Laying the Foundation for a National Entrepreneurship Strategy: The CGA Entrepreneurship Report 

Backgrounder

Laying the Foundation for a National Entrepreneurship Strategy: The CGA Entrepreneurship Report is a report commissioned by CGA-Canada based on a research survey of more than 1,500 CGAs across Canada who work with, or for, small and medium-sized enterprises. These professional accountants are uniquely qualified to speak to the challenges faced by entrepreneurs.

In the spring of 2010, CGA-Canada undertook to examine key issues relating to small and medium size enterprises and entrepreneurship in Canada. In June 2010, CGA-Canada conducted research on key issues facing SMEs which culminated with the CGA-Canada/CPA Australia Forum on SME Issues. On the heels of the success of the SME Forum and to further its examination of the issues, CGA-Canada partnered with another leading professional accounting body, CPA Ireland, to examine more specifically the issue of entrepreneurship and what supports and strategies are needed to stimulate growth and innovation in the current economic climate. The result of this work is cumulated in the creation of two papers – the CPA Entrepreneurship Report, released in Dublin, Ireland on September 22, 2010 and the CGA Entrepreneurship Report.

We anticipate that this new report will be of significant value to the Canadian public, government and small businesses.

Overview

Canada is well positioned to capitalize on its strengths and increase the amount of entrepreneurial activity in this country. Key challenges for Canadian entrepreneurs include access to skilled labour, education and training, lack of innovation, access to financing and the complexity of tax and regulatory compliance.

1. Climate for Entrepreneurship in Canada

Highlights

• CGAs working in business or in public practice believe the climate for entrepreneurship in Canada has deteriorated over the past 18 months.
• Some 51% of CGAs feel that the climate has worsened while 24% feel it has improved, with the remaining 26% sensing no change.
• Reasons given for the perception of a deteriorating climate for entrepreneurship include the declining market, the recession and unemployment the difficulty for companies to find money and their aversion to risk.
• The pool of businesses with entrepreneurial potential is being replenished regularly in Canada. New firms have high survival rates. Yet data shows there is untapped potential for improvement in the kinds of investments that generate growth and innovation.
• Approximately 85% of businesses that enter the marketplace survive for one full year, 62% survive for three years and 51% survive for five years.
• The fact that more than half of firms survive to the five-year mark suggests that Canadians are establishing businesses that are able to attain a competitive advantage in their markets.

Recommendations

• The federal government should establish an expert panel to develop a National Entrepreneurship Strategy. The strategy would have as a main objective to stimulate innovation as a central component of government policy, with strong leadership at the highest political levels.
• The strategy would also address the importance of pan-Canadian cooperation in the quest for innovation and growth.
• Governments need to be particularly cautious in their decisions that may negatively affect the business climate. For the recovery to succeed, governments need to refrain from increasing taxes and other charges that hinder job creation, entrepreneurship and investment.

2. Barriers to Entrepreneurship

Highlights

• Canada is lagging in innovation and productivity – the country is in the middle of the OECD pack of 30 countries for business resource and development (R&D).
• Canada ranks a dismal 6th in the G-7 in business R&D as a proportion of GDP.
• Canada’s lack of innovation and productivity is not surprising considering the significant and entrenched barriers faced by entrepreneurs running SMEs.
• Canada’s youth are not necessarily attracted to working for small entrepreneurial organizations.
• One of the biggest challenges SMEs face is competing with larger companies in recruiting and retaining young talent.
• Many Canadians have great ideas to take to market, but to be successful they also need to be able to assess risk, grow their business and understand the competitive landscape.
• While progress has been made, entrepreneurship education or training is not readily available.

Recommendations

• Governments, universities and the private sector should collaborate to grow centres of excellence in entrepreneurship with a focus on youth entrepreneurship.
• The federal government should make available funds to support research chairs in entrepreneurship through granting councils. Bursaries should be made available for students to pursue university studies in entrepreneurship.
• Governments should support mentorship programs involving experienced entrepreneurs through tax credits, promotion, or other supportive means.

