This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.
If you’ve suspected that complying with federal regulations is particularly onerous for small businesses, a new report from none other than the US Small Business Administration will provide you with plenty of new ammunition.
The report, called the Impact of Regulatory Costs on Small Firms and written by the SBA’s Office of Advocacy, estimates just how much it costs very small, smallish and big companies to follow the rules. The conclusion is that businesses with under 20 employees pay the most per worker–$10,585 per employee each year. The cost for businesses with 20 to 499 employees is $7,454 and for firms with 500 and more employees, $7,755.
The reason, of course, is the matter of fixed costs. A small business incurs about the same expense as a larger one. But the big guys can spread the expenses over more revenue, output, and employees, resulting in lower costs per unit of output.
The report, which looked at data from 2008, found that small businesses with under 20 employees pay the most to comply with environmental, tax, and occupational safety and health and homeland security regulations. Most notably, the cost per employee for environmental compliance is $4,101 compared to $883 for the biggest companies.
Clearly the unequal burden of regulatory compliance makes life a lot harder for small businesses and, in fact, serves to undercut their ability to compete. “This potentially causes inefficiencies in the structure of American enterprise, and the relocation of production facilities to less regulated countries, and adversely affects the international competitiveness of domestically produced American products and services,” says the report. “All of these effects, of course, would have negative consequences for the US labor market and national income.”
Still the report didn’t comment on the benefits of regulations. That’s another issue entirely. In fact, just because they cost a lot doesn’t therefore mean the rules shouldn’t exist. It does, however, indicate that something is very wrong with the way they’re applied–and that, for small companies to thrive, change is imperative.
According to the report, economic regulations, which include things like rules related to tariffs, are the only area where large firms have the highest cost. That is due, in part, to the Regulatory Flexibility Act, which requires agencies “to assess the effect of regulations on small businesses and to mitigate undue burdens, including exemptions and relaxed phase-in schedules.” The RFA, says the report, has been particularly effective in shielding small businesses from the cost of complying with the Sarbanes-Oxley Act.
Seems there should be a significantly more concerted effort to exempt small businesses from certain regulations or, at least, to help with compliance efforts. Some 89 percent of all companies in the US employ fewer than 20 people. If the cost of complying with regulations is really egregiously high for the vast majority of companies simply due to their size, it’s incumbent upon the rule-makers to do something about it.
