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In some cases, the smaller you are, the more it costs to do business. Federal regulatory costs for small businesses grew to $497 billion in 2000, according to a recently released study titled The Impact of Regulatory Costs on Small Firms. Among other things, the report concludes that compliance costs per employee for small firms are 64% higher than large firms and 62% higher than medium-size firms.
Conducted for the Office of Advocacy of the Small Business Administration, the report examines the cost of regulation on firms in manufacturing, trade, services, and other sectors. The study shows that the brunt of regulatory costs fall disproportionately on the shoulders of small businesses.
There are those who consider this discrepancy unfair. “This study is an indication that blanket regulations don’t work,” says Radwan Saade, a regulatory economist for the SBA. “Large firms have more resources to absorb these costs than small firms. That’s not to say that small businesses shouldn’t be regulated. They should if they are to be participants in the economy.” Saade suggests small firms be regulated on a scale that’s proportionate to their relative importance in the marketplace.
Saade argues that the cost of complying with regulations discourages individuals from starting businesses, and many worry that it will stymie business innovation and damage one of our nation’s most relied upon economic resources — entrepreneurs.
According to the study, when looking at specific sectors, small manufacturing firms have regulatory costs per employee that are more than double the costs for medium and large firms. The trade sector shows the least cost differential between large and small firms. The cost per employee in small wholesale or retail firms only exceeds that of medium and large firms by 11% and 18% respectively. In the services sector, environmental regulations cost small firms three to four times more than in medium and large firms.
One company feeling the pinch of regulation is AMG Engineering and Machining. Founded in 1989, the Indianapolis-based company has 50 employees that develop annually more than a million valves, fittings, and other precision-machining, flow-control devices for the automotive, medical, and construction industries.
“For us, regulatory costs are significant not only on the federal level but also on the local level. Customers passing down their regulatory requirements to us can be costly — constituting as much as 5% of our total costs,” says Ted Gary, president of AMG. “What’s worked for us is to not have all of our eggs in one basket. We offset heavy regulatory businesses with those that aren’t. Having a diverse client base really helps during the tough times.”
The following are a few strategies small-business owners can employ to help offset some of these costs:
- Pool resources with other companies in your industry and use outside firms to handle regulatory concerns.
- Offset heavily regulated business with business that is less so.
- Insist on regulation reform via initiatives such as the Regulatory Flexibility Act (RFA), which is designed to conduct impact-analysis studies before new regulations become law.
- Make a stand. Lobby legislators and use your collective voice to make
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