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MANAGING UNDER RECESSION

PERSPECTIVES FROM NEW ZEALAND SMALL FIRMS

Report from BusinesSMEasure 2009

Martina Battisti & David Deakins

New Zealand Centre for Small & Medium Enterprise Research Massey University

March 2010

Electronic copy available at: http://ssrn.com/abstract=1590996

Contents
Contents .................................................................................................................................2 Executive Summary ...............................................................................................................3 Acknowledgements ................................................................................................................5 BusinesSMEasure ..................................................................................................................6 Defining SMEs ....................................................................................................................6 Research focus ......................................................................................................................7 The duration and impact of the recession in New Zealand .................................................. 7 Two Approaches To Small Business Adaptation Under Recession Conditions ................... 7 Research Objectives ...........................................................................................................8 Methodological Background ...................................................................................................9 Sample and response rate ..................................................................................................9 Data collection ....................................................................................................................9 Data Quality ......................................................................................................................10 Statistical Methods ............................................................................................................10 Sample Profile ......................................................................................................................11 About the owners ..............................................................................................................11 About the firm ...................................................................................................................13 Managing under Recession ..................................................................................................19 Firm Performance During The Recession ......................................................................... 19 Timing of Recession Impacts ............................................................................................20 Types of Recession Impacts .............................................................................................22 Responding to the recession.............................................................................................24 Business Financing ..............................................................................................................28 Use of External Finance....................................................................................................28 Changes in The Types Of Finance Used .......................................................................... 29 Conclusions..........................................................................................................................32 References ...........................................................................................................................34

Electronic copy available at: http://ssrn.com/abstract=1590996

Executive Summary
Does the global recession impact on all small firms in the same way? Are small firms vulnerable with regard to a downturn in the economy because of the their limited resources, customers and product range across which to spread their risk or are they resilient because of their flexibility to quickly adjust resource input, prices, processes and products? Recession conditions vary significantly, across industries, regions and even businesses. These differences are partly responsible for producing a range of SME experiences in relation to the economic conditions and subsequently, a variety of business responses to it. To understand the impact of the recession on small firms it is important to consider the particular environment firms operate in, the business owners responses to such events, and the different levels of performance their firms achieve.,. Against this background, this report investigates how New Zealand small firms have experienced the recession and how they adapted to the changing conditions. The questions on which this study is based formed part of BusinesSMEasure, a yearly longitudinal study of SMEs in New Zealand, targeted specifically to survey micro and small sized firms. The number of firms that completed the survey was 1539. Fifty-eight percent of these firms were micro (0 5 FTEs) 1 40 percent were small (6 49 FTEs) and two percent were medium (50 99 FTEs). About two thirds of the firms operated in the services sector while the remainder were from the manufacturing and primary sectors. Overall, results showed that firm performance was constantly deteriorating from 2007 to 2009 as a result of the global economic downturn. Not all firms were affected to the same extent, however. Some firms actually reported increased performance during the last 12 months: roughly one quarter of firms reported increased turnover (25 percent) and increased profitability (21 percent) and 13 percent of firms reported an increased number of employees. The majority of firms (52 percent) first felt the recession in 2009, yet about one out of four firms did not feel the recession at all. The firms who indicated that they did not feel the recession were significantly more likely to be rural based, to employ between 50 to 99 staff, to be a service provider and to have reported increased turnover and profitability within the last 12 months. Results indicated that respondents experienced the recession in a variety of ways. Some firms experienced negative effects. These included finance related impacts which were less pronounced than expected, especially with regard to availability of bank loans/overdrafts. It seems that the Wests credit crunch only had a minor effect on the ability of small firms to access bank loans and overdrafts. , More than half of the respondents however, noticed a reduced cash flow, mainly because of late customer payments, bad debt or uncertainty over customer payments and a reduction of the level of cash reserves. Further, increased costs of energy, transport and supply put more pressure on cash flow. At the same time, some firms experienced positive effects from the wider economic conditions. These were related to changes in the labour market i.e. it was easier to recruit staff and the experience of higher levels of staff motivation. The most common ways that firms reported to cope with the recession were through introducing new or improved products, personally working longer hours and increasing sales effort. Firms who reported growth in turnover and profitability,
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FTE full time equivalent staff

Electronic copy available at: http://ssrn.com/abstract=1590996

however, were more likely to report investment related strategies compared to nongrowth firms who were more likely to cut costs across a range of operations. More than one third of firms reported that they have not needed external finance since at least the start of 2008. These firms were more likely to be at the micro in size and to have not felt the effects of the recession. Firms who did use external finance were more likely to increase the use of existing sources of finance i.e. bank overdrafts, personal savings and bank loans.

Acknowledgements
This report has been produced in collaboration with the Kingston Small Business Research Centre who conducted a similar, earlier SME survey in the UK. Results of this survey can be obtained from the SBRC. Further information on the SBRC can be obtained from their website: http://business.kingston.ac.uk/researchgroup.php?pageid=25

Project Schedule

BusinesSMEasure

BusinesSMEasure is a project that has been designed with one goal in mind: delivering excellent research to all those who can use it the managers of New Zealands 450,000 firms, those working in banks and other organisations that make up the support infrastructure and all those involved with developing government policies and programmes. The aim of BusinesSMEasure is to examine small and medium-sized firms as they develop through an ongoing, longitudinal research program. In the first phase, researchers visited and interviewed 400 firms in eight separate studies. This produced a hugely valuable resource and formed the foundation for the second phase of BusinesSMEasure, a quantitative survey. The specific objective of this survey is to gather data over time that relates both to the characteristics of the firm and its performance, and to the owner-managers. The survey is administered annually by mail. Each survey has potential to gather data on an issue of current concern using the approach typical of an omnibus survey, thus allowing the researchers to gather data on highly topical subjects.