3. Supports & Funding

Highlights

• Timely, accessible financing is critical to helping SMEs develop the business flexibility needed to invest in growth opportunities, innovate and improve productivity.
• Banks are not helping SMEs invest in innovation or productivity (only 5% of SME loans from banks were for R&D).
• Many entrepreneurs (73% of start-ups or 54% of SMEs) have no choice but to rely on personal financing for their business – including mortgages on family homes and credit card debt.
• Keeping taxation at competitive levels, reducing red tape, facilitating the expansion of foreign markets and implementing initiatives like the new Canadian Innovation Commercialization Program should be continued.
• When it comes to supporting entrepreneurship, government support, as seen by CGA members, is most commonly seen as fair (52%) rather than very good or good (25%) or very poor (26%).
• SMEs operate in an environment where resources can be stretched, time can be short and money can be tight, making it extremely difficult to navigate the complex array of SME support systems that are available.
• Without a one-stop-shop for assistance, SMEs do not know which programs are available to help them.

Recommendations

• Governments should ensure that information about programs and services for entrepreneurs are accessible and available in a timely manner.
• Governments should continue to find ways to financially support new entrepreneurs. The federal government could, for example, allow for a contribution holiday to Employment Insurance premiums for start-up companies for the first three years of operations or until they reach a certain threshold of revenue, whichever comes first.

4. Access to Credit

Highlights

• Just over one-quarter of CGA members working in business or public practice report that one or more of their clients have been refused credit over the past 12 months.
• The principal effect of this credit refusal has been a loss of growth opportunities for these businesses.
• Members in public practice are more likely to be aware of clients that have been refused credit (56%) that they believe have resulted in job losses.
• Members clearly see access to financing as being the most important issue impacting entrepreneurship. 71% rate it as very important.
• Despite an increase in government support through initiatives such as the Business Credit Availability Program, tighter lending conditions are here to stay for the foreseeable future.
• As entrepreneurs continue to adapt to these new conditions, their professional accountants are likely to play an even larger role.

Recommendations

• Policymakers need to remain on the alert, at least until 2011, and evaluate the need to continue helping businesses find financing solutions to fund growth.
• Governments will need to encourage asset and equity finance, including angel investment. This is a matter of stimulating demand as much as it is of encouraging supply – ensuring SMEs understand these sources of finance, choose suitable modes from the full range of options, and make themselves attractive as recipients of non-bank finance.

5. Taxation

Highlights

• Governments need to address the issue of compliance costs. Tax compliance, on a per-employee basis, for a company with five employees or fewer is five times the cost of compliance for a business with 500 or more employees.
• Business in Canada spends $30 billion per year complying with regulations.

Recommendations

• The federal government should appoint an independent panel of experts to undertake a comprehensive review of Canada’s tax regime, with a view to ensuring the system is simple, fair and efficient.
• The government should undertake a study of the effect of the small business tax threshold on the growth of enterprises.

6. Regulations & Red Tape

Highlights

• CGAs working in business or providing services to companies of all sizes say it is the cumulative effect of compliance measures that are wearisome.
• They cite the duplicative and uncoordinated nature of federal, provincial and in some cases municipal regulations.
• Companies are frustrated with provincial barriers to the movement of goods and services.
• CGAs tell us that the tax code has grown too complex.

Recommendations

• The federal government should adopt open-trade legislation and establish a permanent internal tribunal to deal with interprovincial barriers to the trade of goods and services.
• Bilateral free trade agreements, multilateral trade liberalization and foreign investment protection agreements open new markets to Canadian products and incentivize Canadian companies to boost their productivity.
• The federal government should continue streamlining the process of complying with regulations municipal, provincial and federal regulations.
• The regulatory burden needs to be measured through the creation of a simple, standard means of assessing red tape and its impact on businesses.

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