Key Small Business Stats: It Pays to Help, Not Hinder SMEs

Evelyn Jacks

There are many forms of entrepreneurship, from “gigging” part time to supplement income, to more ambitious ventures which hire many people from the get-go. That seems to be the secret sauce to economic development and growth in Canada. Yet, SMEs face formidable obstacles that could be removed with government support for private labor force development. But does government understand the SME sectors well enough?

They have certainly done a good job of researching and reporting on the sectors. Yet, they have an interesting way of defining what a small business is. From the government’s perspective, despite being taxed under similar rules and held to the same high compliance standards, the “self-employed”, do not meet the definition of running a “business”.

According to Key Small Business Statistics :

• A small business has 1 to 99 paid employees
•  A medium-sized business has 100 to 499 paid employees
• A large business has 500 or more paid employees

The “self-employed” meanwhile, fall into a separate category with “indeterminant businesses” in that they don’t hire employees. They are treated more as individuals, for the purposes of provisions like the Canada Worker’s Benefit and EI (Employment Insurance) and they file an individual T1 tax return if they are unincorporated. The deadline for doing so is coming up on June 15.

Small businesses are a significant source of employment. Small business, defined as those with at least one employee, were responsible for hiring 67.7% of the total private labor force - 8.2 million people. They are a force! By comparison, medium-sized businesses hired only 20.4% and large businesses 11.8% of the private labor force.

Who Hires the Most People? (2021 Statistics)

How did COVID affect SMEs? According to this research, the economic contraction significantly impacted 2020 employment statistics but by 2021, the recovery started and there was a positive net employment change in the private sector culminating in an increase of over 715,000 jobs, most of which were in the small business sector: 494,000 jobs.

Expressed another way, between 2020 and 2021, small businesses were responsible for 69.0% of the net employment change in the private sector, medium-sized businesses contributed 17.4% and large businesses contributed 13.7%.

Large Businesses Contribute More to GDP. When it comes to contributions to GDP in the private sector, large businesses beat smaller ones:

• In 2019, small businesses contributed 36.7%
• medium-sized businesses contributed 13.7%
• large businesses contributed 49.6%

The greatest contributions to GDP in the services sector broke out as follows:

• Educational services (90.9%)
• Health care and social assistance (84.8%)
• Other services except public administration (84.8%)
• Information, culture and recreation (23.9%)
• Finance, insurance, real estate and rental and leasing (36.0%)
• Transportation and warehousing (39.4%)

In the goods-producing sector, the average contribution of SMEs to GDP was:

• Agriculture 92.9%
• Construction 81.6%
• Others under 50%

What is the link between employment growth and economic output? It appears to be how many people a firm can hire and keep. Consider the following from the research:

•  90.4% of businesses had 1−4 employees when they began operations
• 8.2% began with 5-19 employees
• 1.4% of new businesses began operations with 20−99 employees

Who survived and who didn’t? Unfortunately, 92% of the small businesses closed, medium sized businesses did better: only 7.5% closed. The businesses that had staying power were those with 20-99 employees – only 0.4% closed.

What matters to business survival? Here’s what the research tells us: “There is a positive correlation between enterprise survival rate and initial business size, even though the birth rate is lower when the business starts with more employees.” Birth rates, on average between 2015 and 2019:

• 11.4% for those with 1-4 employees
• 3.5% for those with 5-19 employees
• 1.6% for those with 20 to 99 employees

However, businesses that began operations with a larger number of employees had a higher survival rate:

Survival rates: Consider the following survival rates for businesses that start with:

1−4 employees:

• 63.0% were still active after 5 years,
• 43.7% were still active after 10 years
• 27.0% were still active after 18 years

20−99 employees:

• 74.6% were still active after 5 years
• 55.3% were still active after 10 years
• 36.8% were still active after 18 years

Bottom Line. It would appear that helping small businesses with labor force development would be extremely beneficial to our economy. Unfortunately, the costs of staying business, in particular with rising payroll taxes, inflation, interest costs and the increase in other inputs, have made it difficult – if not impossible - to do so.

The sobering statistics : the total number of insolvencies in January 2023 was 33.7% higher than the year before. Consumer insolvencies increased by 33.0%, while business insolvencies increased by 55.4%. This is not the worst of it:

Business insolvencies for the 12‑month period ending January 31, 2023, increased by 39.1% compared with the 12‑month period ending January 31, 2022 with accommodation and food services, and construction being the industries with the biggest increases in the number of insolvencies.

It’s time to pay attention and reverse these trends with educational opportunities, professional financial guidance and government support for hiring.