Why May Canadian Small Businesses Not Be Spending?

In many places, small business is considered the backbone of the economy. This is because small business symbolizes ingenuity, innovation and growth, which the economy needs to function. Recent findings show that in Canada, many small businesses have significantly reduced their spending, creating speculation as to why and what it means for Canada’s economy.

What constitutes a small business in Canada?
In Canada, a “small business,” is one with fewer than 100 employees. In 2010, small businesses accounted for 98% of all businesses in Canada. Additionally, 48.3% of all employees worked for a small business. Therefore, small businesses account for a major portion of employers. Furthermore, small businesses made up 28% of the country’s total GDP in 2009, showing how dependent the Canadian economy is on these businesses.

Why the reduced spending?
A sluggish world economy may be to blame for the drop in spending. The long-term economic recession has penetrated a variety of areas, leading to widespread uncertainty. This in tern leads to broad implications for unemployment, general spending, and real estate value. For example, where the housing market is bad, mortgage rates are lowered because of a lack of buyers. When businesses cut expenses through lay-offs, not only does unemployment increase, but the business growth also halts, as fewer employees cannot reasonably do more work.

Therefore, the economic climate contributes to reduced spending from small businesses, Most people tend to use a more conservative approach in these conditions, either by cutting expenses, freezing hiring, or investing more cautiously on new technology or marketing. While some feel that they can weather the storm through drastic spending cuts, it does not bode well for a speedy economic recovery.

What does reduced spending mean for the economy?
As the old saying goes, “you have to spend money to make money.” Businesses that do not seek to invest in growth, either through hiring more staff, investing in the design of a new product, expanding facilities or upgrading technology, will not grow. When a business does not grow, it may produce at the same pace, or it may fail. For small business, there is much less space between staying the same and failing. For Canada, this could be a major problem because of the percentage of the economy that small businesses contribute and account for.

The outlook isn’t completely bleak, though. According to the Globe and Mail, confidence from small business owners is rising, even if spending is low. Furthermore, a survey from this year found that 18% of business owners plan to add more full-time staff by the end of 2012, which shows the intention of growth and job creation, even in a bad economy.

Michael Edmondstone is a freelance personal finance writer.


Author: Editor

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