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Do you need insurance with a micro business?
What is a micro business?
Micro businesses are growing fast in Australia as people take a new approach to work. Here’s a guide to going micro, including the benefits and challenges involved.
There are more than 2.5 million small businesses in Australia, with almost 694,000 of these classified as a micro business, according to the Australian Bureau of Statistics (ABS). These figures are based on businesses registered for GST, so actual numbers could be higher.
Micro businesses play a vital role in our economy, employing more than three million people and contributing more than $350 million to gross domestic product (GDP), government data shows.
So, what exactly is a micro business, who will it appeal to, what benefits does it bring, and what challenges are involved?
In this article
What is the difference between a micro business and a small business?
The ABS defines a micro business as a business that’s actively trading with up to four employees, while a small business is one that’s trading with between five and 19 employees. From there, businesses with 20-199 employees are classified as medium-sized, and 200-plus as large.
‘Actively trading’ means the business has an ABN (Australian Business Number) and is actively remitting GST (goods and services tax) in the economy. The employee numbers are based on a ‘headcount’ rather than a measure of full-time equivalent persons.
Annual turnover is also used to define businesses, but this doesn’t tend to separate micro from small. The Australian Taxation Office (ATO) classifies a small business entity – be it an individual, partnership, company or trust – as one with a turnover of less than $10 million, which is a common threshold for tax concessions, offsets and rebates.
In reality, the vast majority of businesses in Australia (92 per cent) have a turnover of less than $2 million and almost a quarter (24 per cent) have a sub-$50,000 turnover.
It all points to micro businesses being a major factor in our economy.
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Micro businesses allow you to be your own boss and set your own hours of work, but there are pitfalls to avoid. Image: Getty
Who will a micro business appeal to?
Micro businesses can appeal to a wide range of people who are looking to start a business but might not have much capital to get it off the ground.
The business might spring from anywhere: an idea, a passion, a hobby, a special skill or a desire to generate income around lifestyle, family commitments or other circumstances where independence and flexibility are vital.
Tradies such as electricians, plumbers and carpenters are often associated with micro businesses, but extends to any small-scale operation that’s run by one person or a tight-knit team, often with limited resources and staff.
Beyond the trades, micro businesses are commonly found in the food industry (coffee and food vans, pop-up cafes), retail and e-commerce (online shops, handmade craft sellers, boutique stores), coaching and consulting (personal trainers, life coaches, financial planners) and creative fields (artists, graphic designers, freelance writers, photographers, videographers).
A report prepared by the McKell Institute found that micro businesses are increasingly run by women, especially those who are middle aged and/or have caring responsibilities.
A separate report also found micro businesses are closely connected to the community in which they operate, serving as a place of social interaction as well as a source of local employment.
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What are the advantages of a micro business?
Micro businesses are popular because they’re typically not weighed down by a lot of the formal operating structures that govern larger enterprises. The owner might not need specialist training to run the business, nor require much capital to get it up and running.
The financial structure and processes involved tend to be simpler and the finance itself might come directly from the owner. Transactions are often straightforward and cash may be the preferred form of payment. Business planning might not extend past any given day or week.
A micro business allows individuals to set their own hours, organise the business to fit their lifestyle, and make independent decisions. While the long-term vision might be macro, starting small can be the best approach.
Often, the business can be run from home, removing the need for traditional premises such as an office or shopfront. Shared working spaces can also offer flexible, cost-effective options with amenities such as high-speed internet and meeting rooms. Or internet sales might be the primary source of revenue.
Operating on a small scale can foster personal connections with customers, building loyalty and trust. Creating a business from what might otherwise be a hobby or an unpaid passion project may also bring tax benefits, such as claiming a deduction for the costs incurred in running the micro business.
Micro businesses are increasingly run by those who have caring responsibilities.
What challenges are involved with a micro business?
Running a micro business can be rewarding but challenging. Owners may struggle to find a work-life balance, working longer hours than envisoned, with the potential for burnout.
Being your own boss sounds attractive but being in charge of sales, marketing, finance, legal and customer service operations – even at a micro business level – could lead to difficulties if these areas aren’t well managed.
Financial stress might also become a factor if capital is limited. Delays in payments or irregular income could make it tricky to maintain a steady cash flow, while lenders might not be willing to provide a loan or invest in a micro business that’s only operating on a small scale.
This micro status could place the business at a disadvantage if larger competitors, armed with greater resources and stronger brand recognition, are also operating in the same space. Often bigger companies are better placed to adapt to changes in the marketplace too, with capital behind them to combat economic downturns, shifting customer preferences and/or new technologies to remain relevant and competitive.
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Do you need insurance with a micro business?
In Australia, whether a micro business needs insurance depends on the nature of the business operations.
Some types of insurance are legally required if a business has employees. In Victoria workers’ compensation insurance, for example, is provided by the state government through WorkSafe Victoria. Check with your state or territory regulator for full details.
Some other types of insurance are optional but are recommended to help protect a micro business from financial loss. These may include public liability insurance, professional indemnity insurance and insurance that’s specific to a particular line of work.
RACV Business Insurance provides cover for different industries to help protect businesses from financial loss, with insurance available for tradies, professionals and consultants, retailers, hospitality businesses, IT professionals and domestic service professionals, such as cleaners.
More: What insurance could help give the cover I need for my small business?
The information provided is general advice only. Before making any decisions please consider your own circumstances and the Product Disclosure Statement and Target Market Determinations. For copies, visit racv.com.au. As a referrer, RACV Insurance Services Pty Ltd AFS Licence No. 230039 receives commission for each policy sold or renewed. Product(s) issued by Insurance Australia Ltd, ABN 11 000 016 722, AFS Licence No. 227681.
