Photo by Mike Petrucci on Unsplash

Statistics show  a widening gap between the profitability of small and large businesses. 

According to a recent study by McKinsey & Co., the best performing companies worldwide earned 80 percent of all profits between 2014 and 2016, up from 75 percent a decade earlier. The top 1 percent got 36 percent of the profits.

About half of the more than 5,000 firms surveyed by McKinsey were reported as solvent but their return on capital fell far short of what investors would consider adequate.  Half, then, were effectively unsustainable. A separate, larger study by Aswath Damodaran of over 25,000 firms had roughly the same results.

Some discussion of this problem has blamed globalization for the widening gap between small and large businesses. But with the internet, global supply chains and marketing connections are now available to all. A small retailer anywhere can access the same inexpensive inventory as a giant retailer and can also market those products nationally, even globally.

A better explanation might well be the differences of market power. All may have access to the same suppliers, but larger firms, such as Walmart and Amazon, can drive harder bargains on price and delivery terms than smaller or mid-sized firms.

A bigger culprit than market power or globalization appears to be government regulation. It imposes huge burdens on all businesses. According to a recent study by the Office of Management and the Budget (OMB), Congress passed only some 65 significant laws in 2013, the year under review. In contrast, federal regulatory agencies that year issued some 3,500 regulations, an average of nine per day.

Compliance to those regulations means expenses. According to the U.S. Chamber of Commerce, fully 11 percent of the country’s gross domestic product (GDP) goes to comply with federal regulations only and excluding the burden imposed by state regulations.

Since reporting and other compliance requirements vary little with the size of the firm involved, these burdens are heavier on small businesses.

Technology developers have, however, begun to correct this inequity starting with systems to deal with tax calculation and reporting. Then, more developers are making available systems to deal with labor, environmental, and trade regulations. Given the overall burdens involved, these systems, especially as they become more efficient and cost effective, will offer small businesses tremendous relief.

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