IBISWorld REPORT – Phil Ruthven Chairman

There are a lot of businesses operating in Australia – 2.15 million of them in 2013 and nominally one in every five homes, after allowing for multiple business ownership by many households. By the middle of the century, of course, all workers will be their own enterprise anyway as contractual arrangements supplant the concept of being an employee (which involves constraints on freedom and innovation). So there would be 11.6 million businesses in 2013, if that eventuality was a reality now.

Around 40% of the businesses that were operating in 2009 have dropped out, but these have been replaced by more than that number of new entrants. Over the course of 2012-13, 48,000 to 50,000 went broke (2.25% of all businesses) and another 150,000 or more (7.5% of all businesses) just closed up shop.

Most businesses are small: 62% have annual revenue of less than $200,000 and 28% have revenue of less than $50,000. Most are small employers too: 75% employ less than 5 people and 61% have no employees at all apart from the owners. However, when we turn to the source of the nation’s over $4.2 trillion in revenue, the picture changes dramatically. The big end of town dominates, as we see in the first chart.

Just 35 corporations account for 17% of the nation’s entire revenue, and around 1,800 corporations account for over half the nation’s revenue. So Australia’s businesses are dominated in numbers by small enterprises, but dominated in output by the big enterprises.

The preferred ownership structures are shown in the second chart. Companies account for just over one-third of all businesses, but are more than matched by unincorporated businesses in the form of sole proprietors (28%) and partnerships (15%).

Trusts have proven popular over recent decades, and now account for 22% of the businesses in the nation. Their existence and growth are signs of increasing financial planning in an ageing society, and increasing financial literacy.

Australia’s economy, as with most nations in the OECD, is increasingly a services-oriented one. At the same time, it is always well to note that all industries in any economy are services based. The industries that produce products that you can touch (which we call “goods”) are, of course, the result of free raw materials being moved (i.e. mining) or altered by humans with labour, depreciation of equipment, profits and taxes (i.e. agriculture or manufacturing). But they are all the result of service industries be they agriculture, mining, utilities, manufacturing or construction. Wholesaling, retailing and transport are service industries that move tangible products. So, we need to be careful in thinking that “goods” industries produce wealth that the “service” industries depend on! Codswallop and twaddle, of course.

All industries are service industries. Goods are simply products where the value-added is “frozen” into the product, temporarily (if consumed) or for a long time (if a capital good, like buildings, equipment or appliances).

 Our economy is made up of; GDP of $1.5 trillion and revenue of over $4.2 trillion.

There are some interesting apparent anomalies, but, in fact, differences are based on the prevalence or otherwise of very small or very large enterprises. Agriculture, for example, is dominated by small businesses; Mining by very large corporations.

This leads to the interesting question of the attrition rate in the various industries: businesses that either close up shop, so to speak, or go bust.

Health, Agriculture, Real Estate and Manufacturing shed the least number of businesses. Hospitality, Administration & Support Services, Arts & Entertainment and Information Media & Telecommunications shed the most. That Government Administration, Defence & Safety sits at the top of the list of the most vulnerable is actually a result of the tiny number of business in that public sector industry, and many closing down through outsourcing to the private sector.

Which leads to the question of insolvency. As said earlier, around 50,000 businesses go broke each year (business bankruptcies and company insolvencies). Some 15,000 of these are companies and the number is growing. This number does not include companies under other schemes of arrangement to avoid liquidation.

This number is growing at around 7% per year. The losses are not yet each year quantified to our knowledge, but the total would almost certainly exceed $100 billion of the business world’s total investment of over $3.5 trillion.

Insolvency is a healthy sign for any nation’s economy. A failure to allow inept (and sometimes unlucky) businesses go under is to damn the economy to mediocrity. Australia has a fairly healthy dose of annual attrition of businesses, which is more than made up by new start-ups.

That is reason to be confident for the future.