DEFINING SMES
Consistent with international definitions, but allowing for the fact that large firms in New Zealand are smaller than large firms in other countries, we define SMEs in the following way (Cameron & Massey, 1999): Micro-enterprise: 5 staff and fewer Small enterprise: between 6 and 49 staff Medium enterprises: between 50 and 99 staff Sixty-nine percent of enterprises in New Zealand have no employees and 89 percent employ five or fewer people (Ministry of Economic Development, 2009). Micro-enterprises are an important group that are not captured by nationwide business surveys, like the Business Operations Survey (BOS). Therefore, BusinesSMEasure has been designed to produce regular, reliable and independent evidence on New Zealand SMEs and to complement existing surveys by including firms with fewer than five FTEs.

Research Focus
THE DURATION AND IMPACT OF THE RECESSION IN NEW ZEALAND
New Zealand was the first country to be hit by the recession in the March 2008 quarter, but as a consequence of domestic factors rather than global impacts. The start of the recession resulted from domestic monetary tightening, decreasing housing market activity and temporary drought conditions (OECD, 2009). As a consequence of decreasing household demand the recession was delayed in the business sector. The unemployment rate rose from three percent to 6.5 percent in the September 2009 quarter. Although this represents a relatively large rise in unemployment, the absolute rate is still low compared to other OECD countries. New Zealands economy has only started to recover in the June and September quarters of 2009 with growth in real gross domestic product (GDP) of 0.2 percent. New Zealands recession therefore, was one of the longest but also one of the shallowest. The recession was not as severe as in other countries because of a relatively sound financial system. New Zealands major banks are Australian owned and not exposed to toxic assets. As such, the banks did not threaten to fail or to be in-need of large-scale government interventions. Hence, New Zealand escaped the full effects of the credit crunch. Other explanations for the limited extent of the recession in New Zealand include the New Zealand export environment. New Zealands commodity exports were not as badly hit by the global crisis as other sectors. The continued growth in China, New Zealands main trading partner of commodity products, namely dairy, greatly assisted this sector in the economic downturn.

TWO APPROACHES TO SMALL RECESSION CONDITIONS2

BUSINESS

ADAPTATION

UNDER

Despite differences in the causes, depth and duration of particular recessions, two broad sets of views regarding how small businesses are affected by economic downturn may be identified, which we term the resilience and vulnerability views. In the vulnerability view, small businesses are treated as highly susceptible to external shocks, such as recessions. It is proposed, that this is a result of their limited internal resources compared with larger firms, as well as a typically narrower base of customers and product lines across which to spread risk; and less bargaining power with a variety of external actors, including customers, suppliers and sources of finance. They are also much more likely to cease trading than larger enterprises (Storey, 1994). One study on established manufacturing small-firms pointed to time lag effects with an economic downturn. Sales would be affected first, then profitability and finally survivability as short-term responses proved insufficient to keep the business alive in the medium-term. The study also raised questions about the long-term consequences of adaptation strategies cutting investment and substituting labour (sometimes own labour and that of family members) for capital (Smallbone et al, 1997). Under this view, falling GDP at the macro level causes performance decline at the micro level and, in severe cases, business closure. In the resilience view, it is the flexibility and adaptability of small businesses that is emphasised, based on adjusting resource inputs, processes, prices and products, enabling them to survive, and possibly thrive, during periods of economic downturn (Reid, 2007). A deteriorating macroeconomic environment does not necessarily lead to small business performance decline and exit, nor does it constrain every small business in the same way,
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This sub section was written context for the UK and NZ recession studies, see Acknowledgements

contrary to the pronouncements of some commentators. Indeed, a United States study has shown that recessions do not have a negative impact on the formation and survival of new businesses (Stangler, 2009): more than half of the companies on the 2009 Fortune 500 list began during times of economic downturn or bear market periods. Recessions are often periods of 'creative destruction' (Schumpeter, 1942) in which old technologies, products and industries go into terminal decline while new ones emerge. Studies demonstrate the importance of retrenchment activity (Churchill & Lewis, 1984; DeDee & Vorhies, 1998; Michael & Robbins, 1998) and revenue-generation practices (Latham, 2009; Shama, 1993) by small firms during downturns. Recession may stimulate activity in particular sectors, or in particular kinds of business. An example of this is in cases where customers switch to cheaper products to restrict expenditure. This may boost suppliers of such goods and weaken the position of higher-priced providers. Some businesses might be willing to undertake risky investment, innovation or diversification because they perceive performance levels cannot be sustained with current practices. Business performance does not translate to business size in a direct way. One study on the early-1990s United Kingdom recession found that the number of smaller sized firms with sales of 51-100k held up better than among slightly larger firms with 501k to 5m turnover (Fuller, 1996). Recessions impact unevenly on industries, regions and businesses and this helps to shape the diversity of experience of recession and business responses to it. Analysis should focus on the particular circumstances shaping individual firms activities, business owners responses, and the variable levels of performance achieved. Size is only one influence on small firms adaptations and performance under recession conditions. Recessions generate contradictory tendencies, some constraining business owners from achieving their objectives, while others are enabling. Recessions are characterised by falling aggregate business sales, and typically by downward pressure on asset prices, which has benefits for resource acquisition. To the extent that recession increases market exit, this is also beneficial for surviving firms. Recessions, therefore, present small businesses with a major dilemma. One, to cut costs in order to maintain survival in the short-run at the risk of reducing the capacity to adapt adequately when recovery comes; or, two, to maintain greater capacity, incurring higher costs in the short-run, in order to retain the capability to realise opportunities for long-term value creation when the upswing comes. Both processes constraining and enabling surviving firms, occur simultaneously, but unevenly during recession.

