• SME Mortality Rate Climbs – Revolution Brewing?  

SME Mortality Rate Climbs – Revolution Brewing?

The average life expectancy of a person living in 1 A.D. was 28 years. In 1800, it was 35 years. In 2014, average life expectancy is now 79 years for developed nations (as high as 83 in Japan and Switzerland)—which would be astonishing in the eyes of everyone who lived before the modern era. The increase in longevity has many drivers – healthcare, technology, education, nutrition, production, information, economics, etc., but it is really the convergence and the sum of the parts that has paid dividends.However, if you were to point to a singular source, healthcare would perhaps be the largest contributor of all—particularly the latter part of the twentieth century and now twenty-first century. Before this time, it was only those at the top of the social pyramid, like the high-ranking persons of a region, who had access to and benefitted from the best medical care of their era.

In many ways, small companies today are susceptible to sickness and death, much like the peasants of the medieval age. They simply don’t have access to the same technology, economic, or supply chain benefits that the corporate blue bloods enjoy. In fact, according to fairpaymentchoice.org, few small companies make it to their fifth birthday. Worse than that, only one-third of those that made it past five years will make it to ten.

One significant contributing factor in this mortality rate is that more and more of these small companies are depending on a mere handful of big box companies as their primary customers. This means several things to these smaller companies: 1) the promise of significant potential of sales; 2) volume-based pricing with razor-thin margins; 3) extreme terms and conditions from the buyer; and 4) there is always a wolf at the door, whereby they can be replaced by another competitor very quickly. One only needs to take a cursory read of the Wal-Mart/Vlasic pickle case study to get a sense of how dealing in the Wal-Mart arena is like dancing with an 800-pound gorilla.

Nonetheless, there are good arguments for a SME to sell through a big-box retailer or larger aggregator like Amazon.com. For example, Amazon, as of May 2014, represents nearly 250 million customers worldwide (according to a Geekwire report). That is massive reach for any business looking to put its wares into the Amazon network. Also, selling through Amazon means never having to worry about the buyer’s ability to pay. Amazon has incredible financial resources, and presents less risk than selling to another small company, who will undoubtedly be on less stable ground.

The problem though, is that while these larger companies have the ability to pay, they often don’t pay on time. In fact, most of the time, big companies simply refuse to pay on time, and often pay 30 to 60 days late on average. In the 2014 Discover Small Business Watch report from Rasmussen, 46% of small businesses reported significant cash flow issues and 80% of CFOs were unable to predict cash flows within a reasonable margin of error. This isn’t an isolated report either. In the American Express OPEN Small Business Watch’s report of the same year, 53% of small businesses reported cash flow issues. The root of these issues, as Fair Payment Choice puts it, is the fact that large corporations consistently pay late by an average of 55 days.

Small companies need predictability of cash flow, and not getting paid or paid on time can sometimes spell the end of their business permanently. The heart of the economy in any region is the group of SMEs that produce goods and services. If we expect to survive as an economy in the long-term, something must be done to increase the mortality rate of these small, feeder businesses. It is the only path forward. The villagers are asking for some medicine from the noble class in order to continue to perform – to enable the continued production of goods and services, but to date, the rulers have been less than benevolent. If “Long Live the King” is what big companies want, it is best to take steps to prevent a revolution.

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