Wednesday, 30 November 2022

for Business Owners

The Economic Strength of South African Small Businesses

South African small businesses are capable of sustaining the lives of their business owners, communities, and the national economy, as they are the largest employer (50% of labour force), and contribute over 30% of GDP. The World Bank and International Finance Corporation (IFC) call this sector "The Unseen Sector of South Africa". It is unseen because it is the most ignored yet has the greatest potential, as it is involved in all other sectors.

 

With a population of 60 million people (2021, est), and over a million new born babies each year, South Africa is a growing consumer market that will always have space for any type of business, large or small. Opinion may differ from analyst to analyst as to what causes unemployment, shortages, riots, and discriminations, but one thing for sure, there are more businesses opening each day. 

 

As fears of future incomes grips many in South Africa, small business start-ups are being seen from those employed, unemployed, as much as seen from FDI. Foreign direct investment (FDI) inflows into South Africa fell from US$4.6 billion in 2019 to US$2.5 billion in 2020, and this is calling for looking inward for the government in large enterprises. 

 

The Ecosystem Development for Small Enterprises

According to the Ecosystem Development for Small Enterprises (ADSE) report, there are 2.36 million operational SMMEs as at the end of 2020. Of all jobs lost in the economy to date, 90% were lost in the SMME sector. 

 

The overall structure of the SMME sector remained relatively stable despite the devastating pandemic impact. The latest SMME survey results confirm that the sector was and remains in the eye of the storm created by the COVI0-19 pandemic Impact. The sector Is fighting for survival and it appears that there may be permanent damage. Entrepreneurs will need to adapt and innovate. 

 

It has to be emphasised, that while the boost to e-commerce has become a major trend, that SMME owners should rather embrace technological development and digitisation with strategic intent. The objective should be to improve human decision-making, optimise core business processes and assist in understanding customers. SMMEs will require support in the fields of access to finance and in marketing. 

 

The Unseen Sector Report

“The Unseen Sector” is a joint report between the World Bank and International Finance Corporation providing an in-depth assessment of the micro, small and medium enterprise landscape in South Africa and opportunities to support the sector’s growth.

 

The report measures the small business sector size and illustrates key barriers small businesses face in terms of access to finance, access to skills and access to markets in South Africa.

 

During the quarter-to moments of Covid19, the World Bank and International Finance Corporation (IFC), in 2019, conducted research on the South African micro-, small to medium enterprises, assessing various micro- and macro-economic aspects that affect their growth and development. 

 

Small enterprises employ between 50 and 60 percent of South Africa’s work force and contribute around 34 percent of GDP. However, the small business sector has been relatively stagnant over the last decade, and only 14% of the country’s small businesses are formalized, capping their job creation and economic contribution potential.

 

The MSME sector in South Africa has been relatively stagnant over the last decade. Based on Stats SA research, there were 2.309 million MSMEs in 2017 compared to 2.019 million in 2008. Given the limited growth in MSME numbers, it appears that the sector is not making as meaningful a contribution to the South African economy as expected.

 

South Africa’s rate of established entrepreneurship is extremely low compared to other African countries. Given its GDP per capita, South Africa should have a rate of early-stage entrepreneurship three times greater than the current rate. With fewer start-ups and a low rate of survival, there is a thin pipeline of businesses with a high chance of scaling.

 

Youth MSME ownership has stagnated since 2008 in the 25-34 age bracket, and declined in the 18-24 age bracket. Entrepreneurial activity is also less in the 18-24 and 25-34 age groups than in age brackets above 35 years. The data also suggests that the informal sector is not providing the youth with significant employment opportunities compared to the formal sector. Access to finance is higher for formal MSMEs and those on the upper-end of the firm size spectrum. The IFC estimates the total MSME finance gap between supply and demand to be $30 billion.

 

Both assessments, the EDSE and the IFC-World Bank reports, show the ups and downs of the environment of micro, small to medium scale enterprises, but most importantly, they show insights into where hope lies.

 

Remedies and Reconfigurations

Without talking investors and capital, there are several remedies and reconfigurations that help create a growth environment and profitability for SMEs, which include, but not limited to Investing in Value Chain, Focus on Opportunities, Lifestyle Audits (Owner Discipline).

 

Investing in Value Chain, a global growth model, is about large companies investing in small companies as Woolworths and Mr Price does with suppliers. 

 

Woolworths has many supplier stories that it tells, all being examples of how a large company can invest in its value chain made up of small businesses, in order to not only grow its business, but also grow the SMEs. One such story is that of Dr Ruben Mahlare is an egg farmer, farming Bosveld chickens just outside Bela Bela in Limpopo. While his business is still small, with only 10 000 chickens, the Woolworths Enterprise Development programme continues to assist him in growing his business. Imagine the impact if many more medium to large companies do this!

 

Mr Price has launched its Local Business Love initiative to connect customers with small and local businesses, as published through TWYG, one of their success stories of this initiative being Nomvula Mxubane, a nanny by day and a punch-needle embroiderer by night. Mr Price, not only added her as a supplier, but plugged her into their Marketing channels on social media, to support her business growth. She says the initiative “makes me feel supported. Having just started out, it’s easy to feel insignificant and lost among so many small businesses. This push from Mr Price is giving me the confidence to dream bigger and think of ways that my business can grow beyond just selling once-off pieces. So far, through the exposure on their platforms I’ve gained hundreds of followers and it has helped my business grow. Since the launch of this initiative, I’ve trained two of my friends to join me and help me with all of the new commissions. I’m paying it forward by helping out others in my community as well.”

 

Growth and Expansion is very possible for South African SMEs if they pay more attention to the opportunities, and not the threats of the market and their industry. According to the 2019 SMEs Landscape Report, many SME owners also expressed that they saw opportunities to expand into sectors other than the ones that they are currently operating in. The report shows that the search for new business opportunities is the primary driver for expansion across industries. 

 

A total of 44,3% SME owners gave business opportunities available as the reason for going into a certain sector, 26% of SME owners said growth prospects, 23,1% stated entrepreneurial drive and only 4% SME owners said it’s because of their education and training. When asked which industry/sector SME owners might expand into, they were most drawn to agriculture and manufacturing, followed by education, technology and real estate. The survey also reveals that business owners in the top four most well-represented industries (consulting, construction, food & beverages, and manufacturing) are inclined to expand within their current area of focus.

 

South African small businesses have the potential to export, as the enabler systems and structures are available for them to export into the surrounding countries that naturally have South Africa as their largest African trade partner. FMCG, Construction Materials, Chemicals, Pharmaceuticals, are some examples of products that are in demand in other countries surrounding South Africa, whose demand the small businesses can tap into, instead of just looking into selling within the Red Ocean of the country. A definite Blue Ocean exists for small businesses in South Africa, that only needs to be tapped into.

 

Many small business owners in South Africa lack discipline, and that is one of the biggest contributors to there being a very high closing-down-business rate within four years of opening. In order to help SMEs, through the tax department, SARS, the South African government engages in what are called Lifestyle Audits. Lifestyle audits are also routinely used in some countries, such as South Africa, to target tax evasion (Business Insider 2020). By identifying previously undisclosed assets and sources of income, tax authorities can increase the revenue collected. Fines and interests are usually coupled with the tax charges.

 

Howbeit if small business owners self-commission the conduct these audits by their accounting firms or internal accountants, as a way to help the management of Working Capital. Because of not living within their means, many South African small businesses suffer from debt, as owners divert company funds to fund lifestyles that are twice or three times the revenue being generated. 

 

Sources: Stats SA, SME SA, World Bank, IFC, EDSE, Woolworths, Mr Price, TWYG