RESEARCH OBJECTIVES
In this context, this report investigates how and New Zealand small firms have experienced the recession as well as how they adapted to the changing conditions. In more detail, the specific objectives for this study are to: explore the timing and the impact the global recession had on New Zealand small firms identify the specific actions small firms have taken to increase or maintain their performance since the start of the recession explore how small firms are financed and how the use and the sources of finance have changed since the start of the recession

Methodological Background
The New Zealand Centre for SME Research has developed a sound methodological approach that has been evaluated by peer review and that adheres to the guidelines provided by Massey Universitys Human Ethics Committee. BusinesSMEasure is designed as a longitudinal study. Given the relatively high attrition rate in the SME sector we have opted to use a revolving panel. This means that we feed in new firms at each wave to keep the size of our panel stable.

SAMPLE AND RESPONSE RATE


The population of New Zealand SMEs comprises 468,902 3 private sector enterprises, equalling 99 percent of all enterprises in New Zealand. The following table provided the context for BusinesSMEasure and shows the New Zealand SME population by size group.

Size group 0 1-5 6-49 50-99 Total

No. of enterprises 319,463 100,459 46,401 2,579 468,902

% of enterprises 68 21 10 1 100

Table 1: Private sector enterprises in New Zealand by size (MED 2009) 4

The sample for this study was purchased from APN Infomedia, a commercial provider of business-to-business information in New Zealand. The 2009 survey involved 4,165 firms (including 694 firms who responded in the 2007 and 743 firms who responded in 2008 survey). There were 1,447 usable responses after excluding 297 ineligible and unreachable firms. The overall response rate was 35 percent, which is well above an acceptable rate for this type of mail survey (Bartholomew & Smith, 2006).

DATA COLLECTION
The study followed Dillmans (2000) Total Design Method (TDM) in choosing the sample, developing, designing and pilot testing the questionnaire. BusinesSMEasure is a postal survey. The mail survey was carried out between 9 October and 18 December 2009 using a four-stage approach at an interval of two weeks. The first mail-out contained an information letter and the survey questionnaire. Step two in the mail-out process entailed a postcard reminder. Another reminder letter with a survey questionnaire was next, followed by the final step of another postcard reminder. The survey form was addressed to the Owner, Ownermanager or Managing Director. Data were collected in four thematic sections:

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Section A: Managing under recession Section B: Business financing and performance Section C: Dealing with government regulations

Based on the 2007 Longitudinal Business Frame which covers all industries, including agriculture. For more information see www.statistics.govt.nz.
4 Ministry of Economic Development. (2008). SMEs in New Zealand. Structure and Dynamics. Wellington, New Zealand: Ministry of Economic Development.

Section D: Management development Section E: Firm performance Section F: Demographics

DATA QUALITY
In order to check for non-response bias, a comparison on the demographic profile (gender, ethnicity, legal form of firm and family firm) was made between respondents who replied to both 2008 and 2009 surveys and those who replied in 2008 but did not reply in 2009, following Armstrong and Overtons (1977) approach. The insignificant differences between the two groups of respondents suggested that non-response bias was non-existent or too small for detection. To account for common method bias, given that the study used a single instrument to measure all the variables of the study, Harmans single-factor test was performed on selected items (Podsakoff, MacKenzie, Lee, & Podsakoff, 2003). The un-rotated factor solution reported seven underlying factors with eigenvalues greater than one. These seven factors accounted for variances ranging from 3.89 percent to 24.39 percent and no factor accounted for more than 50 percent of the total variance. The results offered some evidence that the common method bias per se, could not explain the variations in the responses to the questions. Overall, data quality was considered satisfactory for the relevant variables. No missing data techniques were applied.

STATISTICAL METHODS
Two statistical tests were used to analyse data chi-square test and students t-test. The chi-square test is a nonparametric statistical test that is used to examine differences with categorical variables. For the purpose of this report, a two-tailed test chi-square test was applied. Students t-test assesses whether the means of two groups are statistically different from each other by comparing sample means and displaying the two-tailed probability of the difference between the means. If a result is referred to as statistically significant, there is statistical evidence that there is a difference. For the purpose of this report a 5 percent level of significance was applied. This means that the finding has a 5 percent probability of being incorrect.

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Sample Profile5
ABOUT THE OWNERS
The survey revealed demographic results about the individual owners and owner-managers who make up the respondents of the 2009 BusinesSMEasure survey. The information collected includes: owner age, type of firm entry, age at firm entry, gender and ethnicity of owner. Owner age The age range of the owners who responded to the survey was between 26 and 90, with an average age of 55 years. The majority (66 percent) of owners were between 41 and 60 years old. The biggest group (40 percent) was the 51 to 60 year olds, whereas only seven percent of the sample were under 40 years old. Table 2 shows a more detailed analysis of the age distribution.

Age 30 and younger 31 to 40 41 to 50 51 to 60 61 to 70 71 and older Total

No. of respondents 5 90 360 553 323 53 1384

% of respondents <1 7 26 40 23 4 100

Table 2: Number of owners by age

Firm entry As the results in Table 3 show, the predominant form of business entry is personal start-up. More than half of the respondents (57 percent) had reported this method, followed by 34 percent who bought it as a going concern. A small group (five percent) entered the firm by way of a management buy-out and five percent had inherited the firm in question.

Firm entrance Started it up Bought going concern Management buy-out Inherited Total

No. of respondents 784 460 63 66 1373

% of respondents 57 34 5 5 100

Table 3: Number of owners by the way they entered the firm

The number of respondents varies by question as not all respondents answered all demographic questions. Further, percentages might not round to 100 due to rounding.

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Firm entry age On average, the owners were 37 when they entered the business. A quarter of respondents indicated that they were 30 years and younger at firm entry, while 19 percent entered the firm between the ages of 31 and 40 and a quarter were between 41 and 50 years old.

Age at firm entry 30 and younger 31 to 40 41 to 50 51 and older Total

No. of respondents 388 483 350 142 1363

% of respondents 29 35 26 10 100

Table 4: Number of owners at firm entry by age of owner

Gender As Table 5 shows, 78 percent of the owners were male and 22 percent were female.

