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Maynard: Is bigger really better? Why small business has all the fun.

Statistical economist John Maynard is at it again, this time looking at the benefits of the size of one’s business. The first question that springs to mind is, when is big, too big? He takes a simplistic view on the taxation and government benefits dependant on the size of the business.

The feedback is interesting, it pays to be small, less so to be big, and no incentive to become medium. He questions whether or not government should put initiatives in place which incentivise companies to grow, which in turn will create jobs, and contribute more to the economy.

But beware the percentage trap, 1% of a billion is better than 10% of a million. The discussion all started over a simple cup of coffee, can you smell it? An interesting read. – Stuart Lowman

By John Maynard*

Sitting at a small coffee shop the other day, I wondered what contribution these smaller companies are making to the overall economy. So I set out to find out. My starting point, unpacking the Quarterly Financial Statistics as published by Statistics South Africa.

The graphic below shows the contribution to total turnover by all companies in South Africa, based on their size (sizes are determined by DTI, cut offs and adjusted for Stats SA sampling purposes).

turn over


What I found very interesting from the graph is how small the contribution of medium sized enterprises is when compared to the large and small companies.

The graphic belowshows the contribution to total net profit after taxes by all companies in South Africa, based on their size (sizes are determined by DTI cut offs and adjusted for Stats SA sampling purposes).

NP.

What is clear is the large drop in the overall contribution of large companies to net profits when compared to their contribution to total turnover.

Lower margins due to increased costs, higher average tax rates etc all adds up. So much so that smaller companies contribute almost as much to overall net profits in South Africa as large companies.

Average tax rates are: (Tax as % of net profit before taxes):
Large : 35%
Medium: 18%
Small: 13%

Net profit Margin After Taxes:
Large : 2.99%
Medium: 6.11%
Small: 6.98%

While as a small company, all kinds of policies and initiatives are in place to assist and aid growth, the tax burden is also far less.

The question then, once your small company graduates to a medium sized company, what policies and measures are in place to take your business to the next level? Perhaps this is an area government should look at to ensure that medium sized companies are not stuck in limbo and they move forward once they passed infancy. Based on the above one clearly wants to be a small company.

As a large company you are taxed a lot more and your overall net profit margins after taxes is well below small and medium companies. As a medium company you’re trapped in limbo, you’re taxed more than a small company, and policies are less geared towards assisting you or aiding growth.

John Maynard is the nom de plume of an independent economist who is obsessed with official statistics – and uses these facts to blast through misleading narrative and propaganda. For more of his unique insights click here.

* For more in-depth business news, visit biznews.com or simply sign up for the daily newsletter.

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