NEWSLETTER | WOMEN IN MOTION
The SME Survival Game
Small and medium enterprises are repeatedly hailed as the practical hope for economic development and employment creation in South Africa – they constitute an estimated 91% of formal business and contribute between 52% and 57% of the country’s gross domestic product. But this hope remains stifled owing to their high failure rate, demanding constant evaluation of what predicates business survival in modern times.
by Salome Smit
Because of their portable size and less rigid structures, small and medium enterprises (SMEs) are generally more responsive to sudden changes in the economic climate than larger businesses, which tend to be impeded by lengthy approval processes and inflexible structures. By reason of their efficiency, they should be the most resilient entities in the economic ‘wild’, and, in many instances, they are. A report from the Canadian Federation of Independent Business (CFIB) titled ‘Survival of the Smallest’ shows that, during the worst phases of the economic recession, Canadian SMEs played the redemptive role of creating jobs and stimulating commercial activity that had been lost through the failure of larger businesses.
Locally, the value of SMEs is recognised at all levels – from government, which acknowledges their 61% contribution to national employment, to communities across the country, where entrepreneurship sustains families and creates jobs. But SMEs are plagued by a similar problem both worldwide and at home, regardless of varying economic climates. It is estimated that over half of all SMEs registered across the world do not reach the age of five. In South Africa, between 70% and 80% of small, medium and micro enterprises do not survive beyond their fifth year of operation. The only gain for the country from the enthusiastic entrepreneurship of the founders of these businesses is in the form of their consumption while they are in existence. But, for the business owners themselves, it is a loss of millions of rand spent on a failed venture, not to mention misspent time and resources.
The 2010 Global Entrepreneurship Monitor (GEM) reports that South Africa ranked second-last out of 59 countries in terms of established business activity, with an established business rate of only 2.1%. This is about a quarter of the average for all GEM countries, which is calculated to be 8.6%, while that for all efficiency-driven countries is 7.6%.
The Profile of an SME
Businesses are regularly placed into categories according to the skill levels of their labour as well as their turnover levels. Common characteristics of small businesses include management by owners or part owners in what is usually a personalised style, although many medium-sized entities have formalised management structures similar to larger enterprises. According to the National Small Business Act 102 of 1996, firms with less than five employees are classified as micro enterprises; those with less than 50 employees are considered small enterprises; and those with less than 100 to 200 employees, depending on the industry, are categorised as medium-sized enterprises.
The Major Problems Plaguing Start-ups
Challenges commonly faced by small business owner–managers have generally been described as being related to environmental, marketing, financial and managerial factors, with financial difficulties being the most prevalent reason for business failure. The lack of managerial skill means that, even though SMEs are managed by highly motivated people, they still find it difficult to compete with larger firms.
The 2011 National Small Business Chamber (NSBC) Small Business Survey listed the following among the most significant challenges faced by micro and small businesses: cash flow and growth finance; building a client base; finding skilled staff; and payment by corporate and government clients. Among the key issues that respondents in the survey asked the NSBC to take up in campaigns for small businesses included taxes and bank charges, payment by government and big businesses, and the improvement of the vendor process.
The top three queries raised with regard to accessing finance related to the need for short-term small loans, easier and quicker access to finance, and more bridging-finance options. It was found that 33% of respondents had tried to raise finance for their businesses in the past three years without any success, while 19% had had some success. When asked in which areas they most required skills, training and development, the majority of respondents cited finance and accounting as being the most needful area, followed by people management and, lastly, technical skills. Of those surveyed, 65% said that the person in charge of the business did not have any formal training or qualification in business management.
Information Technology as a Modern Necessity
Because technology and the Internet are becoming more and more important in the modern business environment, lack of access to the Internet and the nonexistence of an Internet presence are also inhibiting factors for many local businesses.
Principal analyst of the SME Survey, Arthur Goldstuck, points out the importance of an online presence as being a crucial finding in the 2012 survey. He notes that companies with a website are “more likely to be users of Internet and related technology tools, which, when used appropriately, can deliver substantial efficiency benefits”.
Among other elements of businesses, the SME Survey analyses competitiveness, which it defines as being based on: a company’s ability to generate profits; its ability to generate revenue; its ability to develop a market share or compete with similar businesses; and its ability to cut costs. Arthur says that only 65% of companies surveyed saw themselves as competitive, in comparison with 75% in past surveys. While this is due in part to recessionary pressures from the global financial crisis, Arthur notes that 68% of businesses with a website considered themselves to be generally competitive, and 45% professed to be highly competitive. For SMEs without websites, the results were, respectively, 59% and 38%.
In terms of profitability, the survey found that 79% of SMEs with a website described their businesses as being profitable, in comparison with only 59% for those without a website who reported their businesses as being profitable. “The interim results indicate that there is indeed a correlation between being online and being successful. One might suggest that an online presence is becoming a necessary but not a sufficient condition for doing business, given that more and more consumers than ever before are looking for their needs on the Internet,” says Arthur.
Given the increased use of smartphones and other Internet-enabled devices, there is likely to be an exponential increase in the use of the Internet to locate businesses. In accordance with this trend, the launch of a service called ‘Woza Online’ last year by Google and Partners aimed at bringing thousands of South African SMEs online to increase their visibility and, potentially, their patronage.
The survey also showed that almost two-thirds of all registered SMEs – 65% to be precise – have their own websites. This indicates an improvement from 45%, recorded in 2008. Sadly, it is businesses that have been in operation for over 10 years that are more likely (72%) to have websites in comparison with younger operators, who have a greater need for visibility and to gain a market share. Only 46% of businesses under three years are reported to be online. “While one might suggest that a website is something of a necessity which is being overlooked by the start-up, the research does indicate that nearly one in every two start-ups either have a website when they launch or soon after,” adds Arthur.
The NSBC survey found the greatest information technology (IT) hindrance to be the cost of IT products, followed by reliability and complexity. The majority of those interviewed said that they did not know what cloud computing was, with 59% saying that they back up all of their data on site.
Surviving in Recessionary Times
Jane Tully, Channel Manager at Fujitsu Technology Solutions, says technology holds much potential for survival and growth in the current economic environment. “The recessionary environment places new challenges on businesses. It is in times like these that they [SMEs] need to be increasingly conscious of the efficiencies and competitive advantages that can be reaped from their technology solutions. With the ever-increasing power from technology innovation, businesses can get more out of their technology (often for less expenditure) by staying abreast of developments and investing in the appropriate solutions.”
In the face of possible future economic slowdowns, SME owners need to utilise and maximise the advantages of their size, which include adaptability and agility. SMEs find it easier to implement ideas rapidly than do larger firms, which adds to their flexibility in changing conditions. This change in approach, together with a greater emphasis on training in business and financial management, could place small and medium-sized businesses in a better position not only to survive, but also to thrive beyond the currently short SME life expectancy.