Gender Male Female Total

No. of respondents 1097 307 1404

% of respondents 78 22 100

Table 5: Number of owners by gender

Ethnicity As shown in Table 6, 89 percent of the respondents were of New Zealand European descent, which indicates that other different ethnic groups are underrepresented in the sample.
Ethnicity New Zealand European Maori Chinese Indian Other Total Table 6: Number of owners by ethnicity No. of respondents 1247 29 11 11 100 1398 % of respondents 89 2 1 1 7 100

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ABOUT THE FIRM


The survey also collected data about firm size, types of employees, age and type of firm, industry, location, whether the firm exported or not, and the size of the turnover. Size Based on the number of full time equivalent (FTE) employees, a quarter of firms did not have any employees. 38 percent of the firms employed one to five FTEs, 37 percent employed six to 49 FTEs and two percent employed 50 to 99 FTEs. The average number of FTEs per firm was seven. The average number of full-time employees was nine while the average number of part-time employees was three. Excluding non-employing firms, 52 percent of firms had unpaid family workers.

Firm size (FTEs) 0 employees 1 to 5 6 to 49 50 to 99 Total

No. of firms 223 545 534 26 1328

% of firms 17 41 40 2 100

Table 7: Number of firms by size (FTEs)

The firm size distribution reflects the sampling design rather than national context, to ensure micro firms (those employing five staff or fewer) are adequately represented. Turnover The average turnover for the firms in our sample over the last 12 months was $2.2m. Table 9 shows that while the majority of respondents (59 percent) had a turnover of more than $500k, 43 percent had a turnover of $500k or less, with 33 percent falling in the $100k to $500k band.

Turnover $100k or less $100k - $500k $500k - $1m $1m - $5m $5m and more Total

No. of firms 156 366 238 377 108 1245

% of firms 13 29 19 30 9 100

Table 8: Number of firms by turnover

Table 9 shows the distribution of turnover by firm size. Sixteen percent of firms employed one to five FTEs had a turnover of over $500k, while 32 percent of firms employed 6 to 49 FTEs and had a turnover of over $500k.

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% of firms by size group Turnover $100k or less $100k - $500k $500k - $1m $1m - $5m $5m and more 0 8 6 0 0 0 1 to 5 3 21 11 5 0 6 to 49 1 2 7 25 7 50 to 99 0 0 0 0 2

Table 9: Number of firms by turnover and firm size (FTEs)

Growth in the last 12 months Growth was measured as increased turnover and profitability in the last 12 months. Overall, 16 percent of firms showed performance growth.

No. of firms Growth Non-growth Total 222 1194 1416

% of firms 16 84 100

Table 10: Number of growth firms

Age of firm Most firms were mature and well established. For example, the average age of the firms in our sample was 23 years. Eighty-eight percent were over 10 years old, while only five percent had been operating for less than five years. Table 10 shows the age distribution of the firms in more detail:

Firm age (years) 5 or younger 6 10 11 20 21 and older Total

No. of firms 48 162 420 604 1234

% of firms 4 13 34 49 100

Table 11: Number of firms by firm age

Type of firm Three quarters (78 percent) of the respondents indicated that their firms were set up as a limited liability company. Eleven percent reported that their firm was a partnership, while 11 percent were sole traders. Over half of the respondents described their firms as a family business. The high number of limited liability companies reflects the national context. New

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Zealand is considered to be the easiest country worldwide to establish a business by the World Banks rankings (World Bank, 2009).

Form of legal ownership Limited Liability Partnership Sole trader Total

No. of firms 1087 152 157 1396

% of firms 78 11 11 100

Table 12: Number of firms by type of ownership.

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Industry sector For classification by industry sector, the survey used the Australian and New Zealand Standard Industrial Classification New Zealand Version 1996 (ANZSIC96). About one third of the firms were services firms (38 percent, n = 497) and one fifth manufacturing firms (20 percent, n=263) with the remaining 42 percent coming from agriculture, forestry and fishing, mining, electricity, gas and water supply, construction as well as wholesale trade and retail trade. Table 13 shows the distribution of the sample by industry sectors:

Industry sector (ANZSIC) A B C D E F G H I J K L N O P Q Agriculture, forestry and fishing Mining Manufacturing Electricity, gas and water supply Construction Wholesale trade Retail trade Accommodation, cafes and restaurants Transport and storage Communication services Finance and insurance Property and business services Education Health and community services Cultural and recreational services Personal and other services Total

No. of firms 73 4 263 21 184 128 117 90 61 38 51 60 28 37 59 72 1286

% of firms 6 0 20 2 14 10 9 7 5 3 4 5 2 3 5 6 100

Table 13: Number of firms by industry sector (ANZSIC).

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Regional location This survey used a nation-wide sample, covering 16 regions. The regions with the most respondents reflected the main urban areas of Auckland (24 percent), Canterbury (15 percent) and Wellington (10 percent).Table 14 shows the distribution of the sample by regions.

Region Northland Auckland Waikato Bay of Plenty Gisborne Hawkes Bay Taranaki Manawatu-Wanganui Wellington West Coast Canterbury Otago Southland Tasman Nelson Marlborough Total

No. of firms 72 330 102 115 15 66 47 90 145 23 203 60 40 16 36 29 1389

% of firms 5 24 7 8 1 5 3 7 10 2 15 4 3 1 3 2 100

Table 14: Number of firms by region

Using the physical address data and guided by the Statistics New Zealand classification of urban and rural locations, the sample has been categorised, for analytical purposes, into urban and rural locations. To allow for international comparison, the urban category comprises of main urban and satellite urban areas, but excludes independent urban areas. This group has been combined into the rural category.

