Small Business

Sustainability & Business

Sustainability: The Key to Small Business Survival?

 By Julie Urlaub Taiga Company
The report, The Impact of Regulatory Costs on Small Firms via Small Business Administration, assessed the overall cost of federal regulation on small businesses in five major sectors of the U.S. economy.  According to the post, Small Businesses Are Hit Harder by Regulations, “the report showed that costs are particularly disproportionate in the manufacturing sector. Small manufacturers’ compliance costs per employee are more than double the costs for mid-sized and large firms.  What specific types of regulations are the most costly? Compliance with environmental regulations costs nearly four times as much in small businesses than in large ones, while the cost of tax compliance is more than twice as high in small firms than in large ones." 
While those are known cost, within our sustainability consulting, it is not uncommon to    interface with business leaders who are unaware of the potential cost and business risk they may be incurring though misunderstanding or inactivity related to business sustainability.   The post, Supplies in the Hot Sear: Are you One of them addresses the extended responsibilities of water, carbon, environment management to suppliers in larger supply chains. More recently, the post, Wal-Mart's Green Performance Reviews Could Change Retail for Goodillustrates the depth sustainability is reaching in the supply chain and the consequences of businesses not getting on board.

While many organizations recognize the ‘softer’ value of sustainability generated by some of the more well known leading companies, few fail to acknowledge the risk of their own inactivity to the bottom line:
•    Increase cost from uncontrolled emissions.
•    Increase cost from measure waste streams.
•    Increase cost from rising energy and uncontrolled consumption.  
•    Increased cost in supply and distribution.
•    Increased cost in from the use of unsustainable materials.
•    Increase cost from tax or regulatory changes.
•    Increase in cost from reactive design, engineering and manufacturing changes.
•    Increased cost from obsolete supply or product.
Business sustainability is often reduced to environmental or social action.  While certainly two very important areas of focus, business sustainability is really about taking action to maintain the on-going health and profitability of the company as a business strategy.  This includes valuing the relationship with the environment and social stakeholders.  Business sustainability may very well be the key to small business survival.  

By Nicole V. Crain and W. Mark Crain, Lafayette College, Easton, PA.
Via Small Business Administration

This report was developed under a contract with the Small Business Administration, Office of Advocacy, and contains information and analysis that was reviewed and edited by officials of the Office of Advocacy. However, the final conclusions of the report do not necessarily reflect the views of the Office of Advocacy.

Regulations are needed to provide the rules and structure for societies to properly function. This research, while mindful of this important fact, focuses on the costs imposed by federal regulations; it thus updates and verifies the finding of disproportionality in the burden imposed by federal regulations on small business. Previous research by the Office of Advocacy has established that regulatory and paperwork costs were found to be more onerous for small firms than larger firms.

Executive Summary
The annual cost of federal regulations in the United States increased to more than $1.75 trillion in 2008. Had every U.S. household paid an equal share of the federal regulatory burden, each would have owed $15,586 in 2008. By comparison, the federal regulatory burden exceeds by 50 percent private spending on health care, which equaled $10,500 per household in 2008. While all citizens and businesses pay some portion of these costs, the distribution of the burden of regulations is quite uneven. The portion of regulatory costs that falls initially on businesses was $8,086 per employee in 2008. Small businesses, defined as firms employing fewer than 20 employees, bear the largest burden of federal regulations. As of 2008, small businesses face an annual regulatory cost of $10,585 per employee, which is 36 percent higher than the regulatory cost facing large firms (defined as firms with 500 or more employees). The regulatory landscape highlighted above and detailed in this report emerges from an updated analysis of the regulatory record explored in three previous studies for the Office of the Chief Counsel for Advocacy of the U.S. Small Business Administration (Hopkins, 1995; Crain and Hopkins, 2001; and Crain, 2005). Direct comparisons to the results in these prior studies should be made with caution, however. The present study introduces some new methodological techniques, which may account for some of the differences in the cost estimates for 2008 versus those for prior years.

Summary Comments
Overall and on almost every regulatory frontier, compliance costs place small businesses at a competitive disadvantage. The cost disadvantage confronting small  business is driven by environmental regulations, tax compliance, and occupational safety and health and homeland security regulations. The particular cost drivers differ  somewhat across the five business sectors, as the details of this report point out. Moreover, not all regulations fall more heavily on small firms than on their larger counterparts. For example, the cost of economic regulations falls most heavily on large firms in every sector except health care. The most disadvantaged of all by federal regulations are small manufacturing firms. 

This study provides a broad sense of the costs of federal government regulations in the United States and how they affect the balance in public versus private sector responsibilities. In 2008 federal regulatory compliance absorbed about 14 percent of U.S. national income, a clear indication of what citizens give up in exchange for this government function.
To view the complete report please see the attachment below.

In 2010, the Office of Advocacy released a study by Nicole V. Crain and W. Mark Crain titled “The Impact of Regulatory Costs on Small Firms.”  This was the fourth in a series of papers dating back to 1995.  The goal of the series has been to quantify the economic impact of regulations on small businesses and determine if those impacts are disproportionate when compared to large businesses.

However, since the latest iteration of the study was released, the findings of the study have been taken out of context and certain theoretical estimates of costs have been presented publicly as verifiable facts.  The following is intended as clarification of the intention of the study and its findings.
  • The study is a top-down analysis of regulatory costs that uses certain assumptions to estimate totals.
  • The study is not a bottom-up precise accounting of the overall cost of regulations.
  • The overall figure of $1.75 trillion in costs is derived from a number of different assumptions and sources to create an estimate.
  • As with almost any academic methodology, it was not intended to be considered a precise finding.
  • The study demonstrated that small businesses bear a larger burden from regulations than largebusinesses.
  • It was not intended to do more than provide an estimate of this disparity.
  • The data for this study only goes through 2008.
  • The study cannot appropriately be used to inform discussion about any regulatory costs that have or have not been incurred since 2008.
  • The methodology used in part of this study is novel, but the authors explain why they chose to use it and offer caveats concerning the results.
  • The Office of Advocacy continues to encourage the academic community to engage in this discussion about the best methodology to consider how small businesses are affected by regulations.
Congress created Advocacy in 1976 to give a voice to small businesses that were not being considered during the rule-making process.  Considering the costs of regulations is critical to gain the required insight to work with agencies to minimize the burden on small businesses while still achieving the goals of the regulations.  Advocacy will continue to support research that informs this objective and will continue to seek out the best ideas and methodology to help accomplish it.  

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