's owner, isn't quite as optimistic about what the future holds.

"I wouldn't say I'm confident right now - I'd say I'm hopeful that we'll get through this year and see what a new year brings," he says.

"There's been times when we've been really confident that things are picking up and then they drop back again."

Innes says the Rugby World Cup this year may provide a boost to the trading environment.

"I think there's a lot of people renting out their homes around here, from what I've seen, so hopefully it will bring a few more people through."

But he says the downside of doing business in Glen Innes is that the suburb has a bad reputation it doesn't deserve.

"People are a little scared to come here - they've got the impression they'll get stabbed if they come, which is totally not the case."

In the meantime, Innes says he and his wife just have to "go without" to make sure they pay the bills.

"We eat a lot of fish - a lot."