Location Urban Rural Total Table 15: Number of firms by location

No. of firms 1038 363 1401

% of firms 74 26 100

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Innovation This study followed the OECDs broad definition of innovation (2005) which includes the following four categories: the implementation of a new or significantly improved product (good or service), or process; a new marketing method; or a new organisational method in business practice; workplace organisation or external relations. Results showed that in the last 12 months 30 percent of firms reported product innovation, 28 percent process innovation, 33 percent organisational innovation and 42 percent marketing innovation. Overall 61 percent of firms reported to have been undertaken at least one type of innovation activity in the last 12 months.

Innovation Products or services Operational processes Organisational processes Sales or marketing Total innovators (at least one innovation activity)

No. of firms 405 378 447 578 846

% of firms 30 28 33 42 61

Table 16: Percentage of respondents reporting innovation activity in the last 12 months

Export The percentage of firms exporting in the previous 12 months was 18. Of these firms 11 percent reported that exporting accounted for less than 10 percent of their annual turnover, three percent that it accounted for 11 to 25 percent of their annual turnover and two percent that it accounted for 26 to 50 percent of their annual turnover. Table 17 gives more detail about the percentage of turnover generated by exports.

Export status Not exporting Exporting Percentage of turnover of exporters 1% to 10% 11% to 25% 26% to 50% 51% to 75% More than 75% Total

No. of firms 1166 252 No. of firms 149 35 24 14 30 252

% of firms 81 19 % of firms 11 3 2 1 2 100

Table 17: Percentage of turnover generated by exports in the last 12 months

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Managing under Recession


This chapter discusses the impacts of the recession on small firms and their response to the downturn in the economy. While the macroeconomic environment is the same for all firms, the effect of the recession is likely to vary for particular businesses, as are the actions ownermanagers take in response to the changing economic conditions.

FIRM PERFORMANCE DURING THE RECESSION


Respondents were asked to compare their firms performance to 12 months ago and to indicate on a five-point Likert scale whether their performance has increased, stayed the same or decreased. The results indicated that the recession did not affect all firms equally, but that there is a range of performance outcomes. Overall, more firms reported decreased, rather than increased, performance with regard to turnover (46 percent), profitability (46 percent) and reduced numbers of employees (32 percent). Some firms, however, actually reported increased performance during the last 12 months: roughly one quarter of firms reported increased turnover (25 percent) and increased profitability (21 percent) and 13 percent of firms even reported an increased number of employees.

Percent (%) Strongly increased Increased About the same Decreased Strongly decreased

Turnover 3 22 29 37 9

Profitability 2 19 32 37 9

No of employees 1 12 56 28 4

Table 18: Changes in firm performance from Oct 2008 to Oct 2009

To examine if the change in firm performance in the last 12 months was associated with characteristics such as firm size, sector, or location, we distinguished two groups of respondents. The first group consists of those reporting increased turnover, and the second, those reporting same or decreased turnover. Results suggest that there is no significant difference with regard to location and sector. For firm size however, a significant difference was found. While only about one quarter of micro and small firms reported increased turnover in the last 12 months, almost half of medium sized firms did so.

Percent (%) Location Urban Rural Firmsize* Micro (1-5) Small (6-49) Medium (50-99)

Increased turnover in the last 12 months

Same of decreased turnover in the last 12 months

25 27

76 73

23 27 46

77 73 54

19

Sector Services Manufacturing


2

24 26

76 74

* X significant at the 5% level or higher Table 19: Changes in turnover by sector, size and location

The longitudinal nature of BusinesSMEasure allows us to look at the changes in firm performance over a period of three years from 2007 to 2009. To identify growing firms we distinguished two groups in the sample those who reported increased turnover and profitability, and those who reported similar or decreased turnover and profitability. Table 20 shows that the number of growth firms steadily decreased from 2007 to 2009. In 2007 there were 37 percent of firms who reported growth in turnover and profitability. This number decreased to 24 percent in 2008 and 16 percent in 2009.

Percent (%) Growth in turnover and profitability N Table 20: Changes in firm performance from 2007 to 2009

2007 37 1208

2008 24 1481

2009 16 1416

Overall, results showed that firm performance was constantly deteriorating from 2007 to 2009 as a result of the global economic downturn. Not all of firms were affected to the same extent however, with some firms even reporting increased turnover and profitability.

TIMING OF RECESSION IMPACTS


Respondents were asked to indicate the month and year that they first felt the effects of the recession in their firm. Responses by date are shown in figure 1, ranging from as early as January 2007 to December 2009. The first distinct increase was in March 2008, with a second spike in October and November 2008 and numbers remaining high throughout the first half of 2009. Overall, the majority of firms (52 percent) first felt the recession in 2009.

N Have NOT felt the recession Timing During 2007 During 2008 During 2009 Total 367 N 44 429 518 991

% of firms 27 % of firms 4 43 52 100

Table 21: Changes in firm performance by sector, size and location

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Figure 1: Timing of recession impact

As indicated in table 18, about one quarter of firms (27 percent) reported that they did not feel the effects of the recession. We examined the differences between the firms who reported to have felt the recession and those who have not. Significant differences with regard to location, firm size, sector, turnover and profitability were found. Those firms who indicated that they did not feel the recession were significantly more likely to be rural based, to employ between 50 to 99 staff, to be a service provider and to have reported increased turnover and profitability within the last 12 months. Table 22 shows the differences between the two groups in percentage.
Percent (%) Location* Urban Rural Firm size* Micro (1-5) Small (6-49) Medium (50-99) Sector* Services Manufacturing Turnover in the last 12 months* Increased Same or decreased Profitability in the last 12 months* Increased Same or decreased * X significant at the 5% level or higher Table 22: Recession impact by firm characteristics
2

NOT felt recession

Felt recession

26 32

74 68

30 22 35

70 78 65

31 16

69 84

54 18

46 83

50 21

50 79

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TYPES OF RECESSION IMPACTS


Respondents were asked to what extent their firm was affected by a range of effects, by way of a five-point Likert scale. Effects were grouped into finance related effects and other types of effects. Finance related effects were availability of bank loans and/or overdrafts, late payment by customers, bad debt or uncertainty over customer payments, credit periods and/or credit terms from suppliers and level of cash reserves. The other effects group was made up of energy costs, transport costs, costs of supplies, changing value of NZ dollar, ability to recruit staff and level of staff motivation. Table 23 shows that firms in both groups responded to the questions below with the answer of either no effect or negative effect. More than half of the respondents indicated that they have not noticed any effect with regard to availability of bank loans/overdrafts (74 percent), credit periods and/or credit terms from suppliers (68 percent), ability to recruit staff (67 percent), level of staff motivation (56 percent) and the changing value of the New Zealand dollar (55 percent). The negative effects that were mentioned by more than half of the respondents included the cost of supplies (64 percent), cost of transport (60 percent), energy costs (56 percent), late payments by customers (58 percent) and bad debts or uncertainty over customer payments (50 percent). Despite this slightly grim picture, the recession did have some positive effects for a small number of firms. Twenty-three percent of firms reported a positive effect on the ability to recruit staff and 20 percent reported a positive effect on the level of staff motivation. This result suggests that the recession is not all bad news, but that it actually offers opportunities for some small firms.
Percent (%) Finance-related effects Availability of bank loans/overdrafts Late payment by customers Bad debts or uncertainty over customer payments Credit periods and/or credit terms from suppliers Level of cash at bank Other types of effects Energy costs Transport costs Costs of supplies Changing value of NZ dollar Ability to recruit staff Level of staff motivation Table 23: Experience of recession related effects 6 7 10 11 23 20 38 34 25 55 67 56 56 60 64 35 10 24 7 4 4 4 10 74 38 46 68 39 19 58 50 29 51 Positive effect No Effect Negative effect

To explore the link between the effects of the recession and characteristics of the firms, we split respondents in two groups, those reporting positive effects and those reporting negative effects. Significant effects were found for sector, firm size and firm performance in the last 12 months.

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Sector: The sector in which the firm operated in affected the ability to recruit staff. Results showed that the recession had a negative effect for only 21 percent of manufacturing firms, but for 37 percent of services firms.

Percent of firms that were negatively affected (%) Ability to recruit staff Table 24: Effects of the recession by sector

Manufacturing 21

Services 37

Firm size: Firm size (measured by turnover as well as employment) had an effect on the ability to recruit staff and the level of staff motivation. Particularly firms with five or fewer employees and an annual turnover of less than $750k reported that the recession negatively affected their staff recruitment and motivation.

Percent of firms that were negatively affected (%) Ability to recruit staff Level of staff motivation

1-5 44 64

6-9 24 53

10-19 18 42

20-49 21 49

Table 25: Effects of the recession by firm size (employment)

Percent of firms that were negatively affected (%) Ability to recruit staff Level of staff motivation Table 26: Effects of the recession by firm size (turnover)

Less than $750k 43 60

More than $750k 22 51

Firm performance in the last 12 months: Respondents who reported increased turnover were less likely to report negative effects with regard to the availability of bank loans, level of cash at bank, the changing value of the New Zealand dollar and the level of staff motivation. The same effects were encountered for increased profitability in the last 12 months. In addition, respondents who reported increased profitability in the last 12 months were slightly less likely to report negative effects with regard to cost of supplies. No such effect was found for respondents who reported increased turnover in the last 12 months.
Percent of firms that were negatively affected (%) Availability of bank loans Level of cash at bank Changing value of NZ dollar Level of staff motivation Increased turnover in the last 12 months 65 69 67 35 Same or decreased turnover in the last 12 months 76 88 80 62

Table 27: Effects of the recession by firm performance in the last 12 months (turnover)

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Percent of firms that were negatively affected (%) Availability of bank loans Level of cash at bank Changing value of NZ dollar Level of staff motivation Costs of supplies

Increased profitability in the last 12 months 61 64 67 43 82

Same or decreased profitability in the last 12 months 77 89 79 58 88

Table 28: Effects of the recession by firm performance in the last 12 months (profitability)

RESPONDING TO THE RECESSION


Respondents were asked to indicate what their main source of competitive advantage was during the economically challenging times. About one third or respondents (36 percent) identified established customer relationships as the main source of competitive advantage, followed by one quarter who identified the quality of their product/service. A further 17 percent saw the uniqueness of their product/service as the main source of competitive advantage. Only a minority of respondents indentified price, location and speed of response as their main source of competitive advantage.

Percent of firms (%) Established customer relationships Product/Service quality Product/Service uniqueness Price None no specific advantage Location Speed of response

Main source of competitive advantage 36 26 17 9 5 4 3

Table 29: Main source of competitive advantage

Further, respondents were asked which actions they undertook since the start of 2008 to increase or maintain their firms performance. A prompt list was used with 38 specific actions that were categorised under nine general types of business strategies. These are shown together with the frequencies in table 30. On the level of general business strategies, changes in sales and marketing ranked highest with 79 percent of respondents haven taken action in this area. Changes in employment and workforce skills ranked second with 75 percent of respondents reporting action. Ranked third were changes in finance identified by 70 percent of respondents. Other business strategies that were used by half of respondents included changes in products/services offered (63 percent), changes in markets (63 percent), changes in owner-manager behaviour (59 percent) and changes in production/business processes (49 percent). With less than one third of respondents, taken action changes in business organisation (32 percent) and changes in premises (20 percent) were at the bottom of the ranking. On the level of specific actions taken by respondents to increase or maintain their firms performance, the four most frequently reported actions were: Introducing new or improved

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products/services (54 percent), personally working longer hours (48 percent), increasing sales effort (44 percent) and reducing number of staff employed (40 percent). Only four percent of the sample reported not to have taken any actions at all.

Actions taken Changes in products/services offered Introduced new or improved products/services Reduced the range of products/services Increased the use of intellectual property rights Changes in markets Selling in new geographic markets Selling more to existing customers Selling to new types of customers Changes in sales and marketing Increased sales effort Increased advertising/promotional expenditure Reduced advertising/promotional expenditure Reduced selling prices/held prices below inflation Changes in production/business processes Invested in new equipment Used new suppliers Changes in business organisation Made changes in the management team Made changes in managerial roles/functions Changes in employment and workforce skills Reduced numbers employed Increased numbers employed Increased use of unpaid family labour Introduced wage/salary freeze Introduced new working practices Taken greater care in recruitment of staff Increased use of external labour Increased employee training Reduced employee training

Percent of firms (%) 63 54 14 5 63 13 31 38 79 44 30 19 27 49 27 30 32 15 25 75 40 11 13 21 18 18 14 20 3

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Actions taken Changes in finance Reduced debt to external sources Increased debt financing Invested personal savings Reduced investment expenditure Renegotiated the cost of supplies Extended payment periods to suppliers Shortened payment periods from customers/suppliers Changes in premises Opened new branches/outlets Relocated the business to cheaper premises Negotiated a reduction in the cost of the lease Negotiated a reduction in the cost of the lease Changes in owner-manager behaviour Sold personal assets to compensate for poor business performance Personally worked longer hours Cancelled personal holidays Other changes in owner-manager behaviour

Percent of firms (%) 70 23 16 27 13 21 13 10 20 4 6 8 5 59 9 48 28 7

Table 30: Actions taken to maintain or increase business performance (continued).

Those who reported feeling the effects of the recession were more likely to report taking actions to increase or maintain their firms performance that those who did not (eight actions compared to six actions). There were some significant differences in the specific actions taken by those who felt the recession and those who did not (see figure 2).

Firms with growth in sales turnover and profitability were more likely to have/be: Introduced new or improved products/services Selling more to existing customers Selling more to new types of customers Invested in new equipment Made changes to the mgt team Increased numbers employed Taken greater care in recruitment of staff Increased employee training Opened new branches and outlets

Firms with growth in sales turnover and profitability were more likely to have/be: Reduced selling prices Reduced numbers employed Introduced wage/salary freeze Invested personal savings Reduced investment expenditure Extended payment periods to suppliers Sold personal assets to compensate for poor business performance Cancelled personal holidays

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Table 31: Relationship between recession strategies with turnover and profitability in the last 12 months.

We found some significant differences in the specific actions taken with regard to firm performance. To this end, respondents were divided into two groups those who have reported growth in the last 12 months and those who have not. Growth was measured by combining increased turnover with increased profitability in the last 12 months. Results are summarized in table 31. This table shows that growth orientated firms were more likely to undertake investment as an action rather than retrenchment, which is a characteristic action for lower performing firms.

Figure 2: Differences in the specific actions taken between those who felt recession and those who did not

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Business Financing
This part of the report aims to identify how small firms are financed and how their use of finance has changed since the start of the recession.

USE OF EXTERNAL FINANCE


Respondents were asked for the reasons they used external finance, from the start of 2008. Sixty-one percent of firms have used some form of external finance since the start of the recession, leaving more than one third of firms relying solely on their own financial resources. If external finance was sought, it was predominantly for working capital (44 percent) or to acquire fixed assets (31 percent). Although introducing new or improved products/services was the action that was most frequently reported by respondents to maintain or increase their firms performance, this was not reflected in the reasons why respondents sought external finance. Only 13 percent of respondents indicated that they needed external finance to develop new products/services or for marketing purposes.

N No need for external finance Reasons for external finance Working capital To acquire fixed assets New product/service development Marketing campaign Other Total Table 32: Use of and reasons for external finance. 361 N 328 228 96 69 25 746

% of firms 39 % of firms 44 31 13 9 3 100

Respondents who indicated that they do not need external finance were more likely to have not felt the recession, to operate micro firms and to generate an annual turnover of less than $750k. The exact breakdown of percentages can be seen in table 33.
Percent of firms (%) Firm size Micro Small Turnover Up to $750k More than $750K Recession affected Yes No 39 26 61 74 34 25 67 75 32 26 68 74 Need for external finance No need for external finance

Table 33: Use of external finance by firm profile characteristics.


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Respondents who indicated that they used external finance as working capital were more likely to be affected by the recession and to operate small firms rather than micro firms. Twenty-seven percent of small firms and 26 percent of those who were affected by the recession used external finance as working capital compared to 20 percent and 15 percent respectively.
Percent of firms (%) Need for external finance for working capital No need for external finance for working capital

Firm size Micro Small Recession affected Yes No 26 15 74 85 20 27 80 73

Table 34: Use of external finance for working capital by firm characteristics.

Respondents who indicated that they used external finance to acquire fixed assets were more likely to operate larger firms (measured by employment as well as turnover an alternative measure of firm size) and to have increased their firm performance, i.e. increased turnover and/or increased profitability in the last 12 months. The exact breakdown of percentages can be seen in the table below.
Percent of firms (%) Need for external finance to acquire fixed assets No need for external finance to acquire fixed assets

Firm size Micro Small Turnover Up to $750k More than $750k Turnover change in the last 12 months Increased Decreased Profitability change in the last 12 months Increased Decreased 22 14 78 86 21 14 79 86 13 19 87 81 12 20 88 80

Table 35: Use of external finance to acquire fixed assets by firm characteristics.

CHANGES IN THE TYPES OF FINANCE USED


Respondents were asked which types of finance they used and if they have changed their use of finance since the beginning of 2008. The most commonly used forms of finance which were used by at least half of the respondents were trade credit (69 percent), bank overdrafts (68 percent), personal credit cards (67 percent), business credit cards (63 percent), bank loans (60 percent) and personal savings (54 percent). Even during the recession, business financing remained mostly unchanged. The only significant increase was reported with regard to bank overdrafts (25
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percent increased use), personal savings (22 percent increased use) and bank loans (18 percent increased use). At the same time there were only two types of finance that respondents reported to have decreased their use of (10 percent for bank overdrafts and 13 percent for bank loans). Overall results suggest that respondents have sought to use personal savings as a first resort to withstand the effects of the recession, there is comparatively little increased use of forms of credit.

Percent (%) Bank overdraft Bank loans Business credit cards Personal credit cards Leasing or hire purchase Trade credit Factoring, invoice discounting or stock finance Grants or subsidised loans Informal equity finance Formal equity finance Personal savings Other types of finance

Increased use 25 18 11 11 7 10 3 2 8 1 22 2

No change 33 29 46 47 31 57 16 6 11 5 29 7

Decreased use 10 13 6 9 8 3 1 1 1 1 4 1

Never used 32 40 37 33 55 31 80 92 80 94 46 90

Table 36: Change in the use of different types of finance.

Respondents were asked if they had made any unsuccessful or only partially successful applications for external finance since the start of 2008. Only a minority of firms reported to have applied for a bank overdraft (14 percent) or for bank loans (12 percent). Of those who applied, most were at least partially successful. As table 37 shows, most firms havent applied for any type of external finance, reinforcing the results shown in table 36.
Percent (%) Bank overdraft Bank loans Business credit cards Personal credit cards Leasing or hire purchase Trade credit Factoring, invoice discounting or stock finance Grants or subsidised loans Informal equity finance Formal equity finance Other types of finance No application 86 88 96 98 95 93 99 98 96 99 99 Unsuccessful application 3 5 1 1 1 1 0 1 1 0 0 Partially successful application 10 7 3 2 4 6 1 1 3 1 0

Table 37: Different types of finance by application.


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The most commonly reported reasons for not applying for external finance was that there was no need to do so (81 percent). Only 13 percent could not afford to apply for external finance and nine percent did not apply because they believed their application would be unsuccessful, indicating that some discouraged borrower effect exists during a recession. Respondents who were affected by the recession were significantly more likely to report that they did not apply for external finance because they couldnt afford to do so, and because they believed the application would be unsuccessful. Respondents who indicated that external finance was not affordable for them were more likely to operate micro firms, to generate an annual turnover of less than $750k and to have experienced decreasing turnover and profitability in the last 12 months.
Percent (%) Did not need it Could not afford it Believed the application would be unsuccessful Other reason Table 38: Reasons for not applying for external finance. Reason for not applying for external finance 81 13 9 3

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Conclusions
This report explored how New Zealand small firms experienced the recession and how they adapted to the changing macroeconomic circumstances. We investigated the timing and the impact the global recession had on New Zealand small firms and the specific actions small firm owner-managers took to increase or maintain their firms performance since the start of the recession. This was followed by an exploration into how small firms were financed and how the use and the sources of finance changed since the start of the recession. Responses from 1447 small firm owner-managers allowed us to a draw a detailed picture of the varied impact the recession had on small firms in New Zealand. While our longitudinal data has clearly shown deteriorating firm performance over the last three years, not all firms were equally affected by the recession. The silver lining is that some firms actually reported increased performance during the last 12 months. Roughly one quarter of firms reported increased turnover and increased profitability and 13 percent of firms even reported increased numbers of employees. Results demonstrate a range of performance trends amongst the firms surveyed, emphasising the heterogeneity of the SME sector. Results indicated that respondents experienced the recession in a variety of ways. Negative finance related effects were less pronounced than expected, especially with regard to the availability of bank loans/overdrafts. It seems that the credit crunch only had a minor effect on the ability of New Zealand small firms to access bank loans and overdrafts. This could be partly because New Zealand banks are Australian-owned and largely unexposed to these impacts. More than half of the respondents noticed a reduced cash flow however, mainly because of late customer payments, bad debt or uncertainty over customer payments and a reduction in the level of cash reserves. Further, increased costs of energy, transport and supply have put even more pressure on cash flow. At the same time, some firms have experienced positive effects of the recession. These were related to changes in the labour market i.e. the economic conditions made it easier for firms to recruit staff and caused current staff to display higher levels of motivation. The diversity of experiences we found with regard to the effects of the recession was mirrored in the actions small firm owner-managers took to maintain or increase their firms performance. We found a combination of retrenchment and/or investment strategies. The most common ways of coping with the recession being: introducing new or improved products; personally working longer hours, and; increasing their sales effort. Firms who reported growth in turnover and profitability however, were more likely to report investment related strategies compared to non-growth firms who were more likely to retrench and cut costs across a range of operations. With regard to financing, results showed that more than one third of firms did not need external finance, since the start of 2008. These firms were more likely to be micro in size and not to have felt the recession. Those firms who used external finance were more likely to increase their use of existing sources of finance i.e. bank overdrafts, personal savings and bank loans. The reluctance to access external finance and the preference for self-financing was reflected in the financing of new product development and marketing. While introducing new or improved products/services was the action that was most frequently reported by respondents to maintain or increase their firms performance, only a minority of respondents indicated that they needed external finance to do so. While this strategy might be beneficial in the short-term, firms become more vulnerable the fewer resources they are able to mobilise. This problem is already evident with an increasing number of
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firms, who reported to have felt the recession more in 2009 than compared to 2008. As such, we expect to see increased effects of the global recession in 2010 as firms exhaust personal resources or exhaust cost cutting measures. How small firms cope with the impact of the global recession depends largely on the strategy the owner-managers pursue. Small firms per se are neither vulnerable nor resilient, it is the decisions of the owner-managers and the actions they set that influence a firms performance. Accordingly, there is no one size fits all approach of how to best cope with the recession, but results have shown that there is a wide range of actions owner-managers take to survive or even thrive during the recession. There is a distinctive group of firms that have managed to increase their performance since the start of 2008, and who are expected to continue to increase performance in 2